I was pleased to have Amanda Bresler and Alex Bresler back on the podcast to discuss their newest Naval Postgraduate School symposium paper on the composition of small businesses in the defense industry. Amanda is the Chief Strategy Officer at PW Communications, and Alex is the Chief Data Officer.
They found that small business funding grew 68 percent between 2015 to 2021, but at the same time the total number of small businesses shrank 23 percent. That can only mean the small business players are, on average, getting bigger. Indeed, the number of small businesses receiving more than $100 million per year in defense prime contracts grew three-fold over those six years (from 26 to 84). By comparison, the number of small businesses with less than $1 million fell 32 percent (from 34,205 to 23,337).
Download the full-text transcripts
Set aside goals
Despite there being a “laundry list” of justification for small business set asides, Amanda says in practice, “The program has been measured almost exclusively by one single metric: whether or not government stakeholders are in fact awarding 23% of all of their contract dollars to companies that qualify as small disadvantaged. Full stop. There is no metric around assessing whether any of those other objectives are being met.”
Moreover, the findings lead them to conclude that the small businesses that the program was designed to help are actually worse off because of them. How could that be? The money is set aside for small businesses. It levels the playing field against the big primes with their legions of compliance staff and proposal writers.
Barriers to Entry
They argue, however, at the same time the government creates small business goals, they also levy burdensome compliance regulations such as in cybersecurity and cost accounting. There are also pushes to bundle contract requirements such as GSA’s category management, which is biased against small business. These policies make it harder to the “true” small companies to survive, while the winners are the biggest small businesses who know the inside baseball. As Amanda said:
We have reason to believe that the programs themselves will fail to benefit the groups that they are claiming to serve in the same way as they failed to benefit small businesses. It’s a king making program. You’ll have a couple that emerge, that know how to game the system, but none of that wealth is transferred back to these communities.
The small business size standards don’t really correspond to how normal Americans conceive of small business. There are hundreds of size standards according to NAICS codes that the SBA releases. Some depend on revenue, others on employee count. Some companies can grow quite large under these constraints.
Size Standards
Research for biotechnology has a size standard of 1,000 employees. The vaccine maker Moderna was a small business when they received Operation Warp Speed funding with roughly 800 employees, which then skyrocketed to 1,800 by June 2021. So Moderna phased out, but they were already a public company.
Atlantic Diving Supply received the highest annual revenue as a small business, averaging $2.2 billion in prime DoD contracts between 2015 and 2021. Progeny was a company that came up in Congress recently, a small business with a $3.5 billion market cap.
Amanda recommends moving strictly to revenue cap for small businesses based on public sizing data. “We really feel strongly that it should be a revenue number and employee count should be irrelevant, especially in the age of automation.”
Another issue is when small businesses are just resellers of things, and thus can get quite large. Even though small business participation, including suppliers, must be 50 percent or more, the Breslers have found that major primes are well represented in small business subcontracting data. Booz Allen Hamilton, for example, received nearly $200 million a year as a subcontractor on small business awards.
Alex has some very interesting bits throughout the conversation, so listen to the whole thing! I’ll just throw out a teaser: “Like many things the system that we have in place is completely uncorrelated to logic… You can’t throw money in programs at a system of dysfunctional incentives.”
Thanks Amanda & Alex!
I’d like to thank the sibling duo Amanda Bresler and Alex Bresler for joining me on the Acquisition Talk podcast. Be sure to read their whole paper and presentation: Analyzing the Composition of the Department of Defense Small Business Industrial Base. Check out our previous podcast episode on the declining industrial base, which will point you to their previous NPS papers.
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