Defense acquisition caters to bigger companies

Large companies often are better situated than small ones to meet the Defense Department's acquisition needs, according to a report released on Wednesday.

Defense spends more in industries dominated by larger businesses than in fields where small firms are well represented, the RAND Corp. study concluded. "In many cases, the reasons are beyond the department's or the contractor's power to control," said Nancy Young Moore, the lead author and a senior management scientist at RAND.

In fiscal 2007, Defense spent nearly $270 billion on federal contracts. Roughly $55 billion, or more than 20 percent, went to small business. The statutory goal is 23 percent.

The prospects for the future may be even dimmer, according to the report. Defense's use of small businesses is likely to decline during the next five years, in part because of industry consolidation and the department's evolving needs, the nonprofit research organization concluded.

SBA did not respond to a request for comment on the report.

Moore also suggested that small business goals could be set for specific industries -- rather than as a percentage of an agency's total spending -- to reflect the realities of certain fields.

"In extreme cases, this might even include recognizing as 'small' all firms not dominant in an industry," the report said. "Setting goals by industry rather than across the government similarly could help the DoD foster small business opportunities in industries most conducive to them."

For example, the report found that while Defense purchases goods and services in more than 1,000 categories, more than half of its acquisitions occur in only 10 business areas. In fiscal 2007, small businesses represented less than 13 percent of the total spending in those 10 key industries.

In some -- such as guided missiles, space vehicle manufacturing, and light truck and utility vehicle manufacturing -- less than 1 percent of Defense's purchases were from small businesses. The study, however, noted, "It may be the case that small manufacturers do not produce the goods and services that the DoD needs."

Meanwhile, in six industries in which Defense spent less than $100 million -- fruit and vegetable markets, janitorial services, sporting goods stores, landscaping services, industrial supplies merchant wholesalers, and photographic equipment and supplies merchant wholesalers -- small firms were used about 95 percent of the time.

One difficulty noted in the report is that a typical Defense contract can push a firm over the size threshold for operating as a small business. Consequently, contracting officers often begin "shopping" in the North American Industry Classification System to find an industry code in which a business can fulfill the contract but still qualify as small, RAND said.

Researchers also discovered problems with the size standards for information technology companies, which have annual small business revenue caps of between $23 million and $32.5 million.

One industry adviser told the study's authors that "When you're a $50 million or $100 million company, you're too small to compete with the large boys, and too large to compete in the small business arena."

The study also found that Defense information on subcontracting and contract bundling -- when smaller, often unrelated contracts are consolidated and awarded to large firms -- is lacking or deeply flawed. In addition, the department has made no effort to assess whether programs such as its mentor-protégé initiative have contributed directly to increasing small business participation, the study found.

"Without more adequate data, Congress may find it difficult to devise solutions to the impediments we discuss, and DoD managers will have difficulty in implementing any solutions," the report stated.

The report, titled "Enhancing Small-Business Opportunities in the DoD," was requested in 2007 by the House Appropriations Committee and compiled in consultation with Defense's Office of Small Business Programs.