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Redefinition of Small Leads to Huge Brawl

By Bernard Stamler
The New York Times
September 24, 2004

The Small Business Administration got a lesson this year about size -- specifically, the size of sacred cows.

Last spring, the agency announced a proposal that seemed simple enough: streamline the standards it uses to determine whether a business qualifies as small enough for government assistance.

The agency's officials perceived the change as relatively neutral, and estimated that of the 23.7 million businesses now covered, 34,100 would lose the small-business designation while 35,200 would gain it.

But the reaction was anything but neutral. Many business owners and industry groups, fearing a loss of status, deluged the agency with negative comments. Legislators from both sides of the aisle weighed in, including Senator John Kerry as the ranking Democratic member of the Senate Small Business Committee, asking that the new standards be withdrawn and reconsidered.

In July, the S.B.A did just that, scuttling any chance for changing the standards for now. And it seems unlikely that anything new will be proposed until public hearings can be held, sometime after the November election, according to Gary M. Jackson, assistant administrator for the agency's Office of Size Standards. He acknowledged that he had been ''a little surprised'' by the vehement reaction to the plan.

Perhaps he shouldn't have been. The stakes, after all, are enormous.

In fiscal 2003, for example, the S.B.A. provided more than 140,000 loans, venture-capital financings and loan guarantees worth more than $28 billion.

Small businesses also received more than $90 billion in prime contracts from federal agencies, which are required by law to award up to 23 percent of these contracts to them, and lesser percentages to small businesses owned by service-disabled veterans, women and other disadvantaged or disabled small-business owners.

There are also rules that require large companies to subcontract to small companies under certain circumstances, and similar state and local rules. Eligibility, in nearly all instances, is contingent upon compliance with size standards.

A rule of thumb about small businesses has been that they generally have fewer than 500 employees, but it's much more complicated than that at the S.B.A.

The agency currently uses 37 size standards, based on annual revenues in some cases and employee size in others, depending on the industry code assigned to a company under a Census Bureau classification system. The proposal would have changed all that, offering only 10 standards, most based on employee size only, and most capped at 50 or 100 workers.

This would have hurt businesses that need many employees to generate revenue. Take the plight of restaurant owners, who often seek loans and loan guarantees from the S.B.A. Now they qualify if their annual sales do not exceed $6 million. But under the new rules, which would have abandoned the revenue figure and imposed a 50-employee cap, including part-time workers, some of them would have been shut out.

How many?

''Our analysis showed that 16,000 restaurant businesses would have lost their small-business status under the new standards,'' said Robert J. Green, the associate vice president of federal relations for the National Restaurant Association.

The change would have been similarly dire for many government contractors.

''It would have cost us millions of dollars,'' said Wilt Ashby of the proposal. He is a project analyst for Spectrum Chemicals and Laboratory Products of Gardena, Calif. Spectrum has nearly 300 employees and sells to the government directly as well as to other companies that contract with the government. It is also owned by a woman, thus qualifying for additional set-asides, or contracts reserved for small businesses. But it would have lost its small-business designation under the new standards.

Ditto for Trailboss Enterprises in Anchorage. Trailboss maintains aircraft that pass through government bases. It is considered small because its revenues are less than $6 million annually. But with more than 100 employees, full and part time, it would no longer qualify under the new rules, said Mike Taylor, a vice president for business development. And that would hurt. ''We obtain something like 40 percent of our total revenue through small-business set-asides on government contracts,'' said Mr. Taylor, who, with Mr. Ashby, wrote to the agency protesting the changes.

Not everyone, of course, was unhappy at the prospect of change in the size standards.

The proposal ''would have put federal contracts and subcontracts in the hands of legitimate small businesses, which is what Congress intended,'' said Lloyd Chapman, formerly a general manager for GC Micro, a computer hardware and software vendor in Petaluma, Calif., with about 30 employees.

The company would have been subject to a 100-employee cap under the new rules, as opposed to a 500-employee limit that currently applies for government procurement.

''It's hard for really small companies to compete with 500,'' said Mr. Chapman, who founded a group called the Microcomputer Industry Suppliers Association that supported the new standards. ''That's just way too big.''

Much of the drive for change came from the Pentagon, whose huge procurement budget -- nearly $200 billion in fiscal 2003 -- makes it the 500-pound gorilla among federal agencies. The Defense Department has been especially irked by rules that do not always allow it to count as ''small'' the small subcontractors who may be hired by its larger prime contractors, according to Tim Foreman, assistant director for prime contracting for the Office of Small and Disadvantaged Business Utilization at the Defense Department. The prohibition can lead to ''game playing'' with data and industry codes when contracts are given out, he said.

Moreover, contract officers, he said, are ''resistant to set-asides based on revenue caps,'' making it ''easier to work with employee caps.''

The Defense Department proposed its own legislation to revamp the rules last year. But then it offered to withdraw the legislation if the S.B.A. would revise the size standards on its own.

That, in turn, acted as a catalyst for the proposed new size standards, Mr. Foreman said, and a ''win-win'' for the S.B.A.

''We dropped what they wanted us to drop,'' Mr. Foreman said, referring to the proposed legislation, ''and they also got to simplify, which they wanted to do.''

For his part, Mr. Jackson of theSmall Business Administration acknowledged that the Defense Department had provided an impetus for its attempt to revise the standards. But he denied tailoring the proposed new rules to the needs of that department or any other government agency.

''We looked at the issue objectively,'' he said. ''We wanted to see if we could make the standards simple and easy to use.''
That argument holds little sway among those who would have been hurt by the changes.

''The current rules have evolved as small business has become more complex,'' said Giovanni Coratolo, the director of small-business policy for the United States Chamber of Commerce, which opposed the size standard revisions.

''The government shouldn't be choosing winners and losers in a regulatory system,'' he said, ''just because they want to make it simple.''



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