STRATEGY

Why Bureaucrats Avoid Small Business R & D

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As a rule, the federal government doesn't like to do business with small companies, for reasons that are not hard to understand if you're the government employee who has to sign the R&D procurement contract.

Big R&D efforts usually involve many scientific or technical disciplines. So the tendency of procurement officials is to say, "Why not give the contract to a big company and let them manage it for us," according to Eugene Rosen, small business adviser at the National Aeronautics and Space Administration. "That's been the attitude at NASA," Rosen adds.

Besides being easier to manage, R&D contracts with big, established firms involve less risk to the government official who okays the contract. He can hardly be blamed if, say, General Electric fails to deliver on time, but let him try to explain the failure of a $3-million independent firm that nobody else in the agency has ever heard of.

In some agencies, "profit" is a dirty word. Take the Public Health Service, for example, which has only this year decided to allow for-profit business to compete for its research assistance grants. The fine print in the new regulations almost assures that the agency won't have too many takers. There will be no provision for profit in the research grants. Only direct and indirect costs will be covered. And should the research turn up something useful -- and of potential commercial value -- it belongs to the government, which can share it with anyone. And just in case the company should earn something from royalties, license fees, or copyrights on the data it produces, that income, too, belongs to the government up to the full amount of the R&D grant awarded.

Profit is not a dirty word at the Department of Defense, which adds about 4% to contracts it negotiates with suppliers. Called Independent Research and Development/Bid and Proposal (or IR&D/B&P), this money is awarded in addition to contract costs and profits, and is intended to help DoD contractors cover the technical and administrative expenses of preparing their bids and conducting the research required to keep them abreast of the state of the art in their industries. Is the estimated $1.7 billion in IR&D/B&P that Defense handed out in 1979 to its 93 largest contractors, for example, a subsidy, as critics frequently charge? Defense officials say no. But if you run a small company that's trying to get its first DoD contract, you'll be competing with your own money against veteran suppliers whose bidding costs have already been picked up by the government.

Of course, government is supposed to apply an even hand in awarding its R&D business to private firms, so it publishes requests for proposals (RFPs) in the Commerce Business Daily ($105 per year by subscription) where anyone can see them. But there is an old saying in the procurement business, according to a government official who has been there: "If you haven't heard about it before the RFP is published, it's too late to respond." Big businesses keep people in Washington whose job it is to keep their cars open, and those firms get a leg up on the small company that has just 30 days or less to respond to a published RFP.

Sen. Warren Rudman, a freshman Republican from New Hampshire, says the government should start heeding its own studies and turn over more of its R&D work to small businesses. His proposed amendments to the Small Business Act would require most federal agencies and departments to establish "small business innovation research" programs, modeled on the four-year-old National Science Foundation program. Agencies with R&D budgets greater than $100 million -- and that is most of them -- would be required, under Rudman's bill, to set aside specific amounts of their R&D budgets for the small business programs: not less than 0.2% of their total R&D budgets for fiscal 1982, 0.6% for 1983, and 1% thereafter.

Government agencies probably won't like the bill. "We are against it," says a NASA procurement official. He complains about the additional bureaucracy and inefficiency. NASA already has enough authority to do a better job on its own, the official says, adding, "We don't need a law to tell us we need innovation." A spokesman for the Office of Management and Budget said the Reagan Administration had developed no position on Rudman's proposal yet. But, he added, the government's procurement laws have already become an "absolute monstrosity... with set-asides for minorities, women, small business, and disadvantaged business. I would find it very suprising if the OMB did like [the Rudman bill]."

Part of the opposition to the Rudman proposal is more easily understood when you look at what Reagan's budget writers have done to the allocation of R&D money among agencies. Although the Administration has budgeted 28% more money for R&D in 1982 than the 1980, the increase is primarily in the defense area, where R&D spending will rise 54%. In virtually every other agency, R&D budgets have been either cut or increased less than the rate of inflation. Universities, nonprofit organizations, government laboratories, and established government grant and contract recipients can already see their incomes declining.

NASA, which has in the past made efforts to attract small companies into its basic research programs, will pour more of its resources into development programs, according to Stuart Evans, the agency's director of procurement. "Most of our development contracts," he adds, "go to big companies."

In contrast, the NSF has awarded most of its small business grants for applied research. Under the Reagan budget, the NSF will concentrate on basic research where universities and nonprofit organizations get most of the grants.

Even the substantially higher funding for defense-related research may not bring much business to small companies, says Judith Obermayer, president of a Cambridge, Mass., research firm. "When there's so much money to spend and you can't spend it fast enough," she says, "you aren't going to take the time to write a $100,000 or $200,000 contract. You don't want to be caught not spending it all, for heaven's sake."

Rudman and others on Capitol Hill argue that as R&D budgets get tighter, agencies should be turning toward small business, not away from it, to increase the returns on their limited dollars. "This is not a small business relief bill," says a member of Rudman's staff. "This is a way to get federal government R&D needs met more efficiently." -- T.R.

Last updated: Aug 1, 1981




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