Graduation Day

Joshua Smith built the fastest-growing black-owned business in America. But can Maxima survive its graduation from the government program that made success possible?

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AS HE SIPPED CHAMPAGNE AT THE New York Marriott Marquis and looked out at the New Year's Eve revelers below in Times Square, Joshua I. Smith had reason to celebrate.

The year 1985 had been filled with accolades. Smith's information-management company, Maxima Corp., had been named federal government contractor of the year by the Commerce Department's Minority Business Development Agency. Black Enterprise magazine had designated it the fastest-growing black-owned business in the country, good enough to keep Maxima on the INC. 500 list of the fastest-growing privately held companies for the second year. And Smith himself had been chosen as the U.S. Department of Energy's first minority entrepreneur of the year.

Now, as he shared a second bottle of champagne with his wife, Jacqueline, Smith dreamed of the day he would head the first black-controlled Fortune 500 company, solving the information problems of other companies and the government.

The euphoria didn't last.

On January 3, 1986, the phone rang. David Smith, Maxima's corporate vice-president and general counsel and Josh's younger brother, was calling from the company's Rockville, Md., headquarters. Josh stiffened as he heard David's news. "I got that call and it wiped out the whole vacation," Smith recalls. "I said, 'Oh, shit. Our whole business base is gone."

For nearly seven years he had guided Maxima through the Small Business Administration's set-aside program, a means for small minority-owned companies to win government contracts. Smith had known that Maxima, with fiscal 1985 revenues of $27 million -- mostly in the design and management of government records and computer systems -- would soon be too large to qualify for the program. But he thought there was still time for one more big round of contracts. His managers had been laboring to build a backlog of contracts to ease the transition to the harsh world of competitive government and commercial bidding. They had won promises of some $100 million in contracts that would have lasted five years, the maximum time allowed.

Now the SBA was refusing to approve any of these contracts. For Smith, whose company was the program's prize pupil, the champagne had just gone flat. Much of his business base was gone. And his company, like many others graduating from the set-aside program, still hadn't developed a coherent product strategy or a strong marketing presence.

The issue had become one of survival.

Josh Smith knew from the start that working with the SBA wouldn't be easy. In August 1978, a few months after opening his one-man office in Silver Spring, Md., he applied for certification in the set-aside program. And waited.

Smith knew that the program, known as 8(a), was worth the wait. It offered a vehicle by which minority-owned businesses could grow fast. Begun in 1968, 8(a) served the laudable purpose of encouraging minority entrepreneurship, long held back by discrimination. While other companies had to endure the arduous process of bidding on government work, 8(a) firms could grab contracts quickly through person-to-person negotiations; in fact, price wasn't negotiated until after an agency picked the contractor based on its capability. Contracts in hand, these minority companies typically enjoyed improved access to capital.

There was a down side to the program, though. It didn't encourage minority executives to develop the skills and strategies needed to survive in a competitive environment. Many companies, succumbing to the temptation to pursue any contract remotely related to their businesses, failed to develop a strong product and marketing strategy aimed at a specific niche. When they left the program, their operations tended to be unfocused.

The program had endured criticism on Capitol Hill for other reasons, too. Critics pointed to past scams in which some minority "owners" illegally fronted for whites who actually controlled the companies. They also criticized the SBA for letting too few businesses control too great a percentage of 8(a) contracts. Once in 8(a), most companies stayed there -- a logjam that would eventually be changed by regulation -- and as a result, few new ones could get in.

Smith thought he could avoid the program's economic traps and political pitfalls. His first taste of reality came when he tried to get into 8(a) -- a club that accounts for $3.1 billion, or less than 2%, of federal contracts awarded annually. Two months passed and his application hadn't been processed. His calls went unanswered.

Every morning, Smith stopped in at the SBA district office in Washington, D.C. "I would tell the secretary, 'Joshua Smith is here, and he is not going away until you tell these guys who would not answer his phone calls," he recalls. He followed officials who had avoided him to the bathroom. "I would stand behind them," says Smith, a barrel-chested, full-bearded man of 46. "Then I would say, 'I know you won't answer my phone calls, but I want to tell you something. I am not going away. I am not going away until I am certified [as an 8(a) contractor]."

As he waited, Smith dreamed big. As former executive director of the American Society for Information Science, he was convinced that most companies were ill-prepared to manage their information needs. And he felt the marketplace was needlessly fragmented: some companies sold computer hardware, some software, and some service. Smith eventually wanted to do all three, but around $15,000 of his own money couldn't buy all that. So he concentrated on service.

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