Bad Medicine

The SBA's minority set-aside program could use some reforms, but not the idiotic ones being advanced in the wake of Wedtech

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When I first tried to market my company's engineering services seven years ago, as a minority defense contractor I had a tremendous amount of difficulty simply getting into the offices of prospective customers. Despite my 17 years of firsthand experience in the industry as a naval project officer and acquisition manager, and with a master's degree in engineering, many people could not get beyond the point that I was black. They talked down to me, explaining the acquisition process for government contracts even though I'd spent the better part of my professional life in this field. It was a humiliating experience.

Now, my company is on the INC. 500, and in 1987 had revenues of $36.4 million, nine offices nationwide, 650 employees, and a substantial contract backlog. Much of that success is the result of our emphasis on a quality product -- and when I needed assistance to get into a difficult market, the Small Business Administration's set-aside program for minority-owned businesses, known as 8(a), allowed me to negotiate for government contracts outside the normal bidding process. Once in that market, our performance carried us, and after five years, we left the program. (Companies are eligible to remain in the program for as long as seven years.)

In the wake of the Wedtech scandal [Wedtech Corp., an 8(a) company, is the South Bronx-based technology company that allegedly bribed politicians to obtain government contracts], Congress is considering legislation aimed at "reforming" 8(a). Wedtech the company was a pawn in the hands of ambitious people who, by virtue of their relationships with the highest offices in government, manipulated the business for personal gain. Wedtech the political issue is something potentially worse: a knee-jerk reaction on the part of politicians that could cripple the ability of all minority-owned companies to gain a foothold in the government marketplace.

I'm not saying that the 8(a) program is perfect. I've been a advocate of change ever since I was a participant. The program was designed to foster entrepreneurship, but it has been relegated to a conduit for processing contracts. While the SBA has some truly dedicated people, it also has many who do not understand enough about business to be of any assistance to developing companies. So you have companies growing up virtually overnight from start-ups to multimillion-dollar businesses with little or no understanding of what they should or should not be doing.

Last May a U.S. Senate report estimated that the failure rate could be as high as 30% for 8(a) graduates. Considering some of the problems, it's no wonder. Many of these companies had never competed for a contract. Once they were on their own, not only had their sources of revenue dried up, but lending institutions, which no longer saw the right financial ratios, started pulling back as well.

Then came Wedtech. The 8(a) program became the political football of the Wedtech scandal. Now the absurdity begins. Instead of meaningful restructuring, many well-intentioned but not so knowledgeable policymakers started to poke holes in the dam, while a few real opponents started taking legislative potshots based on their personal pet peeves.

One faction says, "Let's look at the owner's wealth." It doesn't matter where the owner starts off, if he becomes wealthy along the way -- if his net worth is over $250,000 -- boom. We put him out of the program. More often than not, of course, it's the founder's net worth that is guaranteeing the company's lines of credit, and his net worth is tied to the value of the company. Therefore, if the company starts to succeed, we should stop it from participating for fear the owner might become wealthy? The logic escapes me.

Another proposal: 8(a) graduates must maintain a 55% ownership after graduation, or all 8(a) contracts and option years will be canceled and the company will have to pay reprocurement costs. When other companies need to raise capital, they frequently give up a piece of the rock. They use public offerings, venture capital, ESOPs, and various other vehicles to finance their continued growth and health. For 8(a) companies, the program's objective is to mainstream the graduate on the one hand; on the other, we will legislatively hamstring it so it cannot obtain the capital resources it needs to develop.

A third proposal would prohibit the award of any noncompetitive contract whose value exceeds 1150% of the company's largest previous contract. That means if you're a start-up and your initial contract is worth $10,000, your next contract cannot exceed $25,000. I can't in my wildest imagination figure where that 150% number came from. It's absurd. It would prohibit a new business from any reasonable growth opportunity, and it was manufactured to prevent minority small businesses from capitalizing on the megabuck government marketplace.

Of course, you can find horror stories in 8(a) companies much as you can in any other group of companies. The more important point, though, is that the program has helped many more legitimate minority entrepreneurs overcome the bias of the marketplace and contribute to the economic well-being of the country. I'd rather see individuals getting wealthy running a business than doing a drug deal, which, unfortunately, is where many minority youth see the dollars. As a nation, we need the 8(a) program to be able to create opportunities for some of these kids, to assist in the development of role models, and to try to bring some economic parity to the minority communities.

The 8(a) program does not reactive legislation of the nature being bantered about. Constructive change -- emphasizing marketing, business planning, competition, and building corporate infrastructure -- is needed. When we start reacting legislatively to plug holes in the dam, we very soon learn that it might be wiser to rebuild the dam. After all, dams prevent floods.