The Small Business Administration still plans to simplify its small-business size standards despite its recent decision to reassess changes it proposed in March. Thousands of public comments raised significant concerns about the planned changes and led SBA to pull back.

"We are still committed to trying to find ways to simplify the size standards to make them easier to use and understand," said Gary Jackson, SBA's assistant administrator for size standards.

Jackson said SBA will solicit comments on specific options for revising the size standards through an advanced notice of proposed rulemaking, which will be published in the Federal Register this summer. The agency also plans to hold hearings nationwide to discuss changes, Jackson said.

The size standards define what constitutes a small business for the purpose of federal government contracting. Companies that meet the standard in their industries can qualify for SBA loan programs, contracts set aside for small businesses and other federal business-development programs.

SBA earlier this year proposed shrinking the number of size standards from 37 to 10. All the standards would be based on number of employees. Currently, some size standards are based on annual revenue, and others are based on employee count.

Under SBA's proposal, some industries, including information technology, would get both an employee cap and a revenue cap. To be considered small, IT services companies could have no more than $30 million in annual revenue and no more than 150 employees.

After SBA began receiving large volumes of comments on the proposal, the agency in mid-May extended the deadline for comments to July 2, when SBA Administrator Hector Barreto withdrew the rule, saying further assessment was necessary before any changes could be made.

The agency has received about 4,500 comments on its proposal, including 800 since the proposed rule was withdrawn, Jackson said. At least half of the comments support a change in the size standard from 500 to 100 employees for non-manufacturing companies such as resellers, Jackson said.

However, about half of the comments oppose one or more parts of SBA's proposed rule, Jackson said. For example, many executives complained that the proposed 150-employee cap for IT firms would push small companies into large-business status well before they reached the $30 million revenue cap.

hose companies could no longer pursue small-business set-aside contracts nor accept work from large businesses seeking small-business subcontractors, executives said.

Several IT industry groups welcomed SBA's decision to step back temporarily from its rulemaking effort. The House and Senate Small Business Committees and SBA's watchdog Office of Advocacy also had objected to SBA's proposal.

Sen. Olympia Snowe (R-Maine), who leads the Senate Small Business and Entrepreneurship Committee, objected to the proposal because the new standards would reclassify 34,100 small businesses as large businesses.

But SBA said 35,200 businesses could gain small-business eligibility under the new standards, so the net effect would be an increase of 1,110 companies defined as small.

Still, jettisoning more than 34,000 small businesses from the federal marketplace would hurt not only those companies but also the large companies that team with those businesses to meet federal subcontracting goals for small businesses, said Harris Miller, president of the Information Technology Association of America, an Arlington, Va., trade group that opposed SBA's proposal.

Valerie Perlowitz, chairwoman of ITAA's Small Business Subcommittee, said she wasn't surprised SBA temporarily put its rulemaking effort on hold.

"SBA is doing the right thing by trying to streamline the size standards, but it is very difficult to figure out a good methodology when you are dealing with so many different industries," said Perlowitz, president and chief executive officer of Reliable Integration Services Inc., a small IT contractor in Vienna, Va.

That difficulty is why Giovanni Coratolo, director of small business policy at the Washington-based U.S. Chamber of Commerce, said he thinks SBA should revise only certain size standards if necessary, not all of them.

"All fiddling with the rules does is change long-standing standards by which small businesses entered into this [federal contracting] arena and developed strategies based on those rules," Coratolo said.

"I would like to see the rules stay the same, unless they can make a case why they should be changing a specific size standard. Simplicity is not a good reason."

Perlowitz, on the other hand, said she'd like to see SBA create a grandfather clause that would temporarily protect the small-business status of companies that would be pushed out of small-business programs as a result of a size-standard change. She said a grandfather clause would help companies that built their business plans around the current standards.

At least one industry group was unhappy about SBA's delay. Lloyd Chapman, president of the Microcomputer Industry Suppliers Association in Petaluma, Calif., said his organization prompted 2,000 of the 4,500 comments to SBA.

Those 2,000 comments were form letters that supported a part of SBA's proposed rule that would have cut the non-manufacturer size standard from 500 to 100 employees.

"An overwhelming number of people were in favor of the change from 500 to 100. They were a representative sample of the American public," not just computer sellers, Chapman said.

Chapman's group represents small information technology suppliers. He said SBA's rule withdrawal shows that the agency is discounting his group's input.

Jackson disagreed.

"Multiple comments from an organization are a gauge of how strongly the members of the organization feel, but we also need to put that in context," he said. "You may have other organizations that represent a large membership that are taking a position most members support, but through one letter."

"The non-manufacturer size standard, in my opinion, needs to be reviewed and considered," Jackson said.

Reaction is mostly positive to the Small Business Admin.'s decision to pull proposed regulations to change the size-standards system to one based primarily on employment from one based mainly on gross receipts. But the problems cited by commenters won't be easy to resolve.

Several commenters assert the current system isn't broken, and at least one says the rules for determining whether a small firm is affiliated with a large business and therefore ineligible for favorable treatment is the real problem.

About 2,300 of the more than 3,700 comments support a proposal to reduce to 100 from 500 the number of employees a non-manufacturing firm can have to still be considered small. Those commenters do not address the proposed switch to an employment-based system.

It is far from certain SBA's plan for another try with more public input before a rules change is proposed can achieve a more acceptable outcome. This is because there are fundamental conflicts in the objectives of different stakeholders.

On one hand, federal agencies are struggling to meet the statutory procurement goals for small business and various socioeconomic subcategories of ownership. If "small" is defined to include larger companies than current rules permit, it would be easier for the agencies to meet the goals.

The Defense Dept.'s threat to seek legislation changing to an employment-based method produced an interagency task force, eventually leading to the SBA proposal. DoD was finding many small businesses, if they received a DoD contract, would become large businesses in a revenue-based system.

Frank Ramos, director of DoD's OSDBU, praises SBA's effort and says he's confident the final product will meet his agency's needs. Ramos says he is making progress in solving the problem with teaming agreements between small companies to handle large contracts without exceeding the revenue limits.

To translate the revenue-based regime into an employment-based system without making small-business preferences available to obviously large concerns, the SBA size standard experts had to ensure small really was small within a given industry.

The proposed new system would have replaced the current one with 37 size levels, 30 of which are based on average annual receipts, with 10 employee-based categories.

In forecasting the impact of the new system, SBA used 1997 Census data and concluded 35,200 businesses would gain eligibility and 34,100 would lose it for a net gain of 1,100 businesses classified as small. SBA saw this as a positive net effect (MBI, 04-4p3).

But the Office of Advocacy does not.

An analysis provided without charge to OA by Eagle Eye Publishers Inc., a Fairfax, VA, specialist in federal procurement statistics, shows the changes would increase federal spending because firms now considered large would be defined as small. Eagle Eye says companies in the top 25 North American Industrial Classification System codes that set to become employment-based would enjoy a 5% increase in procurement dollars.

" The effect of this may be to crowd out existing small businesses," OA tells SBA in a letter requesting the rules be pulled.

OA says the Regulatory Flexibility Act requires SBA to further examine by industry the impact of the rule change on the 34,100 firms adversely affected by it. This analysis should extend to small nonprofit organizations and small government jurisdictions. Some nonprofits are eligible for micro loans and disaster loans.

One of the most controversial elements of the SBA proposal would have reduced to 100 from 500 the maximum number of employees a non-manufacturing company could have to be considered small.

Lloyd Chapman, the California information-technology executive who has led a campaign to expose large companies falsely claiming to be small, mounted an effort to get companies, chambers of commerce and small towns to write in favor of the change. The result was more than 2,300 comments in favor.

But the Coalition to Preserve Small Business says this would instantly strip small-business status from at least 774 small businesses and SBA did not analyze the impact of this.

Chapman, who has founded the American Small Business League to work for the reversal of government policies and practices, which have hurt small business (see p5), notes Census figures show 98% of the 5.7 million firms with employees had 100 or fewer employees in 2001.

SBA plans to publish an advance notice of proposed rulemaking requesting additional information on issues raised by the comments and it may schedule public hearings.