The spoils of deregulation: federal agencies accused of awarding contracts intended for small firms to large corporations.


The spoils of deregulation: federal agencies accused of awarding contracts intended for small firms to large corporations.

By Brittany Hutson
Black Enterprise
February 6, 2009

WHILE THE FEDERAL GOVERNMENT RESCUES Wall Street, small business owners on Main Street are crying foul, charging that federal contracts intended for them continue to get awarded to large corporations. Over the past six years, more than a dozen federal investigations have found large corporations to be the actual recipients of the lion's share of federal small business contracts, according to the American Small Business League (ASBL), a Petaluma, California-based policy advocate group. Lax regulation in Washington has contributed to this ongoing problem much like deregulation on Wall Street led to the current financial crisis.

In July, the U.S. Department of the Interior Office of Inspector General released a study uncovering $5.7 million in awards to large firms credited as small businesses in fiscal years 2006 and 2007. Among those identified were large, publicly traded corporations including Home Depot, Dell, John Deere, Xerox, and Sherwin-Williams.

But ASBL says that figure is only a small slice of a larger pie, claiming the DOI had actually awarded more than $430 million to corporate giants and their subsidiaries. "We believe that between 50% and 86% of all federal small business contracts are actually awarded to some of the largest corporations in the United States and Europe," says ASBL President Lloyd Chapman. "That means small businesses are losing in total $65 billion to $100 billion per year to firms like Hewlett-Packard, General Electric, and Raytheon."

The ASBL accuses the George W Bush administration and federal agencies, including the General Services Administration and Small Business Administration, of willingly diverting billions of dollars in small business contracts to large corporations. In its defense, the DOI report states that large businesses have been incorrectly coded as small businesses due to data entry mistakes, reliance on incorrect data, and not contacting officials to verify business size reported in the Central Contractor Registration.

For Richard Copeland and other small business owners, there is simply no justification for what is happening. "Contracts are a small fraction of the work issued by the government that goes to small businesses," says Copeland, CEO of Thor Construction (No. 66 on the BE INDUSTRIAL/SERVICE 100 list with $63.6 million in sales) and president of the National Minority Contractors Association, an advocacy and member trade group. "For that small fraction to be eroded by lack of diligence and system errors only compounds the problems that minority contractors and small businesses face. Without equal access we continue to lose ground in the effort to be on parity in the mainstream economy."

Karen Hontz, director for government contracting for the SBA, is quick to point out that incorrect size classification in the federal procurement data system-next generation database can be partly attributed to mergers. She explains that when a company such as Home Depot acquires a small business that may have already won a contract with the government, that contract's classification may remain as is. A small business is defined by the SBA as one that contains between 50 and 500 employees, or has revenues between $750,000 and $31 million. "The recertification rule went into effect on June 30, 2007, that said if there was a merger of two small companies, and that acquisition made the company big then they could no longer classify themselves as a small business," says Hontz. This rule is also valid if a large company were to buy a smaller company. However, if a company merged prior to June 30, then it would be shown as a small business until corrected in the register. "It will eventually take care of itself," Hontz adds. "When you've got 12 million contracting actions going on daily, people make mistakes and check the wrong box."

Small business advocates argue that it has taken six years for such mistakes to be corrected, with no solid solution in sight. The issue of small businesses losing out on federal contracts dates back to September 2002, when the SBKs Office of the Inspector General first received numerous complaints. Since 2003, 13 federal investigations and two private studies have all found widespread abuse, fraud, loopholes, and a lack of oversight in federal small business contracting programs, says Chapman, an outspoken critic of the SBA.

Thomas Boston, professor of economics at Georgia Tech, CEO of EuQuant, and member of the BLACK ENTERPRISE Board of Economists, conducted the study Increasing the Capacity of the Nation's Small and Disadvantaged Businesses, examining government small vendors. The 2007 report, commissioned by the Congressional Black Caucus, found 442 large companies listed under the federal government registry as small businesses. The average revenue of small businesses that are federal government vendors was $3 million, Boston notes, whereas the average revenue of the large firms was $172 million.

"Fraudulently registered large businesses have a particular advantage over legitimate small businesses and minority businesses," he says. "The way the program is currently structured and the continued unwillingness to severely penalize large businesses that fraudulently register as small businesses is taking away business opportunities from minority and small businesses. This issue should be addressed as a No. 1 priority."

ASBL has been pushing for Congress to pass legislation to stop the abuse. The Small Business Contracting Revitalization Act of 2007 (S. 2300), drafted by Senators John Kerry (D-Mass.) and Olympia J. Snowe (B-Maine), seeks to close the loopholes in small business contracts that have allowed large companies to prosper. The bill aims to reduce contract bundling; prevent misrepresentations in subcontracting by prime contractors; extend the 8(a) contracting program through 2012; and expand opportunities for minority, women, and service-disabled entrepreneurs

Kerry, chairman of the Senate Small Business and Entrepreneurship Committee, notes that by law, 23% of federal contracting dollars are supposed to go to small business, a benchmark not being met.

"Sadly, businesses lose billions of dollars in lost opportunities because of loopholes in our contracting system," says Kerry. "I've fought to close these loopholes and add accountability and oversight. We need to strengthen programs to level the playing field for small business firms."

Rep. Benny G. Thompson (D-Miss.) acknowledges that there is a problem. "Unfortunately, we do not know how big this problem may be because there's been no effort to systematically review the database entries. The SBA's Office of Inspector General has found these potential data errors could be easily corrected. To date, those corrections have not been made." Thompson says government-wide procurement reform has not occurred but there have been limitations placed on practices that undermine the ability of small businesses to prosper as subcontractors.

Thompson adds that small and minority businesses have been marginalized in several ways: lead integrator contracts that misuse small and minority businesses, no opportunities to compete due to contract bundling, and large businesses posing as small to get contracts.

According to the SBA Office of Inspector General's Oct. 16, 2007, financial report, the agency has made substantial progress in implementing a program that promotes accurate contractor certification. It further states that the SBA is ensuring federal agencies accurately report the number of contracts they award to small businesses. However, in his statement for the report, former Inspector General Eric M. Thorson admits there has been limited progress in regard to issuing regulations that require firms to meet size standards, and providing adequate educational training on small business contracting procedures.

At press time, the SBA had refused to release its goaling report for fiscal year 2007, which outlines whether the agency met its 23% procurement goal for the past yeas In September, the agency suspended taking applications for the small disadvantaged business program, Chapman says. He adds the SBA's funding cut and the firing of employees within the SBA that ensured minority-owned businesses got their fair share of contracts, is "astonishing" and "disappointing."

SBA officials declined to respond to Chapman's allegations and declined a request for an interview on this matter.

"Small businesses and minority business owners are not getting anywhere near the volume of federal contracts they're supposed to by federal law," Chapman says. "If Congress does not pass legislation to stop this, it's going to threaten the futures of business owners, and opportunities for people to start new businesses will be severely limited as money is diverted to large corporations."


The view from Maine Street


The view from Maine Street

Tapped by Obama to run the Small Business Administration, Wall Street veteran Karen Mills will need to move quickly to unlock the cash and assistance needed by struggling businesses - including those

By Sara Bridget Au
February 6, 2009

BRUNSWICK, MAINE ( -- In Brunswick, Maine, the road running through the center of the town is spelled like the state: Maine Street. It's quintessential New England, picturesque and steeped in history - and like so many other downtown districts around the country, Maine Street is filled with small businesses struggling to survive the ongoing recession. But Maine Street's business owners will soon be looking to one of their own for help, when local resident Karen Gordon Mills takes charge as the new head of the Small Business Administration.

Until President Barack Obama tapped her as his SBA pick, Mills was best known in Brunswick as the wife of the president of Bowdoin College, the town's Ivy-esque liberal arts institution. Most of Mills' business dealings took place 350 miles south, in New York City, where she co-founded the venture capital firm Solera Capital in 1999 with two partners. Mills remained a managing director at Solera until 2007, although a spokeswoman for the company says her final few years were in an advisory capacity.

A Harvard MBA grad, Mills has spent most of her career working with corporate giants and companies that aspire to become them. Owner of the private-equity firm MMP Group, which she founded in 1993 and now runs from her house in Brunswick, Mills has sat on the boards of directors for Scotts Miracle-Gro (SMG) and for Arrow Electronics (ARW, Fortune 500), a $15 billion semiconductor distributor.

But if Mills wants to hear about the concerns of family-run business owners, she need only pick up the phone: Her parents, Ellen and Melvin Gordon, have owned most of famed candy maker Tootsie Roll Industries (TR) for five decades. The company reported sales of $496 million last year.

"She is an extraordinary choice for head of the SBA," says Michael Porter, a Harvard Business School professor who has known Mills since she was a student. "Given her background, she knows more about entrepreneurship and business growth than any administrator in recent memory."

Mills will need all of her skills and resources to pull the SBA out of its quagmire. Eviscerated by budget and staffing cuts and weighed down by bureaucracy, the SBA hasn't been a powerful force in Washington for years - Bush stripped from its administrator the Cabinet-level status President Clinton had accorded. At a time when companies most need access to cash, small business loan volumes are way down, stalling startups and endangering existing businesses that need help surviving the recession. Want to know how bad it's gotten? Just talk to the businesses along Maine Street.

"If I were able to have a conversation with Karen, I'd like to hear her ideas, like what kind of incentives for small businesses [might become available] that would hit the local level," says Martin Perry, 51, co-owner of Brunswick's Oo La La card and gift shop.

Mills was a customer of the shop, but she won't be able to stop by much longer. Just this week, after a stretch of days with negligible sales, Perry and his business partner, Henry D'Alessandris, decided to close their store.

Struggling on Maine Street

Perry and D'Alessandris, started, grew and sold two other small businesses, a lobster wharf and a restaurant, before opening Oo La La in 2005. D'Alessandris, 60, is also a chef, and has catered private parties for Mills, including her three sons' bar mitzvahs and a dinner with Senator Olympia Snowe, who backed Mills for the SBA job.

Like many proprietors in small towns across the country, Perry and D'Alessandris' have been struggling for months to keep their business afloat. They slashed payroll, cut back their inventory, and laid off their only employee. But that hasn't been enough.

"It's just been wicked slow, and I don't want to sit here for two more years before it gets better," D'Alessandris says. "I want to get out before worse gets worse."

Brunswick's economy was swamped when skyrocketing gas prices cut deep into prime tourist season this summer. Looming larger on the horizon is the scheduled closure of the Brunswick Naval Air Station in two years.

Richard Gnauck of Richard's, a German-American restaurant on Maine Street, fears the economic double-whammy of the recession and the base closure. "It's going to be a rough ride," he predicts. "You have to eat, but you don't have to go out to eat. That's one of the first things you cut."

Gnauck, 62, employs 13 people, including his two sons, who work in the kitchen. He owns his entire building and rents two upstairs apartments, often to people associated with the Navy. To conserve cash, Gnauck has put off large purchases and repairs. He may need to cut a shift from each employee to avoid layoffs.

"I can't go to the Senate and say I need a million dollars to pay off my mortgage," he says. "I just hope she can help us along, see the problems that small towns are having."

From Wall Street to Maine Street

Former Maine Governor Angus King, a fellow Brunswick resident, believes Mills' experience on Wall Street and Maine Street will be invaluable at the SBA.

"I think she has a foot in both worlds, in the sense that she worked in New York in private equity and that kind of thing, but then the businesses they were investing in were 'Main Street' kinds of businesses, like Annie's Macaroni & Cheese," says King, citing one of Solera Capital's best-known investments, in the Annie's Homegrown line of organic pantry staples.

Mills, who is keeping a low profile until after her confirmation hearing, declined to be interviewed for this article. If her past work is indicative of her future policy plans, one likely area of attention is business clustering, an economic approach popularized by Mills' former Harvard professor, Michael Porter, and by recent Nobel laureate Paul Krugman.

Clustering advocates promoting geographic pockets of expertise, allowing related businesses to build up and draw upon a shared pool of labor, suppliers and intellectual capital. The best known example of clustering in the U.S. is Silicon Valley, the epicenter of the tech industry.

In April, Mills co-authored a report for the Brookings Institute promoting an expanded federal-government role in fostering regional economic clusters. Her report recommended a two-prong effort: First, create an information center to map, track and conduct research on cluster dynamics; and second, establish a financial grants program to support regional and state cluster initiative programs. The report estimated the annual costs of this plan at $360 million.

Mills has already had a chance to put theory into action. Both King and Porter say her work has been instrumental in boosting Maine's boat-building cluster, which secured a $15 million grant from the Department of Labor's WIRED program.

Mills is also experienced with one of the most daunting issues confronting many locales: Replacing extinct industries. A member of the advisory board for the Governor's Council for the Redevelopment of the Brunswick Naval Air Station, Mills has been an active participant in discussions about how to replace the local military base after it closes in 2011.

"She's a very thoughtful and insightful person," says Steve Levesque, executive director of the redevelopment organization, who sits on the state board with Mills and counts her as a confidant. A former small business owner who's had dealings with the SBA, Levesque is delighted with Mills' selection because of her hands-on business experience.

"Unlike a lot of political appointments, they picked a practitioner," he says.

But much of Mills' practical experience is in high finance and public policy, a point of contention for advocates of the smallest small businesses. Lloyd Chapman, president of the American Small Business League, a Washington lobbying group, views Mills' background as a red flag: "She's a multimillionaire venture capitalist from New York. That doesn't fit my definition of small business."

Chapman has been fighting, and suing, the SBA for years over the number of government contracts earmarked for small businesses that instead go to firms controlled by venture capitalists or Fortune 500 companies.

"If, in her first week, she doesn't address this issue, she shouldn't be allowed to stay a second week," he says - but he doesn't hold out much hope. His prediction: "She'll be a big opponent of mine for the next four years."

Throughout her career, Mills has had one foot in the business world and one in the political realm. In addition to her service on assorted advisory boards, Mills has been an active political donor, contributing more than $60,000 over the past decade to a variety of Democratic office-seekers, including both to Barack Obama and, before he won his party's nomination, to his main rival, Hillary Clinton. In July, Mills donated $28,500 to the Obama Victory Fund, a fundraising operation that distributed cash to Obama's campaign and to the Democratic National Committee. She has worked closely with most of Maine's political leaders, including current governor John Baldacci, for whom she chairs an economic council.

But Mills' defenders say she is in tune with the needs of entrepreneurs running companies that will never be power players on Wall Street or in Washington. Jane Sheehan, CEO of the Foundation for Blood Research in Scarborough, Maine, served with Mills on the board of the Maine Technology Institute, a government-funded nonprofit that invests in local technology initiatives. Maine entrepreneurs often prefer to fly solo - Sheehan speaks admiringly of the "lobsterman mentality" of self-reliance and austerity - but Mills helped bring local owners together to collectively strengthen their businesses, Sheehan says.

"She demonstrated solutions [to them] that if they cluster together for a common purpose, the cluster would bring resources needed to make their industry grow," she says. "I think she'll be a breath of fresh air, not only for Maine small businesses, but for other rural states."

Awaiting confirmation

Mills confirmation hearing in the Senate has not yet been scheduled. As the Senate devotes its attention to crafting the massive and urgent $900 billion stimulus package, Mills has her own distractions: Soon after she accepted the SBA nomination, her college-age son Will required emergency surgery for a brain tumor. Mills' husband Barry has told students and colleagues at Bowdoin that Will's long-term prognosis looks good, and a spokeswoman for Obama's transition team says Mills' nomination is on-track and moving forward.

Balancing her professional and family lives has always been a priority for Mills. The mother of three sons, Mills commutes several days each week between New York City and Brunswick. With the SBA job, her weekly commute to Washington will be "just another short plane ride away," Barry Mills said in a note posted on Bowdoin's Web site.

Brunswick residents are used to seeing Karen at her sons' sports games, at college events, and around town at Brunswick's shops and restaurants. According to Mary Herman, the wife of former Governor King and a close friend of Mills, Karen has always scheduled business trips so that at least one parent is home for their teenagers every night. "They want to be there for homework and for supervision," Herman says. "She's absolutely down to earth and never hesitates to roll up her sleeves and be a helpful friend."

On Brunswick's Maine Street, business owners hope to see Mills roll up her sleeves at the SBA. "I don't see [the stimulus and bailout] trickling down real fast to the small businesses of America, but we do have hope with this new administration," Perry says.

"It would be a shame to see this quality of life go. You just need to look at Maine Street to know that things can go either way." To top of page


Stimulus Bill Ignores Census Bureau Statistics

Press Release

Stimulus Bill Ignores Census Bureau Statistics

February 6, 2009

Petaluma, Calif. – According to a report from the Small Business Administration (SBA) Office of Advocacy, businesses with fewer than 20 employees account for 90 percent of all U.S. firms and are responsible for more than 97 percent of all new jobs. The SBA compiled the report from the latest United States Census Bureau data. (

Detailed analyses of the report were released by and (

Although the nation's top economists agree that creating jobs is essential to a successful stimulus plan, neither the House, nor Senate versions of the stimulus bill contain any provisions specifically directed to the small businesses that create most new jobs.

Economic experts like Dr. Laura Tyson and Carly Fiorina have both acknowledged that directing federal infrastructure funds to small businesses would be the most effective way to stimulate our nation's failing economy.  Tyson is the former Chair of the U.S. President's Council of Economic Advisers during the Clinton Administration and is currently an economic adviser to President Barack Obama. Fiorina is the former CEO of Hewlett-Packard and McCain campaign economic advisor.

During the Bush Administration, federal programs developed to direct federal spending to small businesses were partially dismantled and plagued by widespread fraud and abuse. Since 2003, more than 15 federal investigations have found billions of dollars in federal contracts earmarked for small businesses were actually diverted to Fortune 500 firms, their subsidiaries and other clearly large businesses.

The American Small Business League (ASBL) has launched a national campaign to encourage President Obama and Congress to include a provision in the economic stimulus bill that would bolster federal contracting programs for small business, and eliminate existing abuses in federal small business programs that have diverted billions of dollars in federal small business contracts to Fortune 500 firms.

As early as February 2008, President Obama agreed with the ASBL by stating, "Small businesses are the backbone of our nation's economy and we must protect this great resource. It is time to end the diversion of federal small business contracts to corporate giants." (

The ASBL estimates that if Congress added a provision to the stimulus bill that would stop the flow of federal small business contracts to large businesses, as much as $100 billion a year in existing federal infrastructure spending would be diverted back to America's small businesses.

On December 6, President Obama's transition team estimated that every billion dollars spent on federal infrastructure projects would create 40,000 jobs. Based on President Obama's estimation, the ASBL projects that a simple pro-small business provision in the stimulus bill to stop the flow of small business contracts to large corporations would create up to 4 million new jobs. (  

Survey: Most new jobs come from small businesses


Survey: Most new jobs come from small businesses

The economy picked up 9,000 new jobs in July, according to ADP, thanks to small companies that are hiring even as larger businesses shed workers.

By Brandi Stewart
February 5, 2009

(Fortune Small Business) -- Small businesses drove much of the employment growth in July, according to a report released Wednesday by payroll manager Automatic Data Processing (ADP, Fortune 500). Firms with fewer than 50 workers added 50,000 new non-farm jobs to the private sector this month, which offset the 41,000 jobs dropped at medium and large companies.

ADP partnered with research firm Macroeconomic Advisers to measure the change in headcount at 400,000 of ADP's U.S. clients. Most gains came in the services sector, which includes fields such as education, financial services, health, hospitality, retail and transportation. Small services firms added 56,000 new jobs in July, according to ADP's count.

Small companies are a reliable source of new jobs: While businesses with 50 or more employees have posted net job losses for the past six months straight, small-business employment has expanded every month since November 2002, according to ADP's study. Last month, with a net gain of 7,000 workers, was the smallest increase in six years.

"Small businesses have been somewhat of the employment savior," said researcher Joel Prakken, chairman of Macroeconomic Advisors. "When I look at this report, I see a continuation of a pattern that's been in play for a while. We have a sharp contraction going on in manufacturing and construction, offset roughly by continued, modest expansion in the service sector."

Small businesses weren't immune to the downturn in contracting industries: employment at "goods-producing" small companies, which include manufacturing, mining and construction businesses, dropped by 6,000 jobs in July, according to ADP. Even at small companies, that sector hasn't shown job growth since June 2007.

ADP's findings offer some uplifting news amid a troubled economic landscape. The Labor Department reported a net loss of 62,000 jobs in June, marking the sixth straight month of decline. Recent surveys suggest that while entrepreneurs are still hiring, they're anxious about the economy: 80% of small-business owners polled by Suffolk University earlier this month said they think the country is in an economic recession, and 86% feel the government isn't doing enough to help small businesses.

The latest installment of the Small Business Economic Trends Report, a monthly study from the National Federation of Independent Business (NFIB), found that optimism among those polled is the lowest its been since 1986.

Even Prakken points out that his firm's findings do not suggest a strengthening economy: "If you look at our numbers for small-business employment growth, you'll see that employment is not growing as quickly as it was two years ago," he said. "I expect overall employment numbers to continue to be weak going forward for medium and large business, but they will be offset by modest gains in small businesses."

In the NFIB's June report, 14% of the business owners polled said they plan to create new jobs in the next three months, while 8% said they foresee staffing reductions.

"[Small-business owners] are more cautious about hiring, but they are still moving forward and still creating jobs out there," NFIB chief economist William Dunkelberg said.

Macroeconomic Advisers' Prakken, a small-business owner himself, views even modest employment creation among small businesses as a sign that the U.S. is still innovating.

"I'm always happy to see small-businesses numbers up, because it means that even in a soft economy, entrepreneurs are still looking for ways to expand and grow," he said. "A lot of dynamism in the U.S. economy comes from the creation of new businesses."  To top of page


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National Venture Capital Association President Admits They Are Going After Small Business Programs

Press Release

National Venture Capital Association President Admits They Are Going After Small Business Programs

Venture Capitalists Step Up PR Campaign to Hijack Small Business Contracts

February 5, 2009

Petaluma, Calif. - National Venture Capital Association (NVCA) President Mark Heesen issued a press release Tuesday that finally acknowledged the NVCA and its wealthy members have set their sights on federal contracts earmarked for small businesses.

In the press release, Heesen acknowledged the NVCA had asked Congress to allow firms controlled by some of the nation's wealthiest investors to land federal small business grants under the Small Business Innovative Research (SBIR) program.

In addition to the SBIR program, the NVCA has blanketed Congress with millions of dollars in political contributions aimed at changing the existing federal definition of a small business, which is currently defined as "independently owned." The NVCA is pushing to change the government's definition of a small business for all federal small business contracting programs to include firms that could be owned by well-heeled venture capitalists and some of the largest venture capital firms in America.

Small business advocates are concerned the legislation the NVCA is advocating for would create a colossal loophole in federal contracting law that would divert billions of dollars in federal small business contracts to wealthy investors and destroy millions of legitimate small businesses and middle class jobs.

In recent years, the NVCA's efforts to take over federal small business contracting programs have been opposed by the White House, the Small Business Administration (SBA), the United States Chamber of Commerce, the National Association of Government Contractors, the National Small Businesses Association, the American Small Business League (ASBL) and hundreds of other small business groups and individual chambers of commerce across the country.

The ASBL is concerned President Obama's appointment of venture capitalist Karen Mills to head the SBA could spell disaster for millions of American small businesses.

ASBL President Lloyd Chapman has consistently opposed the NVCA's campaign to take over federal small business contracting programs.

"The NVCA has tried to paint its legislation as something that will benefit small businesses. Nothing could be further from the truth. This is about greed, money and profits for the NVCA and it's members at the expense of legitimate small businesses," Chapman said. "Their multi-million dollar lobbying campaign is nothing more than a blatant attempt to buy legislation that will allow their members to hijack federal small business contracts. If the NVCA succeeds, millions of hard working small business could be forced to close their doors and millions of jobs will be lost. Any member of Congress that votes for this anti-small business legislation should be run out of office."