A Fine Line

I recently spoke to a small-business owner who was fed up. Her frustration echoed what I hear from a lot of small-business owners targeting the federal market: Programs designed to enable smaller players to compete have loopholes that allow big players to cash in while small businesses continue to struggle.

Jill R. Aitoro is senior editor at GovernmentVAR.

For one, she said small businesses often "spin off" from large businesses, which they then partner with on contracts. That way, the original big business can meet its set-aside requirement. The practice, she said, creates an unfair advantage for big business. Others I've spoken to regard it as out-and-out fraud.

But really, is this about breaking the rules or having good business sense? It's a slippery slope.

This brings to mind Thomas & Herbert Consulting (T&H), included in this month's list of 25 successful small businesses. The company's president and CEO, and its executive vice president, are former employees of BearingPoint. Darryl Moody, senior vice president of BearingPoint's Homeland Security and Intelligence practice, worked closely with both as they established consulting careers, and now T&H frequently partners with the systems integrator on government contracts.

BearingPoint is also T&H's big-business mentor in federal mentor-protege programs with the Treasury Department, Small Business Administration, Department of Defense and Department of Homeland Security. The DHS awarded them the first-ever Mentor-Protege Team Award for their work on the DHS Integrated Terrorist Screening project. Currently, the companies work together on the Seaport-e Navy contract, worth $5.3 billion per year for a possible 10 years.

Some might say that BearingPoint helped its own people set up shop so that the company could have a small business in its pocket. But to me, the situation is something else entirely: Two former employees of a mega-contractor saw an opportunity to branch off and knew the smart way to do it would be to leverage their relationships. Does that give BearingPoint an edge in the way of future set-aside contracts that T&H goes after? Maybe; and I'm sure the company figured as much. But again--that's just good business.

Across the board, large systems integrators turn to the same small businesses for subcontracts over and over again. While that might make breaking in a challenge for others, it's not an unreasonable tactic for the integrators to take. When past experience proves a business to be reliable, skilled and capable, why not? It's all about references and whom you know. A job well done should be rewarded with repeat business.

So the integrator that does business with a spin-off consisting of former employees is exercising the same principles, no? Presumably, that integrator enjoys the added benefit of dealing with common business practices on the back end. After all, new business owners will develop business models that mirror what they've seen.

But don't get me wrong. Obviously, it would be naive to think that a fair number of companies aren't coming up with "creative"--and sometimes unethical--ways to win small-business contracts.

Whether it's a midsize firm that fudges its business activities to change the size standard for being deemed small, an integrator that bankrolls a small business--which acts as little more than a storefront--or a big company that tries to pass off a subsidiary as an independent small business so it can win set-aside contracts, questionable tactics are certainly alive and well. It's in the hands of the SBA and watchdog committees to crack down on these activities, close loopholes in the small-business program that allow companies to take unfair advantage and more consistently discipline those that draw outside the lines.

Until that happens, the bad apples have the potential to spoil the bunch, as some segments of the public sector regard companies like T&H with skepticism rather than admiration.

The small-business owner I spoke to actually scoffed at the idea of any small business enjoying legitimate success in federal contracting. Although her own company reported significant growth in the past few years, that revenue came almost entirely from the commercial sector. As far as she's concerned, federal contracting is a losing proposition for small businesses. And that's a shame.