McCaskill's small business warpath obscures the goodness of organic growth

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In shocked, outraged tones, Sen. Claire McCaskill (D-Mo.) showed during a July 26 hearing that small business contracting issues are not as simple as they might appear.

Clearly intent on a warpath, McCaskill demanded to know why federal agencies can still take credit for orders placed with businesses that are no longer small.

"We are continuing to count toward the small business goal companies that are not small by anybody's measure," she said in a voice that suggested someone had just burglarized the poor box at a local parish.

The substance of her assertion, however, is absolutely true--and in many cases that's actually a good thing.

A primary reason for federal small business preferences is to promote the organic growth of small businesses. Until 2007, it used to be that a large business could buy a small business and keep the small business designation for orders executed against the acquired unit's small business set aside contracts. That clearly was a practice that subverted the intention of small business programs, which is not to make a handful of small business owners rich, nor to permit loopholes for large businesses to gain small business work.

But in 2007, small business regulations changed to require that a small business undergoing a merger or acquisition--whether novation is required or not--notify its federal customers within 30 days. Afterward, the contracts the business won while a small business can still stand, but the federal agency placing orders against them no longer can claim small business credit.

Any small business that exceeds its small business size due to organic growth can continue to do business on existing contracts with the federal customer claiming small business credit for an additional 5 years--although, obviously, the business can't compete for new contacts as a small business.

Far from being a subversion of the small business program, this arrangement ensures its success in promoting small business organic growth. Small businesses that come by their enlargement honestly receive a cushion and so does the government. Importantly for federal agencies, that cushion ensures some measure of stability in its small business contractors. Were agencies to have to immediately drop a company for having grown too large (or lose the small business credit), an already-stressed procurement system would be even more pressed. The outcome would not be better for small businesses, it would be worse.

McCaskill is a former state auditor and a rare senator who demonstrates an interest in matters such as federal procurement. For that, she's to be highly commended.

But, as I've noted before, oversight is most effective when done by someone who truly understands the subject matter. Things that appear on their face to be totally wrong can, on deeper inspection, prove to have solid reasons for existing. McCaskill, who clearly showed a less-than-comprehensive grasp of federal procurement issues during the July 26 hearing, has the potential to be a strong voice in Congress for procurement reform. But her prosecutorial-like zeal is an obstacle to that. In order to uncover the truly shocking issues, McCaskill must drop the assumption that hers is the only sane voice in federal procurement. Until then, she's just adding to the chorus of babble. - Dave