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OMB
report underscores need for supply chain initiative
National Commission on Entrepreneurship
November 12, 2002
Three years ago, it seemed like every entrepreneur was
fixated on getting venture capital. Today, it seems
like government contracts are the new fixation. As private
funding dries up and large corporation balk at new purchases,
the Federal government has become the target customer
of both first and last resort for many new companies.
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MEP
helps manufacturers cut costs and streamline production.
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A
simple look at the numbers explains the interest in
government contracts.
Government
spending is booming. This year's defense budget of roughly
$384 billion grew by more than 10 percent over the previous
year — one of the largest one-year budget increases
in recent history. New funding for homeland security
comes on top of this increase.
According
to the Center for
Strategic and Budgetary Assessments, roughly $70
billion in funding has been spent on homeland security
and combating terrorism since the September 11th attacks.
This is a huge increase, as spending for these purposes
averaged less than $20 billion per year prior to 9/11.
Roughly
half (47 percent) of this money has gone to the Pentagon;
the remainder has been used by various other agencies
like the Department of Transportation. While it's unlikely
that we'll see further budget increases of this sort,
robust spending on these programs is predicted for the
next few years.
This
new funding has created a tremendous market opportunity;
both older, established players and newer entrepreneurial
ventures hope to gain new business. Yet, turning that
dream into a reality can be difficult.
Even
though government agencies encourage new competitors,
competing and winning a contract can be tough. First,
the competition can be intense. For example, in the
aftermath of September 11th, the Pentagon issued a call
for "new ideas" in the war against terrorism. The response
was incredible as 12,400 proposals rolled in. Yet, only
$40 million was available to fund these new ideas.
Small
firms can face particularly difficult challenges if
they seek to enter the government market. "Contract
bundling" – the practice of grouping contracts into
a single package to reduce administrative costs – has
grown and made it more difficult for small businesses
seeking government work.
A
recent report from the White House Office of Management
and Budget found a huge drop in the number of small
businesses winning federal contracts over the past decade.
Between FY1992 and FY2001, small business government
contractors dropped from 26,506 to 11,651.
Recognizing
this problem, the White House has committed itself to
address contract bundling abuses and to make other changes
that may ease the path for small business contractors.
So,
it's difficult to break into the government market and
once there, government agencies are often difficult
customers. Does this mean that entrepreneurs should
simply give up on this market? No, but it is essential
that both the pros and cons of government contracts
are considered before making the leap into this market
space.
While
government agencies are not always great customers,
sometimes the problems are much larger. Consider the
case of Boston's Tenebraex Corporation, a small five-employee
producer of optical technology.
Tenebraex
sold a patented technology that limits glints from the
glass of binoculars and sniper sights; these glints
of light can alert an enemy about the location of U.S.
forces. Once the Army began using this technology, other
contractors used this patented technology in their own
products. Current contracting rules allow such re-use,
as Tenebraex painfully learned after years of litigation.
If
government agencies hope to do business with innovative
entrepreneurs, they must find some way to better protect
these critical intellectual property (IP) rights. New
rules and procedures are needed to ensure that companies
don't lose their IP rights by doing business with government
agencies.
Many
government agencies and personnel are great customers
who offer interesting and rewarding work, but this positive
scenario is not true across the board. The good news
is that there are many signs of progress. Recently,
the Pentagon scrapped its old (and often arcane) procurement
rules to make them simpler for small business to follow.
In addition, the Defense Department is reaching out
to entrepreneurial firms to "widen the supplier base."
Pentagon
leaders recognize that they must behave like entrepreneurs
if they want entrepreneurs to do business with them.
Such a transformation creates a true win-win situation:
better and cheaper products and services for government,
and new business for entrepreneurs.
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