By law, the Small Business Administration (SBA) is supposed to review, analyze and update the size standards periodically for each sector. A sector represents all companies with the same first two digits in the NAICS codes, e.g., Sector 54 –Professional, Scientific and Technical Services, which is probably one of the ones that the federal government uses the most.
H.R. 3987, Small Business Protection Act of 2012 was proposed to protect small businesses from being thrust into competition with giants as a result of any new size standards imposed by SBA. After all, that’s the purpose of the small business program – it was designed to shelter small businesses and let them get started, before they actually have to go out into the great big wide world and compete with everybody else.
As the SBA has been updating the size standards, most of the revenue-based or receipt-based size standards have usually doubled. In the case of engineering firms, for example, all of the old $7 million standards went up to $14 million. That means that in order to stay classified as a small business, those companies cannot earn more than $14 million in revenue, on average, over three years.
IT businesses, however, only increased from $25 to $25.5 million. The SBA did in-depth analysis and concluded that IT companies were plentiful enough that they didn’t need much of an increase in their size standards.
This provides a good example of why small businesses need protection when new size standards are proposed. You see, one of the unintended consequences of these new size structures is with businesses who have now outgrown their small business classification in one industry – they’ve become too big to be small but too small to be big.
What some of them decide to do is simply shift the focus of their business activities to another industry. And because IT only had a relatively small increase, it was a very appealing area to choose. By doing this, in essence they are allowed to compete with small businesses, even though they now have the resources of a larger company.
Let’s say a company has built up a successful business doing management consulting – so much so that their earnings have forced them to graduate from the small business size standard set by the SBA. So they decide to hone in on IT consulting, where their revenues still allow them to be sheltered as a small business.
There was a tremendous amount of backlash when the SBA put this out as a draft, but they obviously didn’t change it. So as these new size standards are scheduled to come into effect next week on October 24th, 2012, the IT consultation industry is seeing an influx of larger, more robust companies who were too big to be small as management consultants, now hanging their shingles as IT consultants. Is that a fair competition, what do you think?