Dark Light
It’s not just the revised NAICS size standards that are working against small IT businesses. There is another factor at play.
small business versus big business
Large IT businesses are growing much faster pace than SBA’s size standards.

In August 2013, the Mid-Tier Advocacy presented a report to the Small Business Committee of the Senate about SBA’s methodology for setting the upper limits on how big a business can be and still be considered small. Most of these sizes are denominated in revenue, e.g., a 3-year average not to exceed $X-million. A few codes are designated in employee count, and these have almost always remained constant, since salaries track along the way.

When these were revised by the SBA most recently, the vast majority of NAICS codes increased dramatically, and many doubled. So for example, the administrative categories mostly went from $7 million to $14 million, and the same for program management. In fact, of the 38 NAICS codes increased, 27 of those size standards increased by more than 50 percent.

Information technology (IT) categories, on the other hand, went from $25 million to just $25.5 million. I wrote in an earlier post about the impact SBA’s new size standards would have on small IT businesses.

It’s not just the size standards that are working against small IT businesses. There is another factor at play. When I started in the industry 25-30 years ago, CACI (a large IT and government contracting business) had revenues of $250-$300 million. The small business size standard at the time was $21 million for IT companies. So the ratio was between 10:1 to 15:1 between the biggest small business and a decent-sized large business.

Today, the small business size standards have gone up to $25.5 million, which is a roughly 20% increase. CACI saw $3.8B in FY 2012 revenue, a 10x increase. And so now the ratio between CACI (a big business, but not a giant) is not 10:1, but 100:1, and that’s an enormous magnitude of difference in size. Mind you, the issue is not that CACI has grown (as a former employee, I’m proud to see their success), but that the small business size standard has not kept pace.

So we have two factors that are having a negative impact on small IT businesses: First, the SB size standard didn’t change at the same pace as all the other codes, and second, large IT businesses are growing at a far faster pace than the size standard is growing. These two things put tremendous pressure on companies that graduate.

It’s one thing for any of us small business owners  to imagine our business going from earning $20 million to $200 million, but to see a path from $20 million to $2 billion is just not as easily in the cards. That’s why when so many small businesses graduate by growing beyond the size standard, they divert and sell out because they can’t see how they can compete with the big guys.

That’s what Mid-Tier Advocacy is committed to address. Visit their site to find out more you can get involved and make a difference for your business and all mid-tier businesses.

  1. Good points all, and I feel for the mid-Tier. The perspective from the other end of the small business spectrum is a bit different. Every time the NAICS size standard grows, it becomes less possible for start-up IT companies to compete for small business awards. How is a $1M company of IT experts credible against a $25M company of routine techies? The little guy must sub for any win probability, and then the larger SB prime keeps all the best paying (expert) IT positions.

    Just as there is no gradation of size standards for the growing mid-Tier gap, there is no gradation within the slower-growing SB gap.

    BTW: I have always appreciated this blog – just finally weighing in. As we hear often on radio: “Long time listener, first time caller”.

    1. Yes:

      The point you raise is exactly right. Interestingly, when the Mid-Tier Advocacy had a legislative proposal that was discussed at a hearing in 2012, the (very) small business folks were opposed to that initiative. Realistically, single entrepreneurs, and smaller businesses want sometimes different things than an extended small or new mid-tier groupings.

      We’ll explore these issues in future blogs, thanks for raising the point…

      1. Perhaps the answer at both ends of the SB scale is additional thresholds. Let’s call them “Micro” and “Mid”, and assume a 5x factor from the current “Small” size standard. In a $25M NAICS, the under-$5M Micro-SBs could compete for regular SB set-asides but also would have a few procurements set-aside for Micro-tier only. At the other end of that NAICS, some unrestricted procurements would instead be set-aside for Mid-tiers under $125M.

        There’s a similar option available for the giant aerospace corporations. They would have the option to declare themselves a Large Systems Integrator, the only ones eligible for Large Business set-asides (aircraft carriers, fighter jets, spacecraft, etc.). But they would then be ineligible to bid on anything other than those set-asides. That’s the crazy idea I proposed to Tonya Speed a few years ago. Perhaps Micro- and Mid-tiers are a more achievable first step.

        A Micro/Mid bundled idea is more likely to pass through SBA and congressional wickets because it provides advantages at both ends of the SB scale. Adding both tiers also mitigates the impact of raising the current SB size standards by protecting the startups.

        Are we on to so something here, or has this been tried and shot down before?

Comments are closed.

Related Posts