Socio-economic sourcing: benefits of small business set-asides in public procurement

Date03 September 2018
Pages217-239
DOIhttps://doi.org/10.1108/JOPP-09-2018-014
Published date03 September 2018
AuthorTimothy Hawkins,Michael Gravier,Wesley S. Randall
Subject MatterPublic policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public finance/economics,Taxation/public revenue
Socio-economic sourcing: benets
of small business set-asides in
public procurement
Timothy Hawkins
Department of Marketing, Western Kentucky University, Bowling Green,
Kentucky, USA
Michael Gravier
Bryant University, Smitheld, Rhode Island, USA, and
Wesley S. Randall
New College at Frisco, University of North Texas, Frisco, Texas, USA
Abstract
Purpose Small businessesare critical to economic health and encouraged in governmentspending by set-
asides annual small business sourcing goals that often are not attained. Little research has explored the
negativeand risky stigmas associated with small business sourcing.
Design/methodology/approach This research explores reduced transaction costsof small business
sourcing to governmentbuyers. A survey of 350 government source selectionsreveals lower transaction costs
derived fromlower perceived risk of receiving a bid protest and via moreefcient source selection processes.
Findings Contrary to common bias,the performance level of small businesses is no less than that of large
business. Thus, small businessesengender lower transaction costs for correcting suppliersperformance. On
the basis of these ndings,managerial and theoretical implicationsare discussed.
Keywords Small business, Public procurement, Socio-economic sourcing, Set-asides
Paper type Research paper
Introduction
The Small Business Act of 1953 requires that a fair proportion of contract dollars be
awarded, or set aside, to small businesses (Sakallaris, 2007). This is not a trivial directive as
the public sector constitutesa huge market, approximately $2.7 trillion annually in theUSA
alone (Bureau of Economic Analysis,2017). This means that a tremendous amount of those
public funds $90.7 billion in scalyear 2015 (FPDSNG, 2015) is deliberately funneled to
small businesses at all levels (municipal, county, state and federal) as a matter of public
policy aimed at achieving socio-economic benets. The current, government-wide
procurement goal stipulates that at least 23 per cent of all federal government contracting
dollars should be set aside for small businesses with targeted set asides for women-owned
small business (5 per cent), small disadvantaged business (5 per cent), service-disabled
veteran-owned small business (3 per cent) and historically underutilized business zones
(3 per cent; FPDSNG, 2015).
Unfortunately, while the US FederalGovernment annually seeks to award 23 per cent of
contract dollars to small businesses, it often fails to attain that goal (FPDS, 2005; FPDS,
2006; FPDS, 2007; FPDS, 2008; FPDS, 2009; FPDS, 2010; FPDS, 2011; FPDS, 2012; FPDS,
2013; FPDS, 2014; and FPDS, 2015). Impediments to small business contracting include
Benets of
small business
set-asides
217
Journalof Public Procurement
Vol.18 No. 3, 2018
pp. 217-239
© Emerald Publishing Limited
1535-0118
DOI 10.1108/JOPP-09-2018-014
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1535-0118.htm
contract bundling, strategic sourcing resulting in supplier rationalization, a lack of
accountability for achieving socio-economic goals, a lack of small businesses in some
industries and many small businesseslackof interest in government work (Grammich et al.,
2011). Some have challenged whether the Government really wants to meet the small
business goals (Ivory, 2012). As Robert Burton,former acting administrator of the Ofce of
Federal ProcurementPolicy states:
Indeed, despite the fact that the federal government continues to channel procurement dollars
(and perhaps even an increasing amount) to small businesses, the use of small businesses and the
number of small business contract actions actually have declined. Consequently, it appears that
federal procurement dollars are increasingly concentrated in a smaller number of small
businesses (2015 p. 7 emphasis added).
Much of the blame derives from conicting goals a manifestation of the principle-agent
problem endemic to public policy (Jensen and Meckling, 1976). Public policy promotes
macro-level benets on one hand; on the otherhand, government agenciesprimary concern
is on the operational mission. Thus, government buyers often support small business goals
only to the extent that they must comply with government regulations. At the operational
level, government buyers are more concerned with securing high-quality, reliable supplier
performance as the success of their missions hinges largely on suppliers. Adding to this
issue is the fact that government buyers perceive performance risk in sourcing to small
businesses (Ivory, 2012). Even major government suppliers, such as defense contractors,
have expressed trouble obtaining quality bids for small business subcontracts (Grammich
et al.,2011). Less research has investigated small business supplier perceptions although it
appears that small suppliers are discouraged from bidding on public contracts owing to
perceived in many cases non-existent stringent nancial and performance standards
(Withey, 2011).
The stated public policy of the USA is that the macro-level economy depends on the
health of small businesses (15 USC §631). Specicallycited in this US law are the following
justications for smallbusiness set-asides: small businesses demonstrate reducedcapability
to compete in a free market economy owing to several micro-economic or contract level
factors including lack of access to capital, under-representation for trade negotiations, lack
of access to information to compete successfully in international markets, increased
discrimination (both because of their small size and because they are frequently owned by
minorities) and suffering a disadvantage to compete against imports. Public law denes
small businesses as independently owned and operated and which is not dominant in its
eld of operation(15 USC §632[a][1]), referring to asymmetry in power between small
businesses and non-smallbusinesses.
These factors implicate transaction costs as perhaps the primary culprits in the under-
utilization of small businesses by public procurement (Williamson, 1979). Two well-
documented facets of supply managementinclude ex ante fairness in supplier selection and
ex post efciency of quality supplier performance (Pearson and Ellram, 1995;de Boer et al.,
2001;Ho et al., 2010). While the former is more paramount in government sourcing, it is not
unimportant to the private sector; fair selection and quality performance are intertwined.
Both public and private-sector buyers labor to avoid adverse selection and moral hazard
because they generate substantial transaction costs from vetting prospective suppliers ex
ante and costs in monitoringsupplier performance ex post (Caliendo et al.,2015;Mishra et al.,
1998).
Despite the public policyfocus on micro-level disadvantages, research has ignoredthem,
especially in the context of small businesses. Thereare roughly 28 million small businesses
in the USA, yet they are often ignored, despitethe fact that ignoring small and medium-sized
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