The state of small black business

Black Enterprise, Nov, 1998 by Gerda D. Gallop

To increase their scale of operation, entrepreneurs must think outside the box, compete fearlessly, control costs and develop the urge to merge

African American-owned businesses have always fought for a larger share of the proverbial American pie. As the number of black businesses grows and new players come to the table, the size of the pie continues to get smaller and smaller. Procurement and set-aside reforms are contributing factors to this shrinkage in a post-Prop 209 and Adarand vs. Pena environment, thanks to the Federal Acquisitions Streamlining Act of 1997.

The reality is that black-owned firms are under scrutiny and can no longer rely on the federal government and prime contractors to have the same level of commitment to the minority business community hey enjoyed in the past. To remain viable, small African American businesses (revenues of $10 million and under) must find new ways to expand their market share. There are several vehicles that each company will have to look at individually, including forming strategic partnerships with other minority businesses, exploring mentor/protege relationships with larger corporations, taking advantage of commercial markets in urban development and recognizing the power of global marketing.

It's significant that "we're defending set-asides and affirmative on programs, which are seriously threatened," Thomas Boston, Ph.D., professor of economics at the Georgia Institute of Technology and member of the BE Board of Economists. "But if black-owned businesses want to grow, they need to focus more on what leading companies are doing -- in terms of strategic partnerships, mergers, acquisitions, public offerings and retained earnings -- and adopt those strategies to go from being small- to large-scale companies." For example, BE 100s company Specialized Packaging International acquired Lawson Mardon Carton of North American from Alusuisse-Lonza Holding for $24 million this year. The Hamden, Connecticut-based packaging design company, renamed Specialized Packaging Group, can now produce its own packages rather than outsourcing to another firm, says CEO Carlton L. Highsmith. He projects his company's revenues to increase by 25%-35% in the next few years because of the acquisition.

"Black-owned businesses," Boston adds, "must generate new products and services and keep pace with technology to expand their markets and make their businesses more effective."

SHARING OUR STRENGTH: BUILDING BUSINESS ALLIANCES

Primary growth in the U.S. economy over the last five to seven years has not been from Fortune 500 companies, but from small firms. In fact, New York-based Dun & Bradstreet Corp. reports that the two fastest-growing segments are minority- and women-owned businesses.

According to the U.S. Census Bureau, the n umber of black-owned businesses grew 46% between 1987 and 1992, from 424,165 to 620,912, while revenues increased 63% from $19.8 to $32.2 billion. During the same period, the number of black women-owned firms grew 75%, nearly triple the growth rate for all businesses; revenues grew from $6.5 to $8.5 billion.

One of the greatest threats to minority businesses is contract bundling. Instead of renewing smaller individual contracts, federal agencies are consolidating. So, what used to be a $1 Million contract is now $100 million or above.

Minority businesses that are too small to bid on these larger contracts are knocked out of the box. Their only solution is to partner with one another or to form teaming arrangements with larger contractors.

Bill Ellis, founder and CEO of Interspace Staffing Inc., a New York-based staffing agency, has partnered with other temporary staffing firms across the country to bid on large contracts. "As a small, local minority firm, it's important to have a broader reach," says Ellis. "Clients are looking to do business with minority firms, which don't have the resources to compete with national firms. By building alliances with other temporary staffing firms, it gives me a chance to drive up revenues faster, increase volume and expand my market base."

Although an effective option, teaming arrangements may prove to be a tedious and somewhat difficult process for companies that haven't done it before. Here, the small business owner contacts larger competing companies that are bidding on a contract and tries to convince one of them to bring him or her in as a team partner.

As contracts get bigger and bigger, the opportunities for small businesses clearly diminish. Some legislators and the Small Business Administration are trying to get federal agencies not to make contract bundles so large. If these efforts aren't successful, African American business owners stand to lose out if they don't look to partnering or teaming arrangements.

To some degree it may become easier for small firms to win federal contracts next year, when the government will begin awarding a 10% bidding price credit to minority-owned other disadvantaged businesses in certain industries. This means that these businesses can win a contract even if their bid is up to 10% higher than one from a nondisadvantaged firm.