GOVERNMENT SMALL BUSINESS PROCUREMENT PRACTICES AND PROGRAMS WEDNESDAY, JULY 29, 1964 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE No. 2 ON GOVERNMENT PROCUREMENT Washington, D.C. The subcommittee met, pursuant to notice, at 10:10 a.m., in room 356, Cannon House Office Building, Hon. Abraham J. Multer (chairman of the subcommittee) presiding. Present: Representatives Multer and Smith of California. Also present: Henry A. Robinson, subcommittee counsel; Helen Hitz, acting clerk; John J. Williams, minority counsel; and Eugene W. Loehl, assistant minority counsel. Mr. MULTER. The committee will please be in order. We have met today to continue the public hearings of this Subcommittee on Government Procurement of the House Small Business Committee, in its review of Government small business procurement practices. As the record will indicate, these hearings started last November when testimony was taken from the military departments and major civilian procurement agencies. The private industry phase of these hearings opened on June 23 with testimony from representatives of the petroleum industry, supplemental air carriers, and small business members of the National Association of Wholesalers, regarding their procurement problems. In each instance, the agency involved in the industry's complaints was requested to submit its comments for the record. In the June 23 hearing, the petroleum industry voiced protests regarding the procedures of the General Services Administration in the procurement of service station deliveries of gasoline and related products for Government vehicles. Copies of the testimony were submitted to the agency for its comments. This agency's statement was received and is placed in the record. To complete this aspect of the hearings and to enable the committee to properly evaluate the industry's complaints and the issues involved in this inquiry, additional information was requested by letter of July 24 and is now made a part of this record. The committee expects the General Services Administration's response to this request by August 3, and when that is received it, too, will be made a part of this record. Today, we will continue the private industry phase of these hearings with testimony from big as well as small business sectors of the defense industry. In the nature of things, prime contracts, defense contracts for military systems and equipment are usually awarded to big business, thereby reducing procurement opportunities for small business. To counteract this effect, Congress has enacted Public Law 87-305. We invited two major prime contractors to testify today regarding their subcontracting procedures and the manner in which they implement the provisions of Public Law 87-305 to bring small business into the procurement effort. We will also hear from the Strategic Industries Association and some of their small business members. The committee is interested in knowing their views of current Government procurement programs and the effect of such programs upon small business participation in prime and subcontracting procurements. In addition, we are interested in knowing industry's views regarding the current and proposed curtailment in defense spending and its effect upon small business. What suggestions does industry have regarding current small business procurement programs? These hearings will conclude on a later date with testimony from the Small Business Administration which will review, comment upon, and evaluate the testimony of all witnesses, in order to aid the committee in formulating its final report and its recommendations. The record of these hearings will remain open for 2 weeks after the Small Business Administration's testimony has been received and completed, in order to afford industry an opportunity to document and submit to the committee their procurement problems and recommendations for the record. Now, we are pleased to have with us this morning representatives of the Strategic Industries Association. Mr. Henry Marcheschi, executive vice president of that association, is here with four other members of the association to give us a cross section of their problems in response to the subcommittee's letter of invitation. We will ask Mr. Marcheschi to introduce himself for the record and also those who accompany him, and then he may proceed as he sees fit to present their views. (The subcommittee's July 9 letter of invitation follows.) Mr. HENRY MARCHESCHI, Executive Vice President, Strategic Industries Association, JULY 9, 1964. DEAR MR. MARCHESCHI: In connection with public hearings scheduled by Subcommittee No. 2 of the House Select Committee on Small Business, to review Government small business procurement programs and practices, your association is invited to testify before the subcommittee on July 29, 1964, at 10 a.m., in room 1302 of the Longworth House Office Building, Washington, D.C., with reference to the following items: 1. The effect of current Government procurement programs and policies upon small business participation in prime procurements and subcontracting; 2. Specific instances of Government procurement actions, procedures, or practices which may be beneficial or detrimental to small business; 3. The effect of current or proposed defense spending shifts and curtailments and declining military procurements upon small business; 4. Such comments as you and the members of your association may care to make relating to the subject matter of these hearings; 5. Appropriate recommendations. It will be appreciated if you would furnish the subcommittee with the names of the witnesses who are to testify on behalf of your association and its members on or before July 22, 1964. We will also appreciate having 12 copies of each witness' statement in advance of the July 29 hearing date. Sincerely yours, ABRAHAM J. MULTER, Chairman, Subcommittee No. 2 on Small Business and Government TESTIMONY OF HENRY MARCHESCHI, EXECUTIVE VICE PRESIDENT, STRATEGIC INDUSTRIES ASSOCIATION Mr. MARCHESCHI. Thank you, Mr. Chairman. I am Henry Marcheschi, executive vice president of the Strategic Industries Association, a national nonprofit association, which undertakes to represent independent, private risk, small business companies engaged in Government contracting. These are the companies which, in numbers, far exceed the industrial giants in the aerospace, electronics, and similar fields. A roster of our member companies has been supplied to the committee staff. With me are the following gentlemen: Mr. C. Hart Miller, president of Sierracin Corp., of Burbank, Calif., and president of the Strategic Industries Association; Mr. Elmer Ward, president of Task Corp., of Anaheim, Calif., and a director and chairman of the Government Relations Committee of the Strategic Industries Association; Decker McAllister, president of Pacific Scientific Co., and director, Strategic Industries Association; and Mr. George T. Stern, president of Pneu Hydro Valve Corp., of Cedar Knolls, N.J. Mr. MULTER. I am glad to have you gentlemen present. Proceed, Mr. Marcheschi. Mr. MARCHESCHI. Our presentation is entitled "Strengthening the Inherent Competitive Advantages of Small Business-A New Concept To Increase Profitable Participation of Smaller Companies in Government Procurement." We would like to start the presentation by quoting you, Mr. Chairman: Our Government is the largest purchaser of goods and services in the American market, and the manner in which it exercises this function profoundly affects our economy and our people. It must, therefore, exercise this function with wisdom and foresight to the end that it will not capsize our free enterprise system. There is no profit in gaining the world and losing our democratic soul.1 We are deeply honored to appear before you and the committee to address ourselves to the questions posed to us by your letter of July 9, 1964. I. WHOM WE REPRESENT SIA represents two different types of small business companies. First, there are those small business companies which are primarily engaged in manufacturing activity to the design and specifications of their customers. In this category are small machine shops, chemical millers, metal platers, and so forth. Second, there are those companies which have been traditionally engaged in developing and manufacturing a proprietary line of products at private expense. An almost endless list of vital components, processes, and techniques has originated with this category of smaller firms. Motors, valves, actuators, servosystems, heat dissipators, electronic elements, computer memory devices, bearings and bearing surfaces, weight-reduction processes, fasteners, insulators, corrosion-resistant finishes, electroTuminescence, cooling systems, miniaturized circuitry, standard ground handling systems, instruments of all types and sizes, test de 1 See pt. I, p. 3, of the printed record of these hearings. vices, refueling equipment, recorders, arresting gear, warning indicators, oxygen dispensing systems, and sensing devices represent a comparative handful among the total items developed by this vital but relatively unrecognized segment of the industry. Literally, these firms supply the "building blocks" from which our large research and development contractors "tinkertoy" together completed weapon systems. We have brought with us this morning examples of the type of hardware developed by our companies as illustrations of the category of products of which we speak. They are over there on that table [indicating]. Approximately 40,000 such privately financed firms, the majority small business, fill the large space between the major system contractor and the small machine shop. These are the companies SIA attempts to represent. We are somewhat persuaded that if other requirements would permit, our type of firm-which seeks no subsidy and asks no paternalistic protection-which has traditionally sold its products under firm fixed price contracts-which, more than any other segment of the industry, represents free private enterprise is precisely the kind of company with which the Department of Defense and other procurement agencies would prefer to do business. II. THE EFFECT OF CURRENT GOVERNMENT PROCUREMENT PROGRAMS ON SMALL BUSINESS PRIME AND SUBCONTRACT PARTICIPATION In the past 12 years, with one exception, there has not been a significant change in the total percentage of defense contract dollars that have been awarded to small business.2 The foregoing quote is from the 14th Annual Report of the Senate Select Committee on Small Business. We would be crass cynics, indeed, if we did not recognize and highly commend the efforts of the Congress, SBA,DOD, NASA, and other Government procuring agencies to increase small business' share of Government contracts. We would be fools not to strongly support the objective. We particularly commend the SBA's technical services program and the work being done to increase the awareness of small business to contract opportunities; the gains that have been made in getting the small businessman across the table from someone who can buy something from him instead of just giving him advice; the growing efforts to educate the small businessman to the pitfalls of Government procurement. However, from the standpoint of results-that is, how well we have achieved our common objective of increasing the profitable participation of small business in Government contracting-there is cause for deep concern. The effectiveness of current programs has reached a saturation point. Standing alone, these programs cannot be expected to make further significant contributions to our objective. 1 John Marschalk notes titled, "Cost Principles and Survival of Independent Business." 2 "Fourteenth Annual Report, Select Committee on Small Business, U.S. Senate, 88th Cong., 2d sess., July 9, 1964, p. 41. We are convinced that a new program is needed a program based on the concept of strengthening rather than inhibiting the inherent competitive advantages of small business over its large business competitor. III. THE INHERENT COMPETITIVE ADVANTAGES OF SMALL BUSINESS The following quote, from the last issue of the Harvard Business Review, is particularly significant: *** a large company typically spends from 3 to 10 times as much as a small one to develop a particular product.1 Why, in a free market, does a small business ever beat out a large business competitor a large business competitor who has the overwhelming competitive advantage of size? Why, in a free market, does a small business ever get a subcontract from a large business who would be expected to have a natural incentive to do all the work himself? The answer lies primarily in two economic realities: First, there is an optimum economic size for each separate form of endeavor; and, second, all economic endeavor has a proprietary content. If everyone knew how to be a lawyer, there wouldn't be any lawyers. To put it another way, the reason small business gets any business is that in certain specialized areas it can do it better than large business knows how to do it; it can do it cheaper than large business knows how to do it; and it can do it quicker than large business knows how to do it; or a combination of all these things. These are the inherent competitive advantages of small businessits reasons for being-the very lifeblood of its existence. Inhibit small business' competitive advantages and you inhibit small business; likewise, promote small business' competitive advantages and you promote small business. In this light, we can begin to see that increases in small business Government contracting will not result from programs whose success depends on "sticks" rather than "carrots." Rather, it will come from the competitive advantage of small business relative to his big business brother. What are some of the most important competitive advantages of small business Government contractors? These competitive advantages, which in essence, Mr. Chairman, are the heart of our presentation, are: Ingenuity; Patents; Proprietary know-how-big business doesn't know how to do it; Less inertia-small business can move faster; Much lower overhead, development, and manufacturing costs for many categories of hardware; Unique awareness of a requirement; Special, unique facilities and capabilities; And, last but not least, the "guts" to take great risks. 1 "R. & D. Is More Efficient in Small Companies," Harvard Business Review, May-June 1964, pp. 75, 76. |