(co-authored with Ben Preis and Domenika Lynch) 

When we write about supplier diversity models that should be scaled, adopted, and adapted, our first inclination is usually to focus on state and local governments, or innovative private sector solutions. However, over the last year, the Small Business Administration (SBA) and the Federal government have made some impressive progress in advancing equity in procurement, with a focus on Black-, Latino-, and other Minority-owned small businesses. Their efforts have been fostered by a focus from the White House on advancing equity through a whole-of-government approach, and today we review the federal government’s activities to shine a light on the steps other organizations can undertake to ensure that their purchasing decisions can advance local and equitable economic development. As the world’s largest purchaser — with $665 billion spent through federal contracts in fiscal year 2020 [1]— there is much to learn from how the federal government decides to spend its money.

Whole-of-organization review

On President Biden’s first day in office, he signed an executive order “Advancing Racial Equity and Support for Underserved Communities Through the Federal Government.”[2] As we wrote last year, this executive order included a section on barriers that underserved communities faced in dealing with federal government procurement. The executive order called for an equity review, and for a plan to address any barriers that were found in promoting equity through government purchasing. We applauded the executive order then, and here, we review some of what has come from it.

As a result of the President’s focus on equity and his executive order, the Office of Management and Budget (OMB) conducted a whole-of-government review and released a report last summer.[3] As part of the OMB’s overall findings, the report highlighted a number of shortcomings that limited the potential equity impact of federal procurement. The three challenges facing the federal government — which resonate across a number of organizational scales — were: 1) inadequate outreach to vendors; 2) opacity of federal procurement to potential vendors; and 3) lack of attention to equity from within purchasing agencies. By identifying the barriers to sellers that are endemic to the federal government, OMB recommended high-level changes to federal procurement documents and practices, to be spearheaded by the Small Business Administration in coordination with the entire federal government. The federal government has 3,000 separate purchasing offices spread across its many agencies and departments, thus requiring a recursive series of policy changes and interactions at various levels within and across government.

Data-Driven Discoveries to Guide Action

Limited by Congressional and Judicial guidance on priority purchasing, the federal government has historically limited their data tracking and disclosure to a few broad categories of preferred purchasers. These include Small Disadvantaged Businesses (SDBs), Service-Disabled Veteran-Owned businesses, Women-owned small businesses, and HUBZone small businesses. However, these broad categories obscure differences among marginalized communities, and can make it difficult to clearly identify where the federal government is falling short. Thus, the SBA released data on the amount of federal procurement dollars going to small businesses, disaggregated by race and ethnicity of their owners.[4] Going further, the Council of Economic Advisors compared the economy-wide shares of business ownership by race and ethnicity to their share of federal procurement dollars.[5] These two steps are crucial: only by understanding where procurement is going relative to the supply of available firms can the task at hand be adequately understood. In support of this data disaggregation effort, SBA Administrator Isabella Casillas Guzman stated that releasing data would: “guarantee greater transparency and accountability in federal contracting and put more small businesses in a position to start doing business with the United States government.”[6]

As we’ve highlighted here before, the numbers are dire. Black-owned businesses comprise only 2 percent of employer firms, and Latino-owned businesses comprise only 5.8 percent of employer firms. The analysis from the federal government also highlights two contradictory findings, showing that goal setting can work, but only if the right goals are set. On the one hand, only 1.67 percent of federal procurement dollars go to Black-owned small businesses, and only 1.78 percent go to Latino-owned small businesses. Looking within small business spending, however, paints a slightly different picture: 6.7 percent of procurement dollars spent on small businesses go to Black-owned small businesses, and 7.1 percent of procurement dollars spent on small businesses go to Latino-owned small businesses.[7] This paradox can be explained by the federal government’s goals, which prioritize spending with SDBs, but not larger Black- or Latino-owned businesses. Even these improved numbers are still not enough, however. Additionally, the last, missing, piece of the puzzle is analyzing procurement dollars by race and ethnicity, size, and type of expenditures, something that we hope to see from the federal government as they continue with their data efforts.

Goals

Following the whole-of-government review of practices and current spend data, the President announced a goal to increase the percent of federal procurement spending with SDBs, by 50 percent over the next five years. This represents a one percentage-point annual increase from the current annual spend of 10 percent, up to 15 percent in 2026. These goals are then propagated down from the top-line number to goals for each agency. While the federal government is limited insofar as it cannot do explicit race- and ethnicity-targeted procurement, their model of top-line and within-organization goal-setting can be mirrored by other organizations.

Top-line goals without department-specific goals belie the inconsistent purchasing power within organizations, thus requiring within-organization goals to eventually reach the overall number. Not all departments purchase the same amount. For instance, the Department of Defense is the government’s largest purchaser at more than $400 billion spent on contracts in fiscal year 2020, compared to just $7.8 billion of direct contracted spend from the Department of Transportation.[8] Agencies also purchase different types of goods, with the largest types of goods and services in construction, professional services, and information technology.[9] From our work analyzing data from the Annual Business Survey, we know that there is a mismatch between what large purchasers buy and the industries where we find Black- and Latino-owned businesses, a structural issue that goes beyond what the Federal government can address here.

Structural Changes

Importantly, the Federal government’s new goal setting was also augmented by structural changes laid out in an OMB memorandum to all federal agencies.[10] Associate Administrator for SBA’s Office of Government Contracting and Business Development, Bibi Hidalgo, heralded these structural changes as, “a first step to creating meaningful change,” that will “widen the door of opportunity so that all federal agencies can take full advantage of the talents and ideas in every corner of the contracting community.”[11] Elsewhere, Associate Administrator Hidalgo has highlighted how creating opportunities for small businesses is about closing the racial wealth gap, and using the federal government’s purchasing power to make clear strides in wealth building among marginalized communities.[12] We group the three types of structural changes under “category management,” “incentives and responsibility,” and “new entrants.”

• Category management  

Like hospitals and universities that bundle their spending through Cooperative Purchasing and Group Purchasing Organizations, the federal government uses a system called “category management” to reduce redundancy and save federal dollars. However, the government’s review of federal procurement practices found that category management was hurting SDBs in the federal procurement process. The OMB memo implemented changes in how agencies are reviewed for their compliance with category management, in order to encourage agencies to award contracts to SDBs. These are a variety of technical changes, but they point to an important truth: minimizing cost and maximizing efficiency can come at the expense of complementary equity goals. Category management has only been used by the federal government since 2014, and changes were made in 2017 that were found to lower procurement spending with SDBs. Rather than starting from scratch, however, the SBA and OMB worked within the context of category management to change how the current system can be used to prioritize procurement with minority-owned businesses.

• Incentives and responsibility

The OMB memorandum also highlighted two human-centered components of procurement that are often overlooked. First, hitting an agency’s procurement goals was made part of the performance plan for senior leadership within federal agencies. Second, OMB wanted to ensure that officials charged with SDB utilization had direct access to agency leadership. These two changes highlight how procurement requires a whole-of-organization approach. While data and goals point to where an organization is going, meeting those goals doesn’t happen without conscious human effort. Individuals make decisions about procurement on a daily basis, and making goal-meeting part of an individual’s job description is a crucial step to ensure that those goals are met. However, procurement offices are often separated from functional departments within organizations. In order to succeed in moving an organization towards meeting goals, procurement officers need to have direct a line to leadership, in order to amplify concerns and successes as they arise.

Apart from the OMB memorandum, the SBA is also beginning to centralize the certification of veteran-owned and service-disabled veteran-owned small businesses. Previously, this was done by the Veterans Administration, but the 2021 National Defense Authorization Act mandates this transfer of control to the SBA.[13] We group this activity under incentives and responsibility since onerous certification is often a key concern for small businesses trying to enter into the procurement economy. For business owners trying to navigate the various federal, state, and local requirements for certification in order to bid on contracts, greater centralization at the Small Business Administration will likely help.

• New Entrants

The third and final part of the OMB Memorandum was a push to increase the number of entrants into the federal procurement system. The number of vendors from which the US government contracts has fallen over the last decade, limiting the potential impact of federal procurement dollars. At a high level, the OMB plans to begin tracking the number of “new entrants” into the federal marketplace. The OMB also plans on working with agencies to increase transparency for future funding opportunities, while the SBA, OMB, and General Services Administration will continue to use data to highlight problem areas for federal procurement. These three concrete steps were augmented with a number of recommended best-practices to increase procurement, many of which we have highlighted before.

Apart from the OMB Memorandum, SBA also launched a major new pilot project last year called the Community Navigator Program.[14] This $100 million program provides direct support to 51 community “hubs” that are meant to work with smaller, “spoke” organizations in their geographic community to help with outreach, education, and technical assistance for small businesses, with a particular focus on minority business enterprises and disadvantaged business enterprises. This hub-and-spoke model is meant to reach business owners through organizations with which they are already connected and can trust, and the hope is that it will increase the accessibility of the federal government’s programs to potential federal contractors. This form of networked governance is crucial to reaching our millions of small business owners who might otherwise slip through the cracks of disconnected and hard-to-find federal procurement programs.

What’s missing: sector diversification and new business creation

The activities of the SBA and OMB that we’ve reviewed here provide a set of examples we believe can be implemented by state and local governments, public authorities, regulated entities, and private corporations as they continue to focus on increasing supplier diversity. Reviewing data and the current state-of-practice within an organization is the first step towards better understanding where improvements can and must be made. Data-driven goal setting is the important next step, but must be met with concrete changes within and across an organization. Procurement is a recurring activity, and every time an agency buys, it should do so with equity front-of-mind.

What the federal government doesn’t — and shouldn’t — focus on is what local and regional practitioners do best: sector diversification and new business creation. While the procuring agencies can encourage entrants to the procurement economy, those efforts will only be successful if there are new and growing Black-, Latino-, and Asian-owned firms in those industries where businesses and governments are purchasing. As we know from our own research, minority-owned firms are underrepresented in many high-paying and high-growth sectors across the economy, while they are overrepresented in the service industries that might not be right for procurement. This is where local practitioners enter into the picture.

In addition, serious reforms are needed to change the capital landscape for small businesses. Lack of affordable, adequate, and reliable capital is among the biggest barriers facing potential entrepreneurs. Black and Latino entrepreneurs, in particular, are often faced with the prospect of predatory capital.[15] We are encouraged that the $10.5 billion federal State Small Business Credit Initiative (“SSBCI”), a key component of the American Rescue Plan, could boost the volume of quality, reasonably priced capital in the service of supplier diversity. There is precedent here: as we have noted before, New York State used SSBCI 1.0 funds for a surety bond program to boost minority contracting. This is a moment for states to join up SSBCI finance with federal infrastructure funding for purposes of scaling Black and Latino-owned businesses.

Given the volume of federal funding moving through the American Rescue Plan and the Infrastructure Investment and Jobs Act it is not surprising that the administrative moves by SBA detailed here have not received much public attention. Yet the procurement economy, public and private, is exceptionally large and remains one of the best vehicles for not only growing the number and size of Black and Latino-owned businesses but diversifying the sectors in which these firms participate. This is a critical step in reducing racial and ethnic wealth disparities in the nation and ensuring that the economy we build post pandemic is inclusive and resilient.