State and local governments contract with private-sector vendors to provide many crucial functions, yet too often those contracts go to larger, more-established companies, with the playing field tilted heavily in their favor. As the Harvard Kennedy School reports, “Often, the same vendors win contract after contract, and minority-led and small firms feel they have no chance to compete.” And as New America reports on the challenges of public procurement of digital systems, “The challenges for each state are familiar: an opaque procurement process from start to finish, lack of internal technical capacity, risk aversion, vendor lock-in, and high barriers to competition.”
Governments certainly have an obligation to ensure that potential vendors have the experience needed to perform specified services, but that should neither prevent the competition needed to increase efficiency nor obstruct innovation. Yet that’s exactly what’s happening. Procurement officers typically focus on businesses they know and use the excuse of “executional risk” to bypass younger, smaller companies.
It is those companies, however, that often provide two things: newer ways of doing business that can leverage new technologies and efficiencies that make services more cost-effective. The private sector prizes and benefits from those advantages. Why shouldn’t the public sector?
The need was especially evident during the height of the COVID-19 pandemic, when older, larger companies often couldn’t adjust quickly enough. They couldn’t address the needs of assisted-living facilities, for instance, and younger, smaller, more-innovative companies intervened.
What constitutes a “younger” company, and how can governments overcome “vendor lock-in”? Right to Start, a national nonprofit championing entrepreneurship as a civic priority, offers template legislation, which it calls the Right to Start Act, that proposes that 5 percent of state contracts should go to “new entrant” businesses that have never won government business. In Right to Start’s view, the focus should be on firms under $3 million in annual revenues, with a special interest in businesses in their first five years, especially in underserved communities.
It could be that the definition of “younger” should vary, depending on the service provided. In some cases, it may need to be higher than five years. But the crucial point is that state and local governments should understand how their contracting impacts younger companies. Is it part of a broader landscape of vendor lock-in that prevents new entrants and thereby reduces efficiencies and innovations that would benefit taxpayers?
Governments should then take steps, as needed, to facilitate new entrants and the benefits they provide. Founders First Capital Partners, the organization I lead, has recently partnered, for instance, with New York state’s Empire State Development to create and implement a program designed to help small businesses owned by socially and economically disadvantaged individuals understand and overcome common obstacles to funding readiness.
This initiative supports the growth of New York’s collaborative partner ecosystem, which is crucial for small suppliers to efficiently secure growth capital. It is part of New York’s participation in the federal Initiative for Inclusive Entrepreneurship, an effort led by the U.S. Treasury Department and for which Founders First serves as a co-lead.
Government contracts can be pivotal to the sustainability and job creation of younger smaller businesses. They provide a vital credential that can be used to attract additional business contracts in both the public and private sectors.
In 2017, for instance, Founders First provided initial funding for an IT services company in San Diego led by three co-founders — a mother, her son and a family friend. Thanks to a contract with the San Diego Water Authority, the company has grown to 12 employees. That one contract enabled the pursuit of work with other water authorities in California, school districts in that state and beyond, and the University of California system.
Think about the impact of that on a broader scale. It would be energizing nationwide. In addition, it would benefit the communities where the younger companies are located, because those companies tend to contract and hire locally.
Prizing entrepreneurship would benefit state and local governments and the taxpayers who support them. It would increase business and job growth and enhance the communities where the younger companies are based. It’s time for government procurement to make the shift.
Kim T. Folsom is the founder, chairperson and CEO of Founders First Capital Partners, which works to empower underrepresented businesses by providing access to capital.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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