SWaM: A Transformation in Mindset from an Adjunct Undertaking to an Economic Necessity (Report on Virginia Forum 2008)

Posted on December 3, 2008

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“On August 10, 2006 Governor Timothy Kaine signed Executive Order No. 33 (2006) focusing on enhancing business opportunities for small, women-and-minority-owned (“SwaM”) businesses.  It shall be the goal of the Commonwealth that 40% of its purchases be made from small businesses.  This includes discretionary spending in prime contracts and subscontracts.  The Department of Minority Business Enterprise (“DMBE”), in consultation with executive branch entities and institutions with procurement policy responsibilities, shall develop a race- and gender-neutral Goal Setting Program.  The Program shall require small business goals in every agency’s procurement plan.”

Link to Executive Order No. 33 (2206) is:

http://www.governor.virginia.gov/Initiatives/ExecutiveOrders/pdf/EO_33.pdf

From the  Virginia Department of Minority Business Enterprise web site (http://www.dmbe.virginia.gov/)

While the common practice of establishing set-aside programs for what has traditionally been seen as underutilized suppliers has been a key lever for governments, the practice itself has in many instances done more harm than good.  This is due to the fact that there has been an unspoken intimation that the benefactors of these programs are somehow unable to fend for themselves and therefore require the bolstered support of “big brother” to level the playing field.

It is something similar to when my big brother was “persuaded” by my mother to let me tag along to his sandlot football games with the admonishment that he should make sure that “Jon was allowed to get into the game and catch a few.”  By the way, with age I got bigger and ironically better so that the tag along label was replaced by a “make sure you bring Jon to the next game” refrain from his friends.  What is the old axiom about having to be a football hero to get all of the pretty girls?!

My point here is that at the time, I needed my mother’s intervention to make sure that I got the chance to play.  However, had I not possessed the necessary ability to develop into a good player as I got older I would probably have pursued other avenues of interest for which I would have been better suited.

What traditional set-aside programs do is get the suppliers in the game.  However, without an effective program in which those suppliers’ individual skill sets are properly developed and engaged renders the majority of programs fashionably ineffective rather than being a necessary component of a sound public sector procurement practice.  And this is where the majority of programs fall short.  This is also what differentiates the Commonwealth of Virginia’s SWaM program from the rest.

Government Policy and the Economic Impact of Domestic Clusters

For the unitiated, the critical role that “domestic clusters” play in public sector procurement is represented by the collaborative objective of achieving a balance between a government satisfying its “own internal requirements,” while simultaneously establishing the viability of domestic stakeholders (in particular SWaM-type organizations) to effectively compete in the emerging global economy.  Rather than risk transforming this post into a lenghty dissertation that is more white paper than article, and to help you to delve deeper into the principles behind the importance of domestic clusters, I will refer you to an August 28, 2007 Procurement Insights post titled, “Public Sector Procurement Practice and the Principles of External Economies, Clustering and the Global Value Chain” (see Web Resources for the URL Link).

That said the following excerpt from my recently published white paper titled “Yes Virginia! A Profile In Excellence”, will illustrate how government policy impacts domestic clusters, and why there has been a growing and marked change in the programs centered on supplier engagement.

“From a domestic engagement perspective, public sector procurement practices are leading to an erosion of the overall supply base.  This escalating level of erosion and its negative impact on innovation was initially presented as part of an October 2002 U.S. report by the Executive Office of the President.

Specifically, the practice of contract bundling which resulted in a steadily decreasing number of Small-Medium enterprises receiving federal contracts was seen as a direct threat to the nation’s pool of “innovation and creativity.”  This of course has paved the way for newer legislation which has resulted in agencies such as NASA unbundling contracts in an effort to make business more manageable for small enterprises, or groups of small enterprises.

In turn, the strength of the supply base domestically (of which innovation is a key tenet), lays the foundation for a sound national economy by equipping suppliers to compete more effectively in the emerging global economy.

In fact, a 2006 presentation by the Foundation for Advanced Studies on International Development (FASID) asserted that globalization will ultimately “reduce the number of industrial clusters in the world in each industry.”  FASID concluded that “in an era of globalization, only efficient clusters can survive.”

Therefore, the inability to build strong clusters of innovation domestically will directly threaten a nation’s long-term viability to compete globally in key industries.”  (Note: Refer to the Web Resources section at the conclusion of this post for additional information on the Yes Virginia white paper.)

While the change is noteworthy, most public sector procurement programs continue to be in conflict with the emerging “best practice” policies of those governments (like Virginia) that have recognized the tremdous value of a strong SME or SWaM-type sector relative to innovative breakthroughs and the economic vitality of their domestic economies.

As a result, domestic cluster survival within many countries face a serious threat that for the most part is self-inflicted by what many consider to be a myopic, overly simplistic view of government strategizing.

Examples of Domestic Clusters in Action

There are two immediate examples that come to mind in terms of domestic cluster development.  One is directly linked to establishing a group of SME companies to more effectively compete for public sector business within a particular region, while the other is an illustration of a private sector program’s efforts to boost a sagging local economy through the pursuit of global clients.  The purpose of these examples is to provide you with a broader scope or picture of how domestic clusters are simultaneously regional and global in composition and intent.

Formed in 1994, the CABiNET association of “independent information systems consulting firms” consists of 25 Ottawa-based companies with access to over 2000 “IT resources.”

Through the establishment of project-specific consortiums, comprised primarily by CABiNET member companies, these consortiums have collectively and collaboratively enabled the SME IT community to pursue and win numerous government contracts that would have normally been awarded to the large, multi-national integrators.

In this regard, CABiNET is in and of itself the classic definition of a regionalized domestic cluster.  Like its private sector counterpart, the Associated Manufacturing Marketing Group (AMMG), CABiNET can also be considered a joint “venture.”  But instead of being a consortium of manufacturing firms, CABiNET is made up of twenty-five well-established IT consulting firms who through private funding (re member fees, etc.) are focused on developing new business opportunities through a cooperative partnership approach in the Capital region.

Like AMMG, clusters of this nature are not new.  In fact, the majority of domestic clusters are regionalized in their make-up and area of service.  The challenge of course is directly tied to scalability, as the traditional framework of regionalized clusters have been built around a “centrally resident and somewhat monolithic enterprise client” such as the Government of Canada in the CABiNET example.

This of course raises a question of model sustainability, in that a cluster’s on-going viability is largely dependent upon the buying proclivities of the central enterprise it has been established to service.  It is especially noteworthy when for example, a pursued change in public policy by the Canadian Government poses a direct threat to the ongoing sustainability of the CABiNET cluster.

In the case of the private sector AMMG cluster (who ironically has been partially funded by government), its formation was the result of an increasingly challenged New Brunswick economy that created a vacuum relative to “supplying” a central private sector enterprise client.  In the New Brunswick scenario, “you have a group of SME companies that have core competencies that rank amongst the best in the world,” but lack the “necessary regionalized client base that is essential to ensuring the collective long-term viability of the sector.”

The reasons for the decline or absence of a central, regionalized client or clients in the case of AMMG has everything to do with an increasingly sluggish economy resulting in a diminished demand.

In the case of CABiNET, and as previously indicated, the threat has little to do with the same economic imperatives of a contracting market, and more to do with a shift in policy on the part of the GoC hierarchy.

While the CABiNET cluster is focused on establishing revenue within the region in which the organization operates, and the AMMG cluster is looking to develop customers outside of their region to generate revenue, the economic impact of their success or failure on the domestic economy is similar or shared.  In essence, CABiNET and AMMG represents two separate halves of the same circle in that an effective cluster must look both inward (regionally) as well as outward (globally) to establish a sound financial foundation upon which an individual business or sector can be built.

And this is where government policy will either stimulate or hinder the sustainable viability of the SME or SWaM-type sectors (nee clusters).  This is also the reason why the previously mentioned “balanced” approach is so critical.

SWaM’s Broader View of a Complex Policy

Rather than taking a narrowly defined, traditional view of “targeted” engagement, SWaM is unencumbered by the well-intentioned but inherently flawed set-aside programs of the past.

Recognizing the increasing importance of strong regionalized domestic clusters, Virginia believes that through active and strategic engagement, SWaM organizations will gain both the revenue and core competencies to compete on the global stage.

What this means is that the Commonwealth has effectively united the two halves of the same circle under one cohesive policy to the benefit of all.  Specifically, Virginia has leveraged the core competencies of a CABiNET-type cluster, and developed policies based on merit instead of entitlement.  As a result, the Commonwealth has for all intents and purposes been able to “fund” the development of a “generic” cluster in much the same way that the government of New Brunswick has funded the development of the AMMG cluster.

The financial impact of SWaM is of course immeasurable (although converting data to tangible and contextual significance is essential for quantifying the degree of impact).  This means that this is a program that has bridged the previously contradictory chasm of being the right thing to do to being the smart thing to do.

It also means that SWaM is a program worth championing as well as emulating.

Web Resources:

Public Sector Procurement Practice and the Principles of External Economies, Clustering and the Global Value Chain: https://procureinsights.wordpress.com/2007/08/28/public-sector-procurement-practice-and-the-principles-of-external-economies-clustering-and-the-global-value-chain/

Yes Virginia! A Profile In Excellence (White Paper): https://procureinsights.wordpress.com/2008/10/19/new-white-paper-yes-virginia-a-profile-in-excellence/

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