Despite their importance to the U.S. economy, small businesses struggle to participate in the government procurement process, which could facilitate small-business access to more than $2 trillion in annual government procurement opportunities.
In a recent study, 93% of small businesses reported facing significant barriers to selling to the government; they identified as their biggest challenge the advantage held by the incumbent supplier (the company that has the existing contract). Governments lock in relationships with a small set of suppliers for multiple years, effectively blocking out small businesses who can’t compete against incumbent suppliers, who have the resources, experience and relationships that give them a competitive edge.
That said, governments want to work with small businesses—federal law requires that 23% of annual federal procurement spend goes to small businesses—but these businesses struggle to market themselves to the thousands of government procurement teams who make the purchasing decisions, and they often don’t have the resources to identify contracting opportunities, interpret legal requirements or write proposals. Online stores give small businesses access to a wider array of government buyers, and tools that enable them to more easily be discovered by government buyers, empowering small and diverse business participation in government procurement. This 3-part series will explore the barriers small businesses face—and how online stores can help reduce them.
The traditional government procurement process favors incumbent suppliers
Businesses often must unseat an incumbent supplier when trying to win a government contract with a new buyer. Even though government procurement processes are structured to remove bias, it is impossible to remove the impact existing customer relationships have on procurement decisions, giving the incumbent suppliers an advantage over prospective suppliers. This existing relationship provides a strong knowledge of the customer’s business environment, contract requirements, and pricing structures, all of which give the incumbent an advantage when proposing on a new contract. It should come as no surprise then that 83% of small businesses agree incumbent suppliers enjoy an advantage in the government market segment.
While all prospective suppliers experience the challenge of incumbent advantage, small businesses are particularly affected because they lack the necessary resources, experience, relationships and expertise to expand into new regions. As a result, small businesses spend most of their time and resources maintaining existing customer relationships close to home. Big businesses, on the other hand, have access to more operating capital, marketing staff and legal counsel to help them navigate government procurement opportunities outside their home markets.
Online stores reduce barriers to entry
Despite the potential benefits, two-thirds of small suppliers said they do not sell through online stores in a report released in March of 2020. Small, diverse businesses have been particularly hard hit in the wake of COVID-19. Since April 2020, the number of African American-owned businesses shrank by 41 %, from 1.1 million to 640,000, vs. 17% for white-owned businesses, according to a June 2020 report, “The Impact of Covid-19 on Small Business Owners,” by Robert Fairlie, published by the National Bureau of Economic Research.
However, the businesses already equipped to handle online transactions were better able to adapt during the pandemic, as reflected in Adobe Inc.’s Digital Economy Index, which recorded a 49% surge in ecommerce sales during the pandemic.
The potential for new entrants and innovation in the government procurement process is high. Online stores can help small businesses overcome barriers to entry—like the incumbent supplier advantage—by providing a platform for increased visibility in the government procurement process and an expanded customer base. Going forward, small businesses that leverage online stores now will be best-positioned to land government contracts and adapt to shifting procurement trends.
Anne Rung is Director of Public Sector for Amazon Business. Prior to joining Amazon in 2016, Rung was the U.S. Chief Acquisition Officer in the White House Office of Management and Budget. Also, she has held senior management positions in procurement at the U.S. General Services Administration, the U.S. Department of Commerce and the Pennsylvania Department of General Services.