Growing, growing, growing: Is era of small firms gone?

Expansion: Whether to fend off takeovers, or just overtake the competition, small firms are thinking big.

January 23, 2000|By Shanon D. Murray | Shanon D. Murray,Sun Staff

Small businesses may be going out of fashion.

They were heralded for years as an irreplaceable boon to the nation's economy, primarily because the country's 23 million small businesses created more jobs than the estimated 16,000 large companies.

While their value is still undeniable, the top goal for many of them is to grow as big as possible as quickly as possible, said small business owners and industry experts.

"It has never been my objective to remain a small business," said Kathryn Freeland, chief executive of RGII Technologies Inc., an Annapolis-based information technology solutions and systems engineering services company she founded in 1990.

The 237-employee company's revenue has grown from $10.4 million in 1998 to about $14.2 million in 1999, she said. Under U.S. Small Business Administration guidelines, RGII is classified as a small business because it employs fewer than 500 people.

"At one time, it was great to be a small business, but the opportunities in the marketplace are so great, growing larger is definitely the best way to go," Freeland said.

Still, small enterprises make up 98 percent of all businesses in the state. There were 315,755 small businesses in Maryland in 1997, the last year for which the SBA could provide figures.

A chief motivation for rapid expansion is to ward off being acquired by or competing with a "roll-up," a company that acquires small businesses in the same industry with the intent of going public, said Harsha Desai, a management professor at Loyola College's Sellinger School and director of the Loyola Center for Closely Held Firms.

"If you stay small, someone else will have gathered up all the other small companies similar to yours and will have made a larger company in the same market you're in," Desai said.

"You can afford to remain small only if you give exceptional service and if you are a fantastic competitor," he said. "But why stay small?"

Jim Weidman, spokesman for the National Federation of Independent Business, the nation's largest small-business advocacy group representing more than 600,000 small enterprises, said quite a few small businesses will spend the next 12 months focused on such bread-and-butter issues such as locating qualified employees, instead of expanding.

In fact, Weidman said, some small businesses are postponing expansion plans because they are working at full capacity in a tight labor market.

"The labor shortage is killing small businesses," he said. "It's been an exceptionally tight labor market for more than two years.

"If you walk down a street, I promise that at least a third of the small businesses have a help-wanted sign," Weidman said. "Studies don't show any indications that the labor market will relax, at least for the next six months."

Freeland, of RGII, agrees that it is a consistent challenge for a small business to compete for workers in such a tight labor market.

"The pool of professionals is smaller, and the salaries are greater," Freeland said, adding that RGII is currently looking to expand its work force to 300 employees from 237 by the end of the year.

To retain its workers, RGII offers incentives such as end-of-the-year bonuses and constant training.

The company's turnover rate is about 6 percent, she said.

"Employee morale is key," Freeland said. "Our programs evolved over the years but it became very clear very early on in this business that it's imperative to hire and keep the right talent."

To also stand out among other small businesses -- and larger competitors -- Freeland said she concentrates on adding value to her company's services.

To remain viable, small business must find a unique selling point, said Weidman, of the NFIB. "a small business is always in competition, be it with a big or small business."

RGII is an information technology company that specializes in local area networking, applications development, systems integration and information security, Freeland said.

Her customers include eight federal agencies, as well as private sector companies such as DynCorp., Booz Allen & Hamilton, and Raytheon Co.

As head of RGII, Freeland visits all of the company's customers -- spread along the East Coast -- on a quarterly basis.

"For customers of other businesses, once a contract is signed, they never see the president or CEO again," she said. "It puts me on the road one month a quarter, but it is worth it."

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