Compendium of Successful Practices, Strategies, and Resources in the U.S. DOT Disadvantaged Business Enterprise Program (2019)

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55 Based on the research findings presented in Chapters 3, 4, and 5, the research team presents the following summary of results and conclusions. Application of these conclusions is included in the discussion of each research result, as well as any limitations of the research specific to that conclusion. At the close of Chapter 6, the research team summarizes general limitations of the research, barriers to widespread implementation of new methods, and opportunities for additional research. Summary of Results The research team grouped results as follows: • Number and characteristics of successful DBEs, • Business practices and behaviors of successful DBEs, and • Practices that state DOTs can employ to help DBEs be successful. Number and Characteristics of Successful DBEs 1. There are about 750 successful DBEs identified by state DOTs and trade associations, including graduated firms, based on the different criteria for “success” developed by the research team. This provides the first national picture of the number of successful DBEs for state DOT operation of the federal DBE program. The federal DBE program is sometimes criticized by DBEs and other groups based on their assertion that the program only assists a small number of companies. In fact, based on this nationwide research, there are a large number of successful DBEs. Other important results include the more than 200 firms that were identified as obtaining a substantial volume of state DOT subcontracts without the benefit of a DBE goal. An important limitation to the research is that the number of successful DBEs identified was dependent on the research team’s criteria for “success” and state DOTs’ recollection of firms that met those criteria. The estimated number of successful DBEs would be higher or lower if the criteria differed or one analyzed contract data to determine the results. 2. DBEs identified by state DOTs and trade associations as successful represent a small share of total certified DBEs in the nation (about 41,000). Two key points explain this result. First, many companies certified as DBEs are in fields unrelated to most state DOT work and probably have little interest in highway-related contracts and subcontracts. Even so, these results drive home the message that being certified as a DBE does not guarantee the success of a company. C H A P T E R 6 Conclusions

56 Compendium of Successful Practices, Strategies, and Resources in the U.S. DOT Disadvantaged Business Enterprise Program DBE certification provides training and other technical assistance and eligibility to meet con- tract goals on U.S. DOT-assisted contracts. This opens doors to working with the state DOT and prime contractors. The rest is up to the individual company. There continues to be substantial competition for state DOT work among individual DBEs and with other companies in the trans- portation contracting industry. 3. State DOTs identified 101 companies as having graduated from the DBE program. This also appears to be the first nationwide snapshot of firms related to state DOT work that gradu- ated from the program, if only temporarily. Therefore, the research has documented that some firms do graduate, even if the number is relatively small (average of two graduates per state). Results should be viewed as a minimum estimate, since the estimate is based on state DOT representatives’ recollection of program graduates and probably misses those that graduated many years ago. The fact that the number of graduated firms is not higher has several implications for state DOTs: • State DOTs might do more to help more firms graduate. • There might be a need to adjust operation of the federal DBE program to speed graduation of the most successful firms. The DBE program is most effective if mature DBEs grow, develop, and graduate, leaving space for new or smaller DBEs. Some newer DBEs argue that their opportunities to break into work with prime contractors are limited because primes already have long-term relationships with certain DBEs, which are often older, and can meet any contract goals by using those firms. Some DBEs say that, unless those older, bigger DBEs can be “dislodged” through graduation, the path that helped the older DBEs to be successful will not be open to newer DBEs. • According to interviews conducted in this research, there are disincentives to graduating from the program for both the DBE and the state DOT. The DBE can no longer be used to meet DBE contract goals. The state DOT can no longer count the participation of that firm toward its overall DBE goal. • There might be a need to explore a smoother transition of companies from full participants to non-participants in the DBE program. • For their own purposes, state DOTs could collect and report data on their use of all minority- and women-owned firms, whether or not they are DBE certified. One use of such data would be a better understanding of why a state DOT might be falling short of its overall DBE goal. 4. Graduation is temporary for some companies in the DBE program. About one-third of DBEs identified as having graduated appeared in DBE directories as of summer 2018. This sug- gests that some DBEs become eligible for the program again after having temporarily exceeded certification standards. Their revenue or personal net worth may have declined once they left the program. (Additionally, some companies successfully appeal state or local agency de-certification decisions.) Some points related to the temporary aspect of graduation for some DBEs are the following: • Because state DOTs report that most DBE graduations are not due to exceeding SBA revenue ceilings for small businesses, it follows that re-entry into the program is related to personal net worth or data related to the ability to accumulate substantial wealth. However, the research team did not have the data to analyze what causes firms to permanently graduate and what factors lead to re-entry into the program. • There is a need for state DOTs to collect more information about graduated firms and reasons for graduation and any re-entry. U.S. DOT or others might then compile that data to better analyze any trends. Such information might provide further direction for any needed changes in operation of the federal DBE program.

Conclusions 57 5. There appear to be some DBEs currently on a path that could lead them to graduation. State DOTs identified 70 DBEs that might be on a path toward graduation, a relatively small number. Few state DOTs reported that they were helping those firms prepare for graduation. Some points related to these results are the following: • Each state might have only one or two highway-related firms on a path toward graduation, which makes it difficult to develop and deliver specialized assistance. • There is an opportunity for state DOTs to cooperatively develop multi-state efforts to provide specialized assistance for those firms. For example, states within a region might jointly identify and reach out to companies on a path to graduation to identify the additional assistance that might be helpful and then jointly deliver such assistance. • It is also difficult for a state DOT to know whether a company is on a path toward graduation. Many of the graduations are due to personal net worth and measures of the owners’ ability to accumulate substantial wealth, which are not as easily tracked as annual revenue. 6. About one-half of successful DBEs are firms owned by white women. Data for individual states have shown much of the DBE participation coming from companies owned by white women. This research appears to provide the first nationwide statistic on the demographic com- position of successful DBEs. 7. Firms owned by white women make up a disproportionate share of successful DBEs. The relative number of firms owned by white women was nearly twice what one might anticipate based on their share of all firms certified as DBEs. This result remained after controlling for a number of other firm characteristics that the research team was able to examine. Exploring the reasons for this result might be an area for further research, which might include recording change in ownership of DBEs and minority- and women-owned firms over time (i.e., are the firms inherited or previously majority-owned?). This result does not mean that the number of successful DBEs owned by white women is large. Only a small proportion of the DBE-certified firms owned by white women were iden- tified by state DOTs as successful. In other words, the odds of becoming a successful DBE working with a state DOT are still low for a DBE owned by a white woman; they just appear to be somewhat better than the odds for minority-owned DBEs. 8. The DBEs that state DOTs identified as successful are mostly construction and profes- sional services firms. State DOT disparity studies and other data show that a very large share of state DOT contract dollars go to types of work related to building, maintaining, and designing highways, streets, and bridges, especially on contracts that receive U.S. DOT funds. This fact might be useful to newer DBEs or companies considering becoming DBE certified that are interested in state DOT work. Although there may be opportunities in state DOT con- tracts for DBEs in fields that are not related to state DOT work, they are limited. The path to success for these DBEs must include substantial work from customers beyond the state DOT. 9. There is little concentration of DBEs in any one four-digit NAICS code. There are two important implications of this result: • Many fields within highway-related work can lead to success. State DOTs should anticipate that DBEs from a wide range of disciplines—construction, professional services, supply, and trucking—will be involved in the DBE program and plan technical assistance accordingly. • Overall, state DOT operation of the federal DBE program does not lead to overconcentration of DBEs in a certain type of work. 10. Successful DBEs perform work in many specializations related to the highway construction and engineering industries, and most successful DBEs have more than one way of participating

58 Compendium of Successful Practices, Strategies, and Resources in the U.S. DOT Disadvantaged Business Enterprise Program in a state DOT contract. They may have started in a single field but may have added capabilities over time. Some companies change their primary line of work after they have started the com- pany. Important points include the following: • The fact that successful DBEs may have more than one way of participating in a state DOT contract and that DBEs may change their primary line of work over time or add to it is use- ful information when state DOTs design technical assistance. • Some DBEs may hit a revenue ceiling for one NAICS code and then add a line of work in a NAICS code with a higher ceiling. This did not appear to be the case for a majority of success- ful DBEs, but it might be an effective strategy for some. • The fact that diversification has proven effective for some successful DBEs can be commu- nicated to newer firms. Diversification, however, is not required for success; some firms are successful with a single niche specialization. If a firm takes on new types of work, the firm must be able to do the new work well for a diversification strategy to be helpful. 11. Most successful DBEs are older firms that have been certified for many years. Points related to this result are the following: • It appears to take many years for a firm to be successful in working with state DOTs. For construction firms, the need to build one’s ability to finance and bond contracts might be one reason, which might be more difficult for minority- and women-owned firms than other small businesses. A firm’s reputation, critical to both construction and professional services firms, is also built over time. State DOTs might speed up this process through assistance with access to capital and bonding and in building relationships with prime contractors and state DOT staff. • The path to success that worked for some of the older DBEs might be harder to follow for newer DBEs. Older DBEs may have entered the DBE program when there was less competi- tion, especially from other DBEs. Many older DBEs now have strong relationships with prime contractors that limit opportunities for newer DBEs. A prime contractor may be reluctant to use a newer DBE when it has worked with an older DBE for many years. • If a firm has not graduated after 20 years in the DBE program, it probably will not graduate in the near future. • Many successful DBEs still report difficulties competing for prime contracts. Because most of the successful DBEs have been in business for many years, their age is not a reason for their lack of success in winning state DOT prime contracts. Structural characteristics of how state DOTs contract for construction and professional services might be a more important cause. This is an opportunity for further research. • Technical assistance for successful DBEs should be designed around the fact that they have been in business for many years. Some successful DBEs commented that the technical assis- tance provided by state DOTs was intended for start-up companies. 12. Annual revenue for most successful DBEs is $10 million or less. Some related points are the following: • State DOT operation of the federal DBE program does not appear to put a sizeable number of DBEs or former DBEs on a path to growth beyond small business size standards. As this is the first national research to demonstrate this point, future research may be needed to explore whether this is a limitation of the program or what causes this outcome. • Based on SBA small business size standards for their fields, most DBEs may still be dis- advantaged in relation to large firms when competing for state DOT work. This is con- firmed through interviews with successful DBEs. State DOT efforts to remove barriers for all small businesses will benefit DBEs. • Some state DOTs may be concerned that if the most successful DBEs win more contracts, they will soon graduate from the program. This does not appear to be the case for most of the successful DBEs identified in this research.

Conclusions 59 13. Revenue alone is not a good measure of whether a firm is “successful” or on a path to graduation. Related points are the following: • This research employed measures of success beyond firm revenue. Some of the successful DBEs interviewed seemed to value profitability and other measures of sustainability more highly than gross revenue as metrics indicating success. This helps state DOTs understand the perspectives of successful DBEs. • State DOTs and others can communicate to new DBEs that they might consider measures in addition to gross revenue when gauging their own success. • State DOTs need to monitor measures in addition to revenue, especially personal net worth and adjusted gross income, to identify DBEs that may be on a path to graduation. Business Practices and Behaviors of Successful DBEs 14. Successful DBEs appear to go through the same stages of development as any other firm, but with better results. The stages are • Pre-start-up; • Start-up; • Growth and change; • Surviving unfavorable economic conditions or other events; • Relative stability and profitability; • Succession planning; and • For some, exiting the DBE program or another program. Different types of training and other assistance are needed for a company to move from one stage of development to another. 15. Nine factors appear to be essential to the success of DBEs. Three additional strategies are also important to the success of some firms. The nine mandatory factors are • Experience and relationships prior to start-up; • Being in a field with demand for services; • Access to capital; • Business acumen; • Quality of work and reputation; • Relationships with customers; • Ability to hire, train, and retain quality workforce; • Operational efficiency and competitive pricing; and • Succession planning. Failure in any one of the first eight factors can lead to failure of the company, even if it has strong capabilities in the others. The ninth factor—succession planning—appears not to be discussed much among DBEs and state DOTs. However, for firms owned by individuals who are becoming older, effective succession planning will not only determine whether a company continues to be a DBE, it will determine whether it is in business at all. The three additional strategies that some DBEs have used to be successful are • Diversification or vertical integration; • Serving a geographically large market; and • Bidding or proposing as a prime contractor or consultant. These factors apply across different fields and across different parts of the country. They are not limited to minority and female business owners but would be true for anyone starting or trying to expand a small business. State DOTs and other groups can design training and other assistance to build capabilities in each of these areas, for both new DBEs and older firms.

60 Compendium of Successful Practices, Strategies, and Resources in the U.S. DOT Disadvantaged Business Enterprise Program Communicating these factors to new business owners and those thinking about starting a business can help them plan for the challenges of becoming a successful firm. 16. State DOTs help DBEs through multiple types of assistance. DBE contract goals appear to be very important. However, training and technical assistance also appear to help DBEs be successful. Most state DOT programs include the first six types of assistance shown in Table 17 as well as contract goals. As a whole, relatively few state DOTs provide individualized assistance tailored to successful DBEs, promote access to capital, unbundle contracts, and establish contracting processes that remove barriers for small businesses competing for prime contracts. Only a few states employ procurement strategies where bidding for certain small contracts is restricted to small busi- nesses. It appears that nearly every state DOT could improve its efforts in these areas. There are a few state DOTs that provide little if any training and technical assistance to DBEs. Some are struggling with shrinking or non-existent supportive services budgets. These state DOTs might benefit from setting better priorities for the assistance they provide and consider- ing more efficient delivery methods, including web-based, on-demand assistance. These DOTs also might use more state funding to boost technical assistance programs. For example, state DOTs might eliminate training that DBEs can easily and inexpensively obtain through other providers (basic QuickBooks training, for example). State DOTs can then DBE recruitment and effective DBE certification Relationship-building Information about contract opportunities Enforcement of prompt payment General training Individualized training and assistance Individualized assistance tailored to successful DBEs Delivering access to capital DBE or other contract goals Unbundling contracts, small bus.-friendly selection Sheltered market bidding for small primes Type of assistance provided Basic services provided by most state DOTs Provided by many state DOTs Provided by a few state DOTs Table 17. Types of state DOT-provided assistance to DBEs and their importance.

Conclusions 61 focus on training specific to highway contracting and engineering as well as working with the individual state DOT. Some state DOTs are using new delivery methods for training that may align better with how DBEs want to receive that assistance, while saving costs in the long term. Web-based, on-demand assistance is one method that more state DOTs could consider. They might jointly pursue devel- opment of this type of training. 17. The federal DBE program has helped successful DBEs achieve success. Nearly every successful DBE interviewed said that the program had been helpful. Many said they would not be as successful today without the program, and 20% said that their businesses would have failed without the program. 18. Successful DBEs say that they have and will continue to use different types of general training offered by state DOTs. Some related points include the following: • Even though some DBEs say that such training is too “basic” for their companies, one of the unanticipated results from the research was that many successful DBEs say they still use general state DOT training and other technical assistance and will continue to do so. • The state DOTs that have not experienced this demand for assistance from older or more successful DBEs might reexamine their offerings and delivery methods or perhaps change how they promote this assistance to mature DBEs. Practices That State DOTs Can Employ to Help DBEs Be Successful 19. Few state DOTs have specific assistance for successful DBEs or those on a path to gradu- ation. There is also a disincentive for DBEs to graduate, and some state DOTs report this disincentive as well. These disincentives present a barrier to effective operation of the federal DBE program. 20. State DOTs and their partners can adopt the following good practices to help create successful DBEs: a. Successfully deliver basic services. These services include DBE recruitment and effective DBE certification as well as properly setting DBE contract goals and monitoring achievement if the state DOT operates a race-conscious program. DBE contract goals, if employed, should include construction and non-construction contracts funded by the U.S. DOT, as appro- priate. (Some states currently do not use DBE contract goals to assist professional services firms.) State DOTs must also monitor DBE participation on non-goals contracts to determine whether total DBE achievement has met their overall annual DBE goals for contracts funded by the U.S. DOT. b. Emphasize training specific to the transportation industry and state DOT, including non- construction firms. State DOTs might consider whether they should discontinue classes readily available through other means and focus on training specific to companies involved in work related to the state DOT. This should include professional services firms, which are left out of such programs for some state DOTs. c. Provide individualized training and assistance, including for successful DBEs, using the most appropriate delivery models. Chapter 4 includes examples from some states providing assis- tance that is focused on the needs of mature DBEs. d. Address access to capital and bonding, going beyond classes. Access to capital, with the related constraints on ability to bond projects, continues to be a challenge for many successful DBEs. Some state DOTs participate in loan assistance programs for DBEs (see Chapter 4). e. Open more prime contract opportunities to small businesses, including DBEs. Only a few states have made it a priority to unbundle contracts, rethink prequalification requirements,

62 Compendium of Successful Practices, Strategies, and Resources in the U.S. DOT Disadvantaged Business Enterprise Program or create sheltered bidding programs to encourage participation of small businesses, includ- ing DBEs. Chapter 4 provides some examples. DBE program managers might need support for these initiatives, which may require legislation, from state DOT leadership. f. Track successful DBEs, share information across states, and develop multi-state efforts to pro- vide specialized assistance to firms on a path to graduation. There are only a small number of these firms and state DOTs know relatively little about them. It may be useful for states within a region to join forces when developing targeted assistance for these companies. g. Encourage successful DBEs to assist emerging DBEs. State DOTs and successful DBEs them- selves brought up the idea of creating a culture where successful DBEs give back to the program by assisting new and emerging DBEs. h. Ease the transition from being a DBE-certified firm to a program graduate. Ideally, gradu- ation from the federal DBE program would result in a “soft landing” for those firms. State DOTs might reserve some federally funded or state-funded contracts for application of small business contract goals. They could structure those programs to focus on firm size, not personal net worth or ability to accumulate substantial wealth, which might allow DBEs that have graduated for reasons other than revenue size to still participate. i. Consider ways to make graduation permanent for more graduates. U.S. DOT and state certifying agencies might explore whether graduation might be made more permanent for firms that exceed personal net worth limits or have shown the ability to accumulate substantial wealth. State DOTs with more success in this area might share strategies with certifying agencies in other states. j. Celebrate graduations and track them as a metric of program success. Some of the DBEs interviewed said that if they graduated from the DBE program, they would “throw a party” and thank everyone who had helped them. Some state DOTs reported having such celebra- tions for DBEs that graduate, but that was rare. State DOTs might do a better job of promoting graduation as a symbol of success for a company. k. For a state DOT’s own purposes, track utilization of all minority- and women-owned firms (including graduated DBEs) to provide measures of program success in addition to DBE Uniform Reports. l. Internally plan for graduation of some DBEs, including when setting overall DBE goals. Limitations of This Research In many respects, this research is a first of its kind for the federal DBE program. Therefore, there are important limitations, including the following: • There is very little existing information on this topic; • Results were dependent on state DOT knowledge of successful DBEs and graduates; • Because of very few program graduates, there is little analysis of what differentiates them from other successful DBEs; • No survey questions asked about wealth or the net income of DBEs, factors which appear to be as important to graduation from the program as gross receipts; • This research included only cross-sectional analysis, but future research might be able to track firms over time and how they change ownership; • The research team had to rely on DBE directories for 17 states to draw a sample of all DBEs because no national database of DBEs had the data needed for this research; • Few state DOTs have designed assistance specifically for successful DBEs and firms on path to graduation, which limited what could be said about “good practices” of state DOTs; and • Interviewees often discussed factors for success as “outcomes” (such as delivering quality work) and not how those outcomes were achieved.

Conclusions 63 Barriers to Widespread Implementation of New Methods State DOTs face barriers concerning available budget to provide assistance to DBEs. To imple- ment some of the practices, a state DOT would need to submit a waiver request to U.S. DOT regarding its operation of the federal DBE program, which might not be approved. Some of the changes that could open more prime contract opportunities to small businesses, including DBEs, might require a state DOT to adjust how it aggregates work into contracts and awards those contracts. Some of these changes might require state legislation. In many states, local agencies award contracts using FHWA funds administered by the state DOT. Local agencies might need to change their policies as well to create more small contracts open to small businesses. There appear to be relatively few companies currently on a path to graduation from the federal DBE program; their needs may differ from other DBEs. Because it may be difficult to cost-effectively design and deliver assistance to a small number of firms in unique situations, state DOTs might pool their resources to jointly identify and help companies on a path to graduation. Finally, as mentioned previously, there is a disincentive to the DBE to graduate from the program. Some state DOTs report a similar disincentive—not being able to count a graduated DBE in a state DOT’s DBE participation makes it more difficult to meet its overall DBE goal. This research recommends steps to overcome this barrier. Suggestions for Further Research Future research on successful DBEs might include surveys and interviews with new and emerging DBEs and possibly with minority- and women-owned firms in the transportation contracting industry that are not DBE certified. This research focuses on successful DBEs identified by state DOTs. There are other DBEs that would have been included in the research if DBE program managers from airports and transit properties were also asked to identify successful DBEs. Combined studies might be performed within individual states or regions if the state DOT, airports, and transit agencies decided to jointly conduct that research. There is a need to research DBEs that have been in the market for many years to address what they need in order to graduate and what aspects of the DBE program contributed to them remaining a DBE for so long. Successful DBEs should also be compared with successful poten- tial DBEs to determine if non-certified firms that can qualify as DBEs are receiving contracts from state DOTs or private entities.