The dynamic strategic relationship between small and large companies in Connecticut
By Bill DeRosa
When is the last time you heard a politician proudly proclaim, “I am the big-business candidate”? More often, those running for public office express ardent support for small business—and sometimes equally ardent disdain for corporate America—in their attempts to score points with voters.
The big-business-versus-small-business mentality is not limited to politics. Many in the media and general public also see small businesses and large corporations as distinct—even adversarial—sectors of our economy.
Conflicting reports about which sector contributes the most to economic growth and job creation reinforce the tendency to think this way. Using data from the U.S. Bureau of Labor Statistics (BLS), the U.S. Small Business Administration (SBA) reported earlier this year that companies with 20–499 employees (which the SBA refers to as larger small businesses) represented 63% of the job growth in the United States from the beginning of 2010 to the second quarter of 2011. More recently, the SBA’s Small Business Economy 2011 report reinforced the conventional belief that small businesses drive employment: “Quarter by quarter, small businesses with fewer than 500 workers outperformed large firms in net job creation about three out of four times from 1992 through 2010 when private-sector employment rose.”
A recent New York Times article, however, cited newer, experimental BLS data showing that from April 1990 through March 2011, employment at companies with 500 or more workers increased 29%, compared with 13.1% at firms with 50–499 employees and 10.5% at those with 1–49 workers. But the same data also showed that in the manufacturing sector, employment at smaller firms fell more slowly during the Great Recession than at larger companies and climbed faster once the recovery started.
Obviously, using such data to make a cut-and-dried case about the relative economic importance of large and small businesses is tricky because of the number of variables involved, including how companies are classified by size, the time period covered, and differences in the factors being analyzed.
Moreover, research has shown that job creation among large and small companies varies proportionally with business cycle conditions*, something that Chris DiPentima, president of metal fabricator Pegasus Manufacturing in Middletown, can attest to.
DiPentima believes that Connecticut’s diversity of small and large companies helps the state weather ups and downs in hiring cycles. “What the large OEMs [original equipment manufacturers] are doing, the small or midsize guys may not be,” he says. “In growth periods like we’re in now, a lot of the OEMs send about 80% of their build outside. They certainly aren’t hiring at the rate that companies in their supply chains are, so it’s good to have that mix.”
Debate Misses the Point
CBIA President and CEO John Rathgeber agrees and argues that debate about which company size class creates more jobs turns attention away from the fact that in most economic-base industries, large and small firms depend on each other for survival, and communities depend on both for jobs.
“The important point is that small and large businesses in nearly all sectors are constantly creating mutually beneficial strategic partnerships,” says Rathgeber, “and we need both to be healthy to keep job creation strong and the economy growing.”
Nowhere is that more apparent than in high-end manufacturing, where large companies depend on vast networks of smaller firms to supply materials and components and handle numerous fabrication processes.
“Now more than ever there is a strong partnership between OEMs and their supply chains, the small-to-midsize companies,” says DiPentima. “The partnership nowadays has to be stronger and stronger, because business cycles—ramp-ups (tremendous growth), downturns, and then quick ramp-ups again—are so much shorter than they used to be. There has to be a tight partnership and strong communication between the two.”
DiPentima also believes that having a diverse range of both small and large companies allows for more job diversity as well.
“The other front to look at is the kind of jobs small and large organizations offer to a state,” he says. “Since most of the big OEMs are subcontracting the build side now, their work mainly consists of engineering, purchasing—more of the technical or front-office side—while the companies in their supply chains have the skilled labor, their machinists, welders, inspectors.”
The Case of the Sub Base
The critical interdependence of large and small companies in Connecticut was brought to light in 2005 when the federal government’s Base Realignment and Closure (BRAC) Commission put the submarine base in Groton on its closure list. A coalition of state and local elected officials, businesses, and others fought off the closure, in large part by citing the close working relationship between the base and Groton submarine manufacturer Electric Boat (EB). The coalition emphasized the devastating impact closure would have on the defense contractor, its numerous subcontractors throughout the state, and thousands of small businesses in the region indirectly supported by the base and EB. A study at the time estimated that Connecticut and parts of Rhode Island would lose 31,000 jobs and $2 billion in annual income if the base closed.
“We employ more than 8,300 people in the state and provide contracts to more than 800 Connecticut companies,” says William Lennon, vice president, Maintenance, Modernization, and Lifecycle Programs at EB. “Any changes that hurt EB can have a negative impact on our employees and our suppliers as well. And the opposite also holds true. For example, when policies increase costs for small businesses in our supply chain, they have to pass along those costs or put their businesses at risk.”
The Cluster Phenomenon
What often drives small-business growth is demand by larger firms for supplies, parts, business services, and more, says CBIA economist Pete Gioia. “For many small companies, larger firms represent part or all of their customer base,” he says, recalling results from the 2011 CBIA/BlumShapiro Survey of Connecticut Businesses. The survey found that more than half (53%) of the 707 businesses responding—regardless of size—depend on large Connecticut companies for business. Industries represented in the survey included manufacturing (28%); professional services (25%); finance, insurance, and real estate (11%); and construction (10%).
In professional services, says Gioia, “a whole array of smaller firms serve large corporations in a variety of functions. Banks, for example, use appraisers that must be independent of the bank and tend to be small firms or even individual entrepreneurs.”
Farmington-based i-MARK Inc., a developer of e-business software, includes Stanley Black & Decker and Hamilton Sundstrand among its corporate clients. “In terms of business units, 30% of our business is with large companies,” says i-MARK’s president and CEO Del Merenda. “But they represent roughly 50% of our revenue.”
A similar situation exists in manufacturing. Okay Industries, a New Britain-based manufacturer of metal stampings, mechanical assemblies, and surgical blades, derives about 90% of its business from large corporations, says Jason Howey, the company’s president. Howey believes that the best thing the state can do for small businesses is keep the big ones here.
“There are a lot of small manufacturers here, and a lot of their customers are the large OEMs,” he says. “It’s the cluster phenomenon, where you’ve got some big companies here in Connecticut and a lot of the small, local guys supplying them.“
Pegasus Manufacturing also relies heavily on a big-company customer base, with 80%–85% of its business coming from the large OEMs, according to DiPentima.
The business that companies like Pegasus and Okay Industries do with large corporations also creates a kind of upstream multiplier effect: As the big OEMs outsource jobs to smaller firms, those firms in turn move some of that work to other small manufacturers in the state.
“Even companies like ours outsource jobs like heat treating, or we purchase components that we put in our subassemblies,” says Howey. “We buy more than $5 million annually in products and services from other Connecticut companies.”
Pegasus operates similarly, and DiPentima finds the number and diversity of small businesses in the state advantageous. “That’s one of the reasons we’re in Connecticut,” he says. “There are a lot of special processes for our parts that we do not do in-house, that we contract out to our supply chain. Most of those companies are local Connecticut shops and raw-materials suppliers.”
Doing business with large corporations not only provides small companies with reliable, repeat customers; smaller firms that sell to big companies also make more money than those that don’t, and they typically show impressive growth in revenue and jobs after signing contracts with large firms.
Last year, the Center for an Urban Future, a New York City think tank, surveyed hundreds of small firms, primarily from in and around NYC. Of the 180 that responded, 65 reported being suppliers to large corporations. Of those companies, nearly two thirds (63%) generate more than $500,000 in revenue per year. In contrast, more than three-quarters (77%) of the 115 non-suppliers responding have annual revenues of $500,000 or less.
The study also found that doing business with large corporations is typically “a springboard for growth” for smaller firms. The corporate suppliers in the survey reported revenue growth of 266%, on average, between the year before and two years after their first sale to a large corporation. In addition, corporate suppliers saw significant employment growth during that time span, increasing their workforces by an average of 164%.
Global Reach
Small businesses gain some unique advantages when the large corporations they serve do business globally—and many of them do, says Gioia.
“Proportionately, more large firms than small companies are involved in international business. That doesn’t mean there aren’t firms with 20 employees exporting their products, but the larger firms—those with 500 or more employees—are much more involved.”
That means smaller companies gain access to markets that they normally wouldn’t reach, says Luis Ramírez, CEO of GE Energy Industrial Solutions in Plainville. His firm employs 15,000 people worldwide and has 195 direct and indirect suppliers based or working in Connecticut, translating into approximately $37 million in annual business for those small firms.
“Some of the products we’re buying from companies here in Connecticut will show up in products that we sell all over the world,” says Ramírez.
Gioia notes that small firms partnering with big international players also benefit from the diversity of the larger companies’ markets during economic downturns.
“Global companies are cushioned against the impact of economic cycles because some of their worldwide markets may not be severely affected. That, in turn, helps protect the smaller firms that sell to the larger, global ones.”
Small-Business Breeding Grounds
Often, small businesses are created from large corporations through the spin-off process. A company can choose to spin off part of its operation into a separate business in a downsizing or restructuring initiative, or a spin-off can be entrepreneurial in nature, where an employee or group of employees decide to leave a company and start a new business based on knowledge and experience gained from the parent firm. Either way, the large corporation serves as a de facto business incubator, and in many cases spin-off companies maintain a business relationship with the firms they came from, selling products or services to the parent.**
“If you were to go through a lot of the industrial parks in Connecticut, you’d find that quite a few of the small companies have their roots in what were once divisions of much larger firms,” says CBIA’s Rathgeber.
Ramírez agrees. “A lot of small companies were started by people who came from the corporate world,” he says. “It always helps to have friends in different industries that have worked with you before. When people do leave our organization, we tend to maintain good relationships. I even had a situation last year where the company we bought—Lineage Power—was actually being run by someone who had left GE a few years earlier and had inculcated a lot of things from the GE culture into that business. So when it came into our portfolio, it felt like it had always been part of the company in some ways.” [Read More...]
