With Government Contracts, Size Does Matter

GTSI, for example, which recorded more than $943 million in sales in 2002, was considered a small business by the federal government. ASAP Software, a government solution provider based in Buffalo Grove, Ill., is also a GSA-certified small business and was ranked last year as No. 1 in software sales to the government in 2001. However, the company is a subsidiary of Dutch corporation Buhrmann, which has approximately 25,000 employees across 30 countries and annual sales of roughly 10 billion Euros, or $10.76 billion,hardly a small business.

"This industry is being decimated by fraud, abuse and disorganization," Chapman says. "Some of the biggest corporations, here in America and overseas, are stealing government contracts specifically reserved for small and midsize VARs."

Chapman co-founded the Microcomputer Industry Suppliers Association (MISA), an advocacy group for VARs, and the group began to put pressure on the General Accounting Office (GAO), which is Congress' investigative arm, the U.S. Office of Federal Procurement Policy and the U.S. Small Business Administration. What MISA found is that the small-business classification under the GSA wasn't being monitored or updated. Many small companies had outgrown their statuses, other small firms had been acquired by larger corporations and some companies exploited tremendous loopholes in the GSA rules.

For example, under a 1997 revision to the Small Business Act, the federal government is required to spend roughly a quarter of its procurement dollars with small businesses. But the federal government has no standard definition for the term "small business." In fact, the SBA has its own rules, which are specific for virtually every industry, practice and type of good offered in America. The SBA's small-business standards under Sector 54,professional, scientific and technical services,includes standards for legal practices, tax services and architecture, all of which carry a limit of around $6 million or $7 million in annual sales. But for computer services, the limit goes up to $21 million in annual sales.

In light of complaints from MISA and other VARs, the Office of Federal Procurement Policy has mandated that companies must re-certify their statuses as small businesses annually. In addition, the GAO, the U.S. Attorney's Office and several members of Congress are looking into the SBA standards and reviewing a number of companies that may not be small businesses.

MISA also pressured the SBA. As a result, the SBA removed 19 large companies from its Procurement Marketing and Access Network, dubbed PRO-Net, for small-business deals. Among the companies de-listed from the SBA's PRO-Net system was Tyco International, which employs more than 250,000 people around the world,a far cry from a small business.

Shifting Guidelines

"The government is changing the guidelines on how companies can sell to the government, and many large firms are losing their ability to get small-business contracts," Chapman says. "Large companies were buying these small resellers that were GSA-authorized as a small business, and they would continue to do business with the government and win new contracts as a small business."

Obviously, not everyone is happy about the crackdown. Lou Ray, president of Matcom, a government-focused IT services firm in Alexandria, Va., says he is apprehensive about the changes being made to the SBA and GSA rules. A former small business itself, Matcom is now classified as a large company,a direct result of winning many lucrative government contracts. Ray says it may be difficult for small VARs to grow because once they win a long-term contract, the revenue of that deal may push them out of the small-business category and, as a result, the company will lose its classification through the SBA's annual review and may lose the long-term contract as well.

"In the past, a lot of these large companies would have evergreen SBA small-business statuses that they used 20 years ago to get a big contract, and they're still posing as small businesses today," Ray says. "But now, you could have a small VAR that wins a rich, multiyear deal that pushes them out of the small-business group after the first year. With the annual reviews, that long-term deal could be taken away."

Tony Stirk, president of Iron Horse, a government-focused VAR based in Springfield, Va., is one such solution provider. Stirk claims his company has been affected by fraud, disorganization and a lack of enforcement in federal-government contracting. "It's a chaotic system. You assume that the government polices and enforces the contracting process, but it rarely does," Stirk explains. "Some of these enormous enterprises are considered small, disadvantaged or minority-owned businesses, and it's absurd."

For example, Iron Horse lost a deal with the Environmental Protection Agency (EPA) to a competitor that misrepresented its GSA status and sold Cisco Systems gear without authorization. "That company lied to the government because it wasn't authorized to sell Cisco," Stirk says. "I told the EPA and protested the deal, but it's more difficult to protest bogus deals today. Once the contracting officer signs on the dotted line, right or wrong, it's a done deal."

Iron Horse ended up winning the deal protest, which entitled the solution provider to a small reward for wrongfully losing the EPA job. Iron Horse, however, still hadn't received its check at press time. And Stirk says many of his competitors continue to abuse and circumvent the rules of the GSA Schedule.

Even the rules themselves get caught up in a quagmire of faulty logic. The U.S. Navy and Marines Corps used to be two of Iron Horse's biggest customers, but when EDS signed the landmark multibillion-dollar contract two years ago to provide desktop management and computer services for the two Armed Forces branches, Iron Horse was effectively shut out from serving either entity. It became even more frustrating for Stirk when offices within the Navy and Marines would call Iron Horse for small jobs,projects reserved for small businesses like his own,and he was forced to politely decline because of GSA restrictions.

"Any contract under $100,000 is supposed to go to a small business, but that rarely happens now," Stirk says. "And what makes it worse is that any contract bid over $25,000 must be published by the government, and small VARs like us have little chance of getting even those small deals once the bids are made public."

Change In Status

Ray says Matcom used to be considered a small business under the GSA and SBA rules several years ago, but the company outgrew its status. Ray is grateful, too, because he believes it's much more difficult for small and midsize VARs and vendors to survive in the federal marketplace, even with laws intended to protect small businesses. "It's a particularly tough game for IT-services companies because services are generic, and they're all getting bundled together by the government," Ray says. "Technology products are much easier to differentiate and sell to the government than services."

Stirk and Ray believe the federal-government market is a lucrative opportunity. Long-term government contracts for reoccurring services or deliverables can be especially valuable for small and mid-level solution providers like Iron Horse. Vendors, especially in the security market, are also moving into the federal-government space.

Neoteris, a start-up based in Mountain View, Calif., has quickly built a government practice and already sold its virtual private extranet appliance, Neoteris IVE, to government offices under NASA via the agency's Scientific and Engineering Workstation Procurement (SEWP) contract vehicle, which is similar to the GSA schedule and can be just as complex and murky. "Even though the SEWP is for NASA, virtually any government agency can buy off the SEWP system. Only 10 percent of purchases on SEWP are from NASA," explains Marc Cooper, channel sales manager at Neoteris. "There's a whole list of buying schedules and systems for the federal government."

The security start-up also has spent the past six months becoming GSA-authorized, a process that Cooper says was moderately difficult. Neoteris hired an outside consultant to help the security-technology company navigate through the red tape, bureaucrats, and various laws and requirements under the GSA. "There are a lot of rules and regulations for this market, and sometimes companies that aren't careful can slip up and find themselves in hot water," Cooper says. "But the potential reward in this sector is huge. You don't dabble in the federal government market. You're either in or out."

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