SBA Proposal Could Change Landscape for IT Resellers

Doing business with the U.S. government is always a challenge. In addition to uncertain budgets, political infighting, and the seemingly endless procurement terms of the Federal Acquisition Regulations (FARs), there are many other special provisions that come into play in government contracting.

One of them is the small business set-aside policy designed to ensure that smaller companies can participate in federal contracting along with larger companies and multibillion-dollar revenue giants. Federal agencies regularly issue requests for proposals (RFPs) that are targeted exclusively to small firms. In addition, government contracts awarded to really large corporations often require that small firms get a fair share of subcontracting business.

Sounds like a simple solution — but in federal contracting, nothing is simple and the Small Business Administration (SBA) has a formidable set of regulations covering the set-aside policy — starting with the question of deciding how small is “small” for set-aside purposes. Size standards vary by industry, including the information technology sector.

Information Technology Resellers Targeted

The SBA is proposing to revise the size standards affecting Information Technology Value Added Resellers (ITVARs) — companies that provide hardware, software or both, as part of projects that also involve installation, systems integration and additional IT-related services to federal agencies.

The hardware and software may be acquired directly by reseller firms from different vendors and then passed on to the government within the context of adding value through an equipment and services contract package related to a federal project.

The ITVARS proposal is part of a number of reforms covering many industries that SBA revealed in September in response to a 2010 congressional mandate to update business size criteria. More than 240 industrial categories are covered in the proposal. SBA accepted comment on the proposals through Nov. 10.

For the IT resellers category, SBA proposed that companies with more than US$27.5 million in annual revenue no longer be eligible for small business preferences. Under current standards, federal agencies can offer small business status to IT resellers with fewer than 150 employees, even if revenues exceed the $27.5 million mark.

Some advocates for small businesses strongly oppose the SBA reforms.

“This proposed change is a terrible mistake that would have extreme adverse consequences for many small businesses,” said Lars Anderson, an attorney with Venable, in comments to the SBA on behalf of Wildflower International, a small woman-owned IT reseller.

By using the revenue ceiling, SBA would exclude a large number of small businesses from the federal IT reseller market, because many such firms could book federal revenues well in excess of the ceiling, but essentially remain small operations in terms of number of employees.

“We are looking here at some highly professional, qualified firms that provide efficient IT support to the government with proven track records in terms of federal contract performance — but they just operate with well under 150 employees, unlike the really big players,” Anderson told the E-Commerce Times.

The proposed change would impact smaller firms unfairly, he contended.

The SBA proposal is warranted because the existing size standards that involve references to both revenue and employees have creasted inconsistencies, confusion and misuse, the administration argued.

Contracting officers are not able to identify size elements in a government data base, which leads to misunderstandings about set-aside goals, the SBA pointed out.

The use of employee counts instead of revenues may have negatively affected some small businesses, according to the administration.

SBA Methodology Questioned

Questions have arisen over the documentation for the SBA’s proposal.

Census Bureau data was not used to tabulate contract award information related to the 150-employee criteria, the SBA acknowledged.

The conclusion that the revenue standard and the employee standard were about equivalent was based on 2007 data.

“That 2007 economic census data has no relevance to contracts awarded in 2014,” Anderson said in his comments to SBA.

In certain categories specifically related either to hardware or services, small business provisions will continue to apply, noted Lamar Whitman, director of public advocacy at TechAmerica.

However, there is a need for adequate documentation on the ITVARs proposal, he said.

“What happens if a firm sells a mix of hardware and services? This is where the term ‘value-added reseller’ comes in. The SBA regulations carved out an exception for VARs which allows certain providers to qualify as a small business if the contract in question is composed of at least 15 percent but not more than 50 percent of valued-added services, excluding hardware,” Whitman told the E-Commerce Times.

As to SBA’s rationale for its proposed modification, “without specific data on the revenue typically generated by a 150-person VAR firm, this SBA argument is not supported,” he said.

Billion-Dollar Market Opportunity

The most stringent criticism of the SBA proposal came from Congress.

In a detailed 12-page letter filed with the SBA at the comment deadline, Rep. Sam Graves, R-Mo., chairman of the House Committee on Small Business, not only questioned SBA’s statistical analysis for the proposed size standards, but also contended that the proposal failed to conform to a 2013 statutory change to the Small Business Act.

Regarding ITVARs, the SBA’s reforms “fail to address the underlying issues facing the information technology industry and the misuse of the size standards,” Rep. Graves said. He urged the agency to withdraw the proposal and make appropriate revisions to ensure its legal viability.

With federal agencies pursuing major projects involving cloud technology or big data management, often involving major players such as Amazon or IBM, the reseller segment has not been in the forefront of well-publicized IT projects. Still, the reseller market is significant.

For example, the U.S. Defense Department’s Defense Intelligence Agency (DIA) currently is evaluating potential vendors for its Enhanced Solutions for the Information Technology Enterprise (E-SITE) program, which specifically calls for contracting with ITVARs.

DIA intends to make multiple awards to both large and small businesses under the E-SITE contract. The contract will have a combined ceiling of $6 billion over five years.

Other large contract vehicles, such as one operated by the National Aeronautics and Space Administration, offer similar opportunities for ITVAR companies.