Joint-Venture Dilemma

Is FirstSource a level playing field? Not necessarily, say some of the participating small businesses. Of the 11 solution providers on the contract, three are joint ventures between small and large companies.

"Under the FirstSource contract, those large businesses are able to set up a new joint venture in partnership with a small company in order to secure a position on the contract," says Sean Burke, president of Govplace. The Irvine, Calif.-based solution provider is among the small businesses awarded the FirstSource contract. "It completely disrupts the program."

FirstSource was open to solution providers with fewer than 150 employees. Under the Small Business Administration's 8(a) Mentor-Protégé program, a joint venture qualifies as small as long as the protégé firm meets the size requirements. The following are the three joint ventures awarded the FirstSource contract.

• EG Solutions: A joint venture between Alaska-based Eyak Technology (employees: fewer than 150) and Chantilly, Va.-based GTSI (employees: 700; 2006 revenue: $850 million).

• ST Net Apptis: A joint venture between Gaithersburg, Md.-based St Net Inc. (employees: about 20) and Chantilly, Va.-based Apptis (employees: 1,500; 2006 revenue: about $700 million).

• MultimaxArray: A joint venture between Greenbelt, Md.-based Array Information Technology (employees: fewer than 150) and Herndon, Va.-based Multimax (employees: more than 1,000; 2006 revenue: about $300 million). Multimax was acquired by Harris on June 1. Harris reported $3.5 billion in revenue in 2006.

The other eight FirstSource solution providers unsuccessfully protested the presence of all three joint ventures. The SBA determined that none of the joint ventures violated the rules, given that the protégé firms fell within the size requirement.

"Bottom line, allegations were addressed to the Small Business Administration, [and] the companies who filed on this topic lost their case with the SBA--end of the DHS story," says Larry Orluskie, senior spokesperson for DHS.

In the case of EG Solutions, the SBA stated in a memo that "there is no evidence of affiliation between [Eyak] and GTSI outside of the mentor-protégé agreement." This is prior to confirmation in the same memo that GTSI owns a 37 percent interest in Eyak, thanks to a purchase agreement dated Aug. 15, 2002--three months after the SBA approved Eyak's entry into the 8(a) program and two weeks after approval of the mentor-protégé arrangement between the two companies. GTSI declined comment for this story.

Kim Roman, vice president of marketing and communications at Apptis, promptly canceled a scheduled interview with the protégé company ST Net and declined to comment on Apptis' behalf. Representatives from ST Net declined requests to reschedule the interview.

Multimax couldn't be reached for comment.

More: Joint-Venture Program "The joint-venture program was not originally meant for government contracting," says Guy Timberlake, CEO of the American Small Business Coalition. "Those arrangements were legally authorized and blessed by the government so that [large companies] could partner with small businesses to help develop them. But the rules are slick, and where these companies can take advantage, they will. How many more times can we ping Congress and say 'Hey, you have to see what's going on here?'"

SBA only requires a protégé company to perform a "substantial amount" of the work under a small-business contract. By contrast, small businesses can subcontract to larger companies, but they must perform at least 50 percent of the work. Timberlake and others argue that without any firm specifications, the protégé companies often act as little more than storefronts for the mentors that actually execute the contracts--and subsequently pocket the majority of the payout.

"[Government is] asking small companies to bet their businesses, and then abuses come up that cause them to not get the revenue or margins they're expecting or deserve," says Bob Laclede, vice president and general manager of Ingram Micro's government and education business. "That sets them up for failure. SBA talks about these programs, and it sounds good--this is government, so companies trust them. In reality, it doesn't work that way. SBA has to change its policies."

The prospect of a mentor company taking advantage of a protégé's contract access is something that shouldn't be happening, says Gary Jackson, division chief for size standards at the SBA.

"If a protégé was performing a very small part of a contract, SBA would be very concerned whether the mentor was providing meaningful assistance to the protégé under the terms of an 8(a) mentor protégé agreement," he says. "It's a bit of a double-edged sword, because we need certain advantages for these mentors to enter into these agreements. [Providing access to contracts] is one way we can do that."

Not everyone believes a procurement vehicle set-aside for small businesses is an appropriate incentive. Nor do they believe that large businesses are entering these joint ventures for any reason other than to win contract awards.

"The SBA is counting on people being honorable and having integrity in business," says Kimberly deCastro, president and CEO of Santa Fe, N.M.-based Wildflower International. The small, woman-owned business is among the companies awarded the FirstSource contract. "If they can't count on that, this will always be a problem," she says. "I'm trying very hard to figure out how to compete against large business on a small-business contract. It's a whole new game for me if I can't count on people doing the right thing."