Small VARs Cry Foul On Federal Contracts

A Homeland Security program designed to help small VARs is instead padding the balance sheets of a few channel giants, and solution providers point to manufacturers as widening the loophole.

While solution provider giants Apptis, GTSI and Multimax earned government's blessing to participate on Homeland Security's FirstSource contract, some argue against vendor policies that give the top-tier partners a price advantage over other small business contract holders.

The Department of Homeland Security's FirstSource contract, set aside for small businesses of 150 or fewer employees, is an IT procurement vehicle, worth $3 billion over the next five years, that allows government to purchase a range of IT commodity goods from industry.

Eleven companies were awarded contracts under FirstSource, allowing them to compete against one another for opportunities. Of those 11 companies, three are joint ventures between small and large, or mentor, companies: EG Solutions, ST Net Apptis, and MultimaxArray. Under the Small Business Administration's 8(a) Mentor-Protege program, a joint venture qualifies as small as long as the protege firm meets the size requirements.

But while the joint ventures themselves have many crying foul, they're not the only source of contention on the FirstSource contract. Some small VARs assign blame to vendors that allow mentor companies to leverage their status as top tier partners to earn deeper discounts.

Of course, better pricing for large businesses that sell higher volume is not against the rules -- nor is it unusual. But some feel the practice goes against the intent of a small business contract.

"FirstSource is supposed to be a small business contract, but what you have is [big businesses] playing and manufacturers endorsing that," says Bob Laclede, vice president and general manager of Ingram Micro's government and education business.

As the mentor companies in the three joint ventures awarded FirstSource contracts, Apptis, GTSI and Multimax are able to place orders directly with manufacturers on behalf of their joint ventures for better pricing. This is an exception to HP and Cisco's rules against "two-tiering," which involves a large company selling to a smaller business who then sells to the end user.

"It would be nice if the manufacturers supported the program and supported the small businesses, but they're not," says Sean Burke, president of Irvine, Calif.-based Govplace. "We're a big HP partner, and suddenly these joint ventures have the same authorizations that we do."

In government contracting, that's not unusual, said Mike Humke, director of public sector sales at HP."It's not unusual for smaller VARs -- who would otherwise lack the resources to meet [contract] requirements -- to team up with larger VARs to be successful," Humke said. "[This results] in a win-win for partners and the government."

In an attempt to level the playing field, Cisco is "encouraging"-but not forcing-small businesses on FirstSource to partner with top-tier partners to leverage that buying power.

"Cisco is committed to being fair and consistent with channel partners," says Dawn Duross, Cisco's director of federal channels. "On the FirstSource contract, we have applied the same rules, benefits and discounts to all prime and subcontractors."

Still, FirstSource solution providers say that Cisco's practice of having small VARs buy through Gold partners does achieve consistency, but also drains margin from those that have to compensate an additional partner in the process.

"[The joint ventures] have the advantage, because there are not two layers of companies that need to make profit," Burke said. "They essentially sell to themselves, [then] pass that advantage straight to the government to win the deal."

And while all Dell partners deal directly with the vendor for purchasing, price is allegedly not consistent among FirstSource contractors -- with joint ventures often receiving deeper discounts. In one example, the Federal Law Enforcement Training Center awarded a contract for storage equipment to EG Solutions, a joint venture between Eyak Technology and GTSI, based on a bid of $372,828 in Dell products. Santa Fe, N.M.-based Wildflower International, which also bid the order, lost by $44,679, despite a modest markup of only 2 percent.

"We are losing Dell business below our cost, so obviously there are other factors at play that are influencing price," said Kimberly deCastro, president and CEO of Wildflower. "In general, I'm trying to figure out who's running these competitions, the OEMs or the customer," deCastro says.

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