Small Government VARs Cry Foul Over Contract Awards To Bigger Firms


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With annual sales approaching $1 billion and a worldwide head count upward of 700, one would think it would be next to impossible to consider GTSI a "small business." After all, the company's shares are traded publicly on the Nasdaq, and the organization is considered one of the largest suppliers of IT goods and services to federal and state governments.

Yet, in the crazy world of government procurement, GTSI of Chantilly, Va., is a small business when it comes to certain contracts—and that has many small VARs hopping mad. That's because they are losing business to the likes of GTSI that the government had intended for true small business all along.

Now, GTSI accurately points out that it has done nothing wrong and is only taking advantage of legitimate breaks that the government itself has offered. In fact, GTSI chairman and CEO Dendy Young notes with pride that his company is the prototype success story that leveraged opportunities around it to help it grow to its current size.

"We're the good guys here," he says. Those who say otherwise, he adds, don't understand what would happen to the valuations of small VARs if government contracts were cancelled immediately after these organizations grew past a certain small-business classification threshold. Their values would plummet, and their owners would be disinclined to hire additional employees -- two outcomes no one wants.

Those considerations notwithstanding, VARs remain stressed. Consider Cindra Stolk, president of Federal Edge, a small IT goods and services supplier based in Riverside, Calif. Stolk and her husband and business partner, Ron, and their two sons run Federal Edge. They cannot believe how many contracts that should go to companies of their size wind up going to big outfits like GTSI. But rather than sit silent while the practice continues, they are speaking out.

Recently, for example, Stolk challenged an award from Hill Air Force Base north of Salt Lake City that was given to GTSI. The contract was supposed to be a government "set-aside," which are special deals that federal, state and, sometimes, local governments put together for small entrepreneurs like Stolk. Congress has said it would like to see as much as one-quarter of prime contract dollars awarded go to small businesses. But there are many reasons why some deals don't wind up in the hands of the people they are supposed to. In some cases, bigger IT goods and service suppliers are working back channels and lining up what are essentially surrogates to help win awards intended to go to small businesses. Other times, government procurement officers don't follow their own guidelines when it comes to awarding deals to third-party suppliers. Then there's GTSI.

It's a small business because, under the convoluted rules that govern these things, the government says so. In this case, GTSI qualifies as a small business because it once was when it won a contract years ago. That contract was later extended, giving GTSI a way to position itself as a small business, in one instance at least, as a small business through 2007.

Sound unfair? Stolk and others, including Lloyd Chapman, president of the American Small Business League, think so. Chapman, you may recall, has tirelessly pursued underdog issues on behalf of solution providers for years. This time, he thinks he has found the mother of all battles to wage and is trying to line up a major law firm to file a class-action suit against those that unfairly malign resellers who he believes are getting screwed.

"It's a dreadful situation that needs to be addressed," he says. "I get so mad when I think about it that I sometimes wake up in the wee hours of the morning and start rolling calls in my pajamas."

While Chapman successfully draws media attention to the plight of small businesses, Stolk and others wage their war directly with the government. When she, for example, protested the Hill Air Force Base award, Hill reversed course and then gave the award to her, explaining the GTSI had made a paperwork mistake.

Many solution providers say the practice of giving the award to the company that complains the loudest is common whenever smaller suppliers muster the guts to challenge awards. But the squeaky-wheel strategy is hardly a practice she can rely on. Besides, Stolk and others hate that practice because it almost always comes at the expense of other small businesses that could have ultimately won awards outright.

Others believe it's done by inept contracting agents hoping to placate third parties and prevent them from raising a ruckus. But a ruckus they raise. Since appearing in The Wall Street Journal, Stolk has been contacted by CBS News, The New York Times, Fortune Magazine and other media outlets. She's also been contacted by California Governor Arnold Schwarzenegger's office. The governor is interested, she was told, because Californian companies may not be getting their fair share of government awards.

For her part, she wants to make sure that others understand how widespread the problem is. Her company, for example, is the only Sun-authorized Certified Small Business in what California calls an "enterprise zone." Theoretically, a government agency could achieve two contracting goals by engaging her company. But to this day, she has never been awarded any Sun government set-aside business. Ever. That suggests to her that the problem runs deep.

Other VARs confirm that it does. San Antonio, Texas-based M2 Technology, for example, is wrestling with third parties coming into its territory and stealing its government business. Companies such as EDS, GTSI and others use contracts awarded in one part of the country as a springboard to serve similar government customers in another part of the country. The practice, known as "bundling" in gov-speak, is killing legitimate small businesses trying to win government awards intended for smaller suppliers, says M2 Technology president Mark Martinez. "Something needs to be done," he says.

Chapman, for one, says he's close to making things happen. And even the likes of GTSI, which steadfastly denies doing anything below board, sees the tide turning against it. In its own 2003 10-K, the company acknowledges that it may not be able to count on its small business status for much longer. "new legislation or regulations may require GTSI to recertify its size status on its GSA schedule sooner than 2007. GTSI cannot predict whether it would continue to qualify as a small business at the time of recertification," the company concedes in the document filed with the SEC.

To mitigate any impact from the loss of such business, GTSI is openly courting bonafide minority-owned businesses to serve prime or subcontractors on small minority-owned business awards. If successful, the billion-dollar powerhouse may wind up winning more business intended for small, minority-owned businesses. And it would be all perfectly legal, that is, unless Chapman and others have their say.

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