The U.S. Attorney's Office in Washington and the General Accounting Office are investigating whether large businesses are fraudulently pursuing -- and winning -- government contracts set aside for small businesses.
If the allegations are true, the amount of contracts going unfairly to large businesses could represent billions of dollars, said Wendy Belzer, spokeswoman for Rep. Nydia Velazquez, D-N.Y., ranking member of the House Small Business Committee.

Leaders of the House and Senate committees on small business requested the GAO investigation in January. The federal government each year buys approximately $200 billion in goods and services from the private sector, according to the House committee.

The House committee will hold hearings when the GAO report is released, Belzer said. The report is expected in March or April, sources said.
Sen. Barbara Boxer, D-Calif., requested the U.S. Attorney's Office investigation last fall following complaints that large companies were winning contracts intended for small business.

The investigations have been spurred on by Lloyd Chapman, president of the Novato, Calif.-based Microcomputer Industry Suppliers Association. Chapman started the association about nine months ago to lobby for small IT resellers. The group now has about 1,000 members, he said.

Chapman is also general manager of GC Micro Corp. in Novato, a software and computer reseller with 2001 sales of $34 million.

"One of the things that prompted me to get involved was the fact that I saw a lot of resellers, such as GC Micro, competing on a daily basis with some of the biggest computer suppliers in the world," he said.

GC Micro is a woman-owned, small disadvantaged business employing about 26 people. Five years ago, sales to federal agencies as a prime and subcontractor constituted most of its business. Now those sales are about 20 percent of the firm's business, Chapman said.

Chapman has amassed eight four-drawer file cabinets and numerous boxes of government and private-sector documents that he said show large businesses are indeed winning work that is meant to go to small businesses. He said some of the largest IT suppliers to the federal government are representing themselves as small businesses and winning contracts meant for small businesses.

Chapman has met with congressional staffers and made repeated phone calls to government agencies to rally officials to his side. So far, his efforts have helped instigate the two investigations and prompted the Small Business Administration inspector general to look into the matter.

In addition, SBA officials have removed hundreds of companies from the agency's PRO-Net database, which federal contracting officers use to identify small businesses.

One of the companies removed, according to Chapman, is IT reseller GTSI Corp. of Chantilly, Va., which has about 600 employees and 2002 revenue of nearly $935 million. Others removed include CDW Government Inc. and ASAP Software, Chapman said. Both are subsidiaries of large firms. CDW-G is a division of CDW Computers Inc. of Vernon Hills, Ill.; ASAP is a unit of Buhrmann NV of Amsterdam. Buhrmann employs more than 25,000 people in 30 countries and logged revenue of $10.7 billion in 2002. CDW employs about 2,800 people and had revenue of nearly $4.3 billion in 2002.

Jack Littley, senior vice president of program and information services at GTSI, said the company has not won any contracts as a small business since 2001, but continues to qualify as a small business under a GSA schedule contract that it won years ago.

Procurement rules allow companies who have won multiple-award contracts,such as a GSA schedule, to remain small through the life of the contract, including option years that could be up to two decades. But the White House this month took steps to change this policy.

Chapman said some government employees initially were hostile to his complaints, but now congressional staffers are calling him to see how they can help.

"I am converting people every day," Chapman said. "I'm like the Baptist preacher. When I first talk to people, they are fighting me. They are the typical, cynical government employees. By the time I get off the phone with them, they say, 'I guess we do need to take a look at this ... this needs to change.' "

After Chapman complained to Boxer, the California senator wrote a letter Sept. 24, 2002, to the U.S. Attorney's Office in Washington asking for an investigation.

"With small businesses in California facing a difficult business environment, it is important that government contracts set aside for small businesses be made available to small businesses," Boxer wrote.

Channing Phillips, spokesman for the attorney's office, said its probe is ongoing. He said he could not comment on what companies the office is investigating.

Pete McClintock, SBA acting inspector general, said, "We're looking at complaints that were provided to both Sen. Boxer and us."

In December, the General Accounting Office began its own investigation based on information Chapman provided, said David Cooper, director of GAO's Acquisition and Sourcing management office.

" We are looking into the issue of whether large businesses are receiving contracts intended for small businesses," Cooper said. "We are seeing there is a problem. What we are trying to do is validate what the problem is, what the factors are that caused the problem to occur and whatever corrective actions might be needed to address the issue."

And in January, leaders of the House and Senate small business committees followed, officially asking GAO to investigate on their behalf.
Sen. Olympia Snowe, R-Maine, chairwoman of the Senate Committee on Small Business and Entrepreneurship, wrote Jan. 13 to GAO chief David Walker, requesting "a full investigation into whether large companies are indeed obtaining government contracts set aside for small businesses."

Twenty-three percent of federal prime contract dollars are supposed to go to small businesses each year. But a Senate Small Business Committee staff member said, "It looks like what [agencies] have told us is going to small business isn't ... It looks like a fraction of what is being reported is going to small businesses. We are going to be looking at this closely."

On Jan. 17, Velazquez and Rep. Donald Manzullo, R-Ill., chairman of the House Committee on Small Business, also wrote to Walker, saying, "We ask your immediate assistance in assessing whether large businesses are unfairly receiving contracts that should be legitimately awarded to small businesses. If so, we ask GAO to identify actions that are necessary to correct this very serious problem."

Manzullo and Velazquez asked the GAO to include in its investigation large businesses that have received GSA Federal Supply Service schedule contracts; what actions have been taken by the SBA to address the problem, including reviewing PRO-Net for inaccuracies; and small-business protests to the SBA on size standard issues for the last five years.

Chapman, who regularly logs 14-hour days trying to advance his cause, said he hopes his efforts will pay off with policy changes to ensure multinational conglomerates and billion-dollar companies don't get small-business contracts.

"I feel extremely driven, really compelled," he said. "It's hard to describe. A lot of people that were supposed to be helped by these [small-business contracting] programs are being hurt by these programs."

To view full article, click here: http://washingtontechnology.com/Articles/2003/02/20/Smallbusiness-deals-under-investigation.aspx?Page=2/

The office of Management and Budget will require contractors to re-certify their small-business status annually on GSA Schedules and government-wide acquisition contracts, to weed out those that have outgrown size standards or been acquired by large businesses.

OMB has told agencies to begin requiring re-certification on government-wide acquisition contracts April 1. Currently there are 14 GWACs run by four agencies: GSA, NIH, Commerce and NASA.

Amendments to the Federal Acquisition Regulation and Small Business Administration regulations will be published to require annual re-certificati0on of GSA schedule contractors and those on all other multiple award contracts, OMB said. That will supersede a recent GSA rule requiring re-certification every five years.

"Good deal," said Lloyd Chapman, president of the Micro-computer Industry Suppliers Association in Novato, CA, who has been crusading for action on this front.

After Chapman took his campaign to members of Congress, both the U.S. Attorney's office for the District of Columbia and the General Accounting Office confirmed they have begun inquiries into whether large firms are posing as small ones in bidding on federal contracts.

GAO's early findings indicate that "billions of dollars" have been awarded improperly, said Wendy Belzer, spokeswoman for the Rep. Nydia Velazquez (D-NY). The inquiry is still in progress.

Chapman said GAO is uncovering evidence of "blatant federal contract fraud on the part of some companies."

A company that fraudulently claims small-business status as a federal contract can face criminal and civil penalties as well as debarment from contracting.

The move to more frequent recertification "was inevitable," said Larry Allen, executive director of the Coalition for Government Procurement, an organization of GSA schedule contractors. "I don't think it's a bad thing necessarily. I wonder, however, if one year isn't a little too frequent."

GAO has ruled that an angency may require a contractor to re-certify its eleigibility as a small business every time it bids on a task order under the schedules, but that rarely happens, according to industry sources. (SAA, 9/20/02)

SBA is not considering requiring re-certification when options on individual contracts are exercised, Gary Jackson, assistant administrator for size standards, said in an interview. A company that is small when it is awarded a contract will continue to be counted as small through option periods lasting up to five years.

Nor does the agency intend to require periodic updates of listings on its PRO-NET database of small firms, Jackson said.

He said 90,000 companies were dropped from PRO-NET when the database was merged with the Defense Department's Central COntractor Registration late last year. Most of those had not updated their listings in more than 18 months, but some were dropped because they exceeded size standards.

More than 160,000 companies are registered on the fcombined PRO-NET/CCR, the government's official registry of small businesses.

Chapman said he has given SBA the names of some large businesses listed on PRO-NET.

He said SBA executives recently told him they had removed 19 companies from the registry as a result of his complaint. But he said SBA did not notify other agencies that the companies no longer qualified for small-business preferences: "The flow of contracts (to those firms) has been unaffected."

A California VAR said he filed a complaint with the Federal Trade Commission late last year against Hewlett-Packard that claims the vendor misappropriates trade secrets in an effort to expand direct sales.

Lloyd Chapman, general manager of GC Micro, Novato, Calif., said he's president and founder of the Microcomputer Industry Suppliers Association. Chapman said the organization was founded "about nine months ago" and has more than 1,000 member companies, mainly small VARs. He said he filed the complaint against HP on behalf of the organization.

Chapman said he filed the complaint online "three or four months ago" with the FTC. Chapman, however, was unable to produce a copy of the complaint. The complaint alleges that HP uses proprietary customer information supplied by VARs when they participate in the vendor's various rebate programs, he said.

An FTC spokeswoman said, "Anybody can file a complaint with the FTC online. Unless it was a pretty egregious thing (one complaint) probably wouldn't (trigger an investigation)."

The spokeswoman said that usually when an association or group of associations files a complaint it goes through the office of the secretary and is not filed online.

Chapman wasn't able to immediately produce the names of any other association members who sold HP products and were potentially harmed by the alleged wrongdoing on the part of HP. An attorney who Chapman said works with the association did not return phone calls.

When asked about the complaint at this week's HP Americas Partner conference in Orlando, Fla., Kevin Gilroy, vice president and general manger of commercial channels for the Americas at HP, said he "categorically denied" all of the charges.

Chapman said that to participate in the HP rebate programs, VARs must supply customer phone numbers and pricing information to HP. Chapman alleged that HP then uses that information to take the accounts direct.

When asked if he had specific proof that HP was abusing the data, Chapman said, "If they have it, how can they not use it?"

As part of his evidence, Chapman cited articles from CRN and VARBusiness, published between April 1998 and January 2000, in which executives from Compaq Computer--now part of HP--said the company intends to increase its direct business while still maintaining its channel relationships. But he alleged that HP's intent is to eliminate its resellers by misappropriating their customer data.

Oli Thordarson, president of Alvaka Networks, a Huntington Beach, Calif.-based solution provider, said he suspects that some vendors in the past have used some of his account registration information to try and take an account direct with a special offer.

Facing stiff competition from Dell Computer Corp., Hewlett-Packard Co. has been trying to emulate the strategy that made its Texas rival so successful: Sell more products directly to customers.

But the move is ruffling the feathers of some HP dealers, who say the Palo Alto firm is dumping longtime partners that helped the company build its base of users and customers.

Recently, a group of resellers filed a complaint with the Federal Trade Commission alleging that HP illegally used proprietary customer information on such matters as buying preferences and sales information it solicited from dealers to expand its own direct-sales network.

"Those are my customers," said Belinda Guadarama, an HP reseller in Novato. "That information, it took me years to put it together. What happens to the resellers who, for years, have been cultivating a relationship with those customers?"

Kevin Gilroy, HP's vice president and general manager for its North American commercial channels, denied the charge. "There is absolutely no substance to those allegations," he said.

The dispute underscores the tricky balancing act facing HP, which still does about two-thirds of its business through more than 300,000 outside firms, including more than 20,000 in the United States.

Called channel partners or resellers, they help the company sell its products to small and large businesses. They also offer technical support to businesses using HP products.

Like other major tech firms, HP has been attempting to gain market share by following the example of Dell. By selling directly to customers, the Texas firm has become a dominant PC seller.

In the United States, Dell was No. 1 in PC unit shipments in 2002 with a 27. 9 percent share of the market, as shipments grew 20.7 percent.

HP was second with a 19.8 percent market share, as its PC unit shipments slipped 7.7 percent.

Because of its merger with Compaq Computer in May, HP was narrowly ahead of Dell in worldwide PC unit sales in 2002, a 16.2 percent share for HP compared with 15.2 percent for Dell.

The direct-sales push won't be easy for HP. It faces the delicate task of building a competitive direct-sales network without disrupting its established network of partners that serve as a link to its customers, especially companies that use HP equipment and services.

As it expands its direct-sales operations, the company stresses that it has no intention of abandoning its partners.

Still, Gilroy admitted that its much publicized effort to expand its direct- sales reach has caused some confusion and consternation among dealers.
Although HP had been developing its direct-sales network for years, the biggest changes occurred after HP's merger with Compaq.

During the past eight months, HP, through its direct-sales staff, has revamped its Web site and catalogs to go after more corporate customers directly. The direct-sales push is focused mainly on specific markets, especially PCs and low-end servers.

HP plans to sell other products, such as printers, through its existing network of partners, which work hand in glove with a separate HP staff for resellers.

This is a bone of contention for some of HP's partners. They claim that HP's reseller staff has been leaking proprietary information to the company's direct-sales staff in their bid to win corporate customers.

Through the years, the partners routinely have turned over customer information to HP staff as part of the company's programs for rebates and other incentives. The partners say that there was an understanding in the arrangement that HP would not share the data with its direct-sales force.
Lloyd Chapman, president and founder of the Microcomputer Industry Supplier Association in Novato, is concerned about the handling of customer information.

He believes that "customers' names, addresses, phone numbers, specific contact information, what they buy, when they buy it and what they pay for it would clearly be considered trade secret and proprietary information."
HP denies any wrongdoing.

Gilroy, the HP vice president, stressed that a fire wall exists between the reseller and direct-sales units. "The data that is reported by our partners is not shared with our direct organizations."

He also said that HP's direct-marketing teams buy customer data in the open market, noting there are other ways for the company to get the same data that its partners consider proprietary.

Gilroy said the tech giant also has a program for partners in which HP identifies customers in specific markets that it hopes will buy directly from HP. That way, HP's partners will have a clear idea of where they and HP may be competing for the same customers.

Gilroy said most of HP's partners are satisfied with the program. "The feedback has been just fantastic," he said.

Geoffrey Lilien, president of Lilien Systems, an HP dealer in Mill Valley, said he is content with the direction of HP's sales programs for its partners. The merger helped expand the line of HP products, including new data storage systems and servers dealers could offer to customers, "which strengthens our position and strengthens HP's position," he said.

"I have generally been pretty happy with what's going on," said Lilien, who has been selling HP products for 12 years. "I have a lot of faith in that company. They really are a good partner."

Steve Wangard, president of Vanguard Computers in Wisconsin, also praised HP, saying it helps promote his firm to customers.

"They've been very progressive in their interaction with me," said Wangard, whose company has been an HP dealer for more than 15 years.

Other resellers feel differently.

Cammy Ticknor, owner of Computer Cite, an HP partner in Vacaville, said business has gone down ever since HP began its big push in direct sales.

"Customers say, 'I can get this direct from HP cheaper,' " said Ticknor, whose company has four employees. "So I have to negotiate, and sometimes I don't make money."

Chapman's association, which has about 1,000 members, filed a complaint with the FTC late last year. Chapman said he wants the federal agency to make HP stop using members' proprietary information.

An FTC spokesman said the agency does not comment on pending complaints.

Asked if his group plans to file a lawsuit, Chapman would only say it is "exploring what legal remedies would be available to us to protect our trade- secret and proprietary information."

Gilroy stressed that HP's goal is to have a blended model that includes both direct sales and partners.

Crawford del Prete, an analyst with International Data Corp., said that strategy makes sense, but it won't be easy to implement.

"Not everyone can be happy in this situation," said Del Prete, who does not own HP stock. "At the end of the day, this is absolutely a balancing act."