WhyAre Small Federal VARs Up In Arms?

Small-BusinessCutoff Lowered

In anutshell, the Footnote 18 exception of the North American IndustryClassification System (NAICS) Code 541419 sets the definition of a small VAR as150 employees or fewer. If the footnote is removed, as the Small BusinessAdministration (SBA) is proposing, a small VAR could only be defined as having$27.5 million in revenue or less, the alternative option also allowed in theexception. The SBA told CRN that the rule change would help simplify andprovide consistencies in the federal contracting process.

WhyAre VARs Upset?

Smallfederal VARs say that removing the footnote exception setting a small businessas 150 employees or less would lose them millions, and some are saying it willput them out of business. The reason, they told CRN, is that losing theirsmall-business classification would mean they would be competing head-to-headfor federal contracts with industry giants such as CDW, Hewlett-Packard andIBM. Some VARs pointed out that big business also could lose, as they oftenpartner with smaller VARs to gain contract wins.

ThisIsn't The First Time

Thisisn't the first time that the exception has been under fire. In 2002, when theemployee cutoff was 100 for IT VARs, the SBA proposed changing the sizestandard to 500 employees. That change was shot down in December 2003 and acompromise size standard of 150 employees was put in place under NAICS Code541519. The revenue size standard has also been on the rise, starting at $19million, rising to $25 million in 2011 and finally $27.5 million in June ofthis year.

Why IsThis Rule Here In The First Place?

"SBA'ssize standards and program eligibility requirements do not specifically addressthe classification of federal contracts that combine services with theacquisition of supplies. As a result, federal agencies have had difficultyusing small business preference programs for these types of contracts,especially for IT," the SBA said in 2002.

ShowMe The Numbers

Thepossible removal of the exception is based on the most recent 2007 census data,which SBA representatives said showed that the exception was no longernecessary as most of the companies between 45 and 150 employees would stillqualify as a small business under the new revenue cutoff. However, VARs saidthat they think it will have drastic effects on federal contracts. LloydChapman, president of the American Small Business League, estimates that thetypical federal reseller makes between $2 million and $3 million in revenue peremployee, instead of the $140,000 in revenue the rule change would suggest.

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TheSmall Business Administration is looking at removing a footnote from the NorthAmerican Industry Classification System's Code 541519 exception for ITresellers competing for federal contracts that designates a small business as150 employees or fewer. Instead, a small business would be classified as $27.5million in revenue or less, a cutoff that is currently part of the code but isan alternative to the 150-employee limit. The change would help simplify andprovide consistency in the codes, according to SBA officials.

SmallVARs that CRN spoke with said that, if the change goes through, they expect tolose millions and potentially even go out of business as the new cutoff wouldpit them directly against giant companies such as CDW, Hewlett-Packard and IBMin the federal space. Right now, VARs with fewer than 150 employees getbenefits as small businesses that allow them to compete better for contracts.

Tofight to keep the 150-employee cutoff exception in place, federal VARs arestepping up on a variety of fronts.

Acoalition of small VARs called the Value Added Reseller Consortium (VARC)launched a petition to save the footnote. The petition outlines how removingthe footnote would force small VARs to compete directly against largecompanies, including those on the Fortune 500, and will cause many smallbusinesses to close and employees to lose their jobs. The group needs to get100,000 signatures in less than 30 days to elicit a response from the WhiteHouse.

"Manyof these small VARs have outgrown that revenue standard threshold and, withoutenjoying the 150-employee size standard, many of these small VARs are going tobe put out of business," said Jim Fontana, partner at Dempsey Fontana, theReston, Va.-based law firm that helped create the consortium. "Theconsensus among even more than the 13 [in the consortium] is that it would puta great many of them at a severe competitive disadvantage by having to relyonly on the revenue-based size standard."

Thesame group also has launched a letter-writing campaign and #SaveFootnote18Twitter hashtag to Congress to help spread the word of how they think removingthe exception would affect small businesses. At the time of publication, theyhad already sent more than 285 letters to members of Congress.

VARssaid they are also sending their comments directly to the government about theproposed regulation change. Comments on the 541519 rule are being accepteduntil Nov. 10.

If theexception were removed, groups such as the American Small Business League(ASBL), an advocacy group for small businesses that has been fighting hard tokeep the exception in place, plans to file an injunction, ASBL President LloydChapman told CRN.

Thegroup has to wait until the final rule is issued to file the injunction, butChapman said that the group is already planning just in case. He said that theinjunction will be based on a number of factors, in particular the SBA'sassertion that VARs won't be affected because 150 employees is essentiallyequivalent to $27.5 million in revenue. However, Chapman said that in thefederal space VARs usually do around $2 million to $3 million in revenue peremployee, making that estimate fall short.

"Ifyou made $27.5 million in revenue and had 150 employees, you wouldn't last 15minutes," Chapman said. "That's sort of the heart of the whole thinghere."

TheSBA told CRN that it was using the most up-to-date data from the 2007 censusand didn't believe changing the rule would affect small businesses, though itsaid it had no data to show how many businesses were using the exception.

CarlyGoldstein, vice president at Santa Fe, N.M.-based Wildflower International,said that she thinks the federal government would change its mind on removingthe exception if it truly understood the impact and based its decisions on realdata.

"Thisclaim of theirs that is backed up by nothing. We, as a group, our data iscurrent. I know what it costs to run a small business. There are companies likeours that do this small thing really, really well all over the government andthat is important data," Goldstein said.

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Proposed changes to Small Business Administration rules could have a negative effect onInformation Technology Value-Added Resellers, taking away anexemption that these businesses have and qualifying them as large businesses ifthey have more than $27.5 million in annual sales, according to FCW.

Small Business League president Lloyd Chapman was quoted assaying that the proposed changes would nearly bankrupt 90 percent of ITvalue-added resellers that have 150 or fewer employees, FCW reported.

The changes were proposed as part of a larger effort on behalfof the administration to consolidate the Small Business Administration into theCommerce and Labor Departments in order to streamline government operations,FCW said.

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