Reduced status

How the SBA measures VARs

The Small Business Administration's new procurement rule makes several major changes for IT VARs that are categorized as small businesses.

First, the rule reduces the size standard for IT VARs from 500 employees to 150 or fewer employees.

Second, the rule puts IT VARs into the industry category called "other computer related services," which carries North American Industry Classification System industry code 541519. NAICS codes describe what an organization sells.

Third, the rule requires work that falls into this category to consist of at least 15 percent but not more than 50 percent services.

"In the past, we've looked at contracts as either equipment or services," said Gary Jackson, SBA assistant administrator for size standards. "This new size standard reflects industry practices" where many contracts combine equipment and services, he said.

Previously, IT VARs fell under the Wholesale Trade Sector industry category, along with merchant wholesalers, distributors, drop shippers, brokers and agents.

"Does it make sense for us to maintain a 200-employee base if we can't compete?" asked Joseph Balac of Government Micro Resources Inc. "The change may make it difficult for us to compete and drive us there."

Susan Whitney-Wilkerson

Some resellers no longer qualify as small businesses under new SBA rule

Over the years, Government Micro Resources Inc. has proven to be a reliable small business, bringing in about $100 million from its government work each year.

Although the company graduated from the Small Business Administration's 8(a) development program five years ago, as a value-added IT reseller with 500 or fewer employees, it still qualified for small-business set-aside contracts. That will change Jan. 28, when a new procurement rule goes into effect that says small IT VARs must have 150 or fewer employees.

Government Micro Resources, which employs 200 people, just missed the small-business cutoff. Value-added IT resellers sell computer hardware, software and IT services.

"All those people we used to compete with that were smaller than us, they are going to have an advantage against us," said Joseph Balac, general counsel at the Manassas, Va., company.

The company's business is 80 percent product sales and 20 percent services. "Fifteen percent to 20 percent of our business could be impacted because of our inability to participate in the lower classification," Balac said.

Of the 1,760 VARs registered to do business with the federal government, about 200 have between 150 and 500 employees and, like Government Micro Resources, will no longer be eligible for small-business set-aside contracts, according to Gary Jackson, SBA assistant administrator for size standards. But Jackson said only 23 of those 200 companies are actively involved in federal procurement.

The new size standard represents a significant shift for the SBA, which does not often make such changes, industry experts said.

SBA officials first proposed moving IT VARs into a new industry category, from "wholesale trade sector" to "other computer related services," and retaining the 500-employee size standard.

However, SBA officials received hundreds of public comments objecting to the size standard, which led them to reduce the size standard and re-categorize IT VARs.

According to the SBA, 276 of 291 comments on the proposed rule -- about 95 percent -- opposed the 500-employee size standard, and 12 supported it. Three comments supported a higher size standard or addressed other issues.

Most commenters recommended a 100-employee size standard, citing statistics that show 80 percent of IT VARs have 100 or fewer employees.

"The 500-employee size standard will increase small-business contracting statistics by simply including large businesses under the small-business definition," wrote Belinda Guadarrama, president and chief executive officer of GC Micro Corp., a small IT VAR in Novato, Calif.

After analyzing industry characteristics, including average firm size, distribution of firms by size, startup costs, industry competition and impact of a size-standard revision on SBA programs, SBA officials concluded that the 500-employee ceiling was too high.

In its final rule, the SBA said: "A large number of firms engaged in this activity are much smaller than 500 employees. A business can enter into the ... industry at a relatively small size and grow into a highly competitive business well before it reaches 500 employees."

The SBA said its analysis indicated a 150-employee size standard "more sufficiently considers the overall characteristics" of IT VARs.

"The fact that the SBA is recognizing the categories in the IT space are out of kilter is really the achievement here. This is the first move to fairly define what a small business is vs. a large business," said Tony Matthews, who leads the General Services Administration Council at the Computing Technology Industry Association Inc.

The new rule change is the first of what could be numerous changes in the federal government's small-business size standards. The SBA has drafted a proposed rule that would cut the number of standards from 37 to 10, all of which would be based on number of employees.

Today, some standards are based on annual revenue, while others are based on employee count. The Office of Management and Budget is reviewing the draft rule, Jackson said.

Although the new size standard and industry category for IT VARs could hurt companies such as Government Micro Resources, it also could encourage federal agencies to reserve more contracts for small businesses, Jackson said.

"When [agencies] have a requirement to purchase hardware and services, they now have the capability to go to small businesses as a single source," he said. "Large businesses may see some contracts reserved for small businesses that have not been."

According to the SBA's analysis of federal IT VAR contracts for fiscal 2001 and 2002, about $57 million was awarded to IT VARs that had between 200 and 500 employees. Of that amount, the agency anticipates that $10 million to $25 million annually could be shifted to IT VARs with 150 or fewer employees.

The SBA balanced everyone's concerns before making its decision, Balac said. Jackson even visited Government Micro Resources' office to better understand the company's business. But with its 200 employees, the company won't see any of the additional money going to small businesses.

"Does it make sense for us to maintain a 200-employee base if we can't compete?" Balac asked. "I don't know that we will make a conscious decision to go smaller, but the change may make it difficult for us to compete and drive us there."

Staff Writer Gail Repsher Emery can be reached at

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