The missing dollar question

Not many OP executives moonlight as private investigators. But PD Morrison, CEO of Texas-based PDME, was driven undercover when his small business was threatened by illegal pass-throughs.
As we revealed in last month’s OPI, abuse of fair competition rules laid down by the US government is seeing millions of dollars in office supply contracts, earmarked for small businesses, go instead to the big-box multinationals. Companies, known as pass-throughs, act as a shop window for the big players while falsely claiming to be small businesses. Independent dealers across the country have called for action from Capitol Hill to stem the flow of the missing millions, originally intended to boost the US economy.
After seeing companies cheat the system in this way firsthand, Morrison was determined to flush out the rogue firms. He claims to have successfully uncovered five pass-through companies that were snatching lucrative contracts from small, minority- and woman-owned businesses.
As a result of his detective work, which involved posing as a customer to find out how orders were processed, all five of the suspect companies were subsequently stripped of their status.
But surely no genuine small business should have to go to such lengths to uphold laws designed to ensure a level playing field?
As a response to the growing unease in the dealer community, OPI is lauching the Abolish Pass-Through campaign, or APT, to draw awareness to an issue that is badly damaging dealers on a weekly basis.
In talking to dealers that have lost out "unfairly" to small businesses operating with a larger partner, it is obvious that the definition of what constitutes a pass-through is blurred at best. In an attempt to oppose the practice and establish a standard, Morrison set his sights on developing a ‘Tier One’ business model (a business selling to, and servicing, the customer), which successfully incorporates an "ethical, legal and legitimate" relationship with one of the big-box players.
"I developed this model because I realised there were so many pass-throughs occurring in our industry and i had to find a legitimate way to put together a Tier One alliance that would pass all the tests and help customers achieve their diversity goals. I was the first in the industry to do a model like this and it has passed every public- and private-sector certification and audit it has ever been presented with."
Under the model, PDME operates a protégé relationship with Office Depot through which a "good portion" of the company’s business passes, while at the same time avoiding association with firms like those he has helped to expose.
The relationship sees Morrison’s minority business enterprise provide the majority of the services for supporting an office-supply contract.
For instance, all customer-service calls and helpdesk calls come into the call centre that Morrison owns and manages. PDME also handles all the accounting, billing, invoicing and accounts receivable (A/R) issues on the contracts it operates.
A Small Business Association (SBA)-certified Small Disadvantaged Business (SDB), the company is not currently servicing any contracts directly with the federal government, which comes in for the most critisism over its procurement practice. But PDME is doing business with federal contractors that are required to operate a certain percentage of business with SDBs.
The company does most of its PDME/Office Depot strategic alliance business with state governments and the private sector.
Morrison says that he has spent hundreds of thousands of dollars ensuring his IT system speaks correctly to that of Depot. All this investment has paid off, with the firm seeing rapid growth and the number of employees at PDME doubling in the last three years – the kind of statistic that the SBA would be proud of.
Morrison is adamant that to establish whether a small, female- or minority-owned business has a legitimate strategic alliance, one only has to look at the number of services that are performed by the larger affiliate.
When PDME meets potential customers, a chart describing the organisational set-up forms an integral part of the pitch. Morrison even goes as far as showing the customer pictures of his call centre to reinforce the fact that his company’s strategic alliance is a legitimate enterprise.
"We are very open with our potential customers into the exact detail of how our programme works because we want to set ourselves aside from the companies that are cheating out there," says Morrison. "Simply put, the companies that I believe are pass-throughs today are not performing enough of the value-added services."
Major issues
Pass-through companies have become more sophisticated since Morrison’s efforts ten years ago. Those at the forefront of the fight see pass-throughs operating in all sectors – federal, state and private.
"In truth, pass-throughs occur in the entire office supply purchasing marketplace," says Morrison. "I would like to see them eliminated in all the segments, but I totally agree that there are some major issues with the federal purchasing guidelines and the enforcement of these guidelines that were developed to help small businesses. As far as US federal government purchasing of office supplies is concerned, there may not even be a need for strategic alliances if the guidelines are properly enforced."
America’s largest corporations realise that supporting small businesses offers good returns in the long term. And unlike the public sector, the corporate arena is aware of bad practice and pass-throughs and is attempting to tackle the problem.
 The National Minority, Supply and Development Council (NMSDC), the private sector’s version of the SBA, is due to release new guidelines on the certification of small companies that could have repercussions for firms that are currently in JVs or strategic alliances but went untouched under the old rules. Morrison says the federal government should take note.
"I’m very happy to see what’s going on at the NMSDC and I hope the federal government will look towards what it’s doing. The NMSDC is looking very hard at these companies because if they are breaking the rules it ruins the council’s credibility as a certifying agency."
TriMega secretary Dick Dodge has seen dealers’ concerns about pass-throughs grow over the past year. Dodge believes the onus is on dealers to make their voices heard on Capitol Hill, and brought the information he gathered to the attention of his congressman for the state of California, Tom Lantos.
Encouragingly, a spokesman for Lantos said he was "investigating and working with Nadia Velázquez’s office and the Small Business Committee to see if congressional action is warranted".
"There are several plans of attack for dealers to stop this," adds Dodge. "All independents that have a stake in this have got to write to their congressman and their senators, and point out the abuses that are taking place. They need to show how the spirit of the law, which calls for 23 percent of all federal procurement to go to small business, is not being followed in the office products industry, and that the revenue is ending up with the power channel and not the independents like it’s supposed to."
Tip of the iceberg
Of course, pass-throughs are not solely prevalent in office products, but their existence in this industry led to the creation of an organisation that aims to help fight for the rights of all small businesses.
While working for an office products supplier, Lloyd Chapman found himself losing out on a small business set-aside to a large multinational company. Driven by frustration at having a month’s hard work unjustly snatched away, he began digging into the database of government contractors and discovered his experience was just the tip of the iceberg.
The list included dozens of some of the largest corporations in the world and eventually prompted him to found the American Small Business League (ASBL), a non-profit organisation dedicated to the battle against misallocated billions from federal procurement contracts.
"Each year, the US government spends billions of dollars in goods and services purchases from private firms," says Chapman. "To foster an equitable federal procurement policy, government-wide small business goals, in terms of a percentage of annual expenditure, are established for federal agencies. The SBA negotiates the goals annually with each federal agency on an individual basis. The problem is much larger than anyone realises."
 What advice would he give to OP dealers that find themselves on the losing end of a pass-through?
 "There are a few mechanisms in place that small businesses can use, but if you were to ask me if the current mechanisms are useful tools that produce satisfactory results, no they are not. For example, small businesses can appeal a contract that has been awarded through the SBA.
"The problem is that a small business has only five days to file the appeal. Often, the company doesn’t become aware of who won the award until long after the five-day threshold, therefore it renders the appeal process useless."
Lip service
Chapman says a recent proposal suggested increasing the appeal process to ten days but various government agencies rejected the idea, saying that would be too burdensome. So the SBA opted for five days instead – even though over 87 percent of the feedback received by the SBA during its commenting exercise stated that a ten day period would be more appropriate.
"People can join organisations such as ours to help unite and combat the fight," says Chapman. "We suggest contacting local, state and national public officials in the House and Senate to try to solicit their assistance.
"The SBA has some resources on its website that offer assistance, but my understanding and the feedback I’ve received from small firms is that it is only a lot of lip service."
Eventually, the focus of the debate over federal procurement is brought back to the department at the centre of the controversy, the SBA. Responsibe for resolving small business disputes over federal contracts, the SBA had previously been the focus of strong criticism in a recent report by the SBC.
However, the SBA announced a change in the regulations in November last year, aimed at helping small businesses secure more government contracts.
Central to the changes was a new rule requiring small businesses to recertify their size status on long-term contracts when a contract option is exercised, when a small business is purchased by, or merged with, another business, or alternatively after the first five years of a contract.
Following the announcement, SBA administrator Steven Preston said: "This regulation will go a long way towards ensuring that contracts get into the hands of small-business owners, federal agencies get the proper credit toward their small-business contracting goals and small business contract awards are fairly and accurately reported. It is a win-win situation for everyone."
Damaging report
All of the federal agencies involved in the miscoding of $12 billion worth of contracts uncovered by the SBC in its damaging report (see January issue of OPI) were forced to go back over their records to determine what had happened to the money.
The results of the search are due to be printed later this year and if it is established that billions of dollars were miscoded in error to companies that are other than small, then the SBA may have to restate its 2005 Small Business Accomplishments. For dealers, the new regulations are good news but whether they will be successful in stopping rogue alliances remains to be seen.
Calvin Jenkins, the SBA’s deputy administrator for government contracting and business development, says it is up to the dealers themselves to point out any wrongdoing and that accusations of a broken system are unfair and out of date.
"We rely heavily on the industry to police itself," says Jenkins. "If you’re a small business and the company winning the bid is really a large firm, we would want to know that and look into it to ensure that small business is really getting the benefits.
"There have been problems in the past, but we believe we have the regulations in place and the authority to look at the issues and stop these things from having a negative impact on true small businesses."
Encourage growth
Jenkins refers to the rule change regarding company size when it submitted a bid. Under the new regulations, incumbents have to recertify their status if it changes during the fulfilment stage.
"We want to encourage firms to grow," he says, "but there are some instances that may occur that we would want to address immediately. For example, if the firm is acquired by a large company during that five-year cycle, we require that it immediately contacts the contract officer to recertify its status. Once this is done, the contracting officer would no longer count those dollars as going to small business.
"This way we accurately know how many dollars are really going into the hands of small businesses."
Jenkins is keen to point out that the SBA’s guidelines need careful scrutiny before any finger-pointing can take place.
Office products comes under the mantle of ‘non-manufacturers’. If the contract is a small business set-aside then the non-manufacturer has to provide the product of a small business. In some cases that could be difficult, so it’s common for the contracting officer to approach the SBA and request a waiver for the set-aside status. Once the waiver is granted, then the small non-manufacturer can go and buy the stapler from a company that is other than small, like Office Depot or CE.
In 2005, the US federal government purchased over $300 billion of products and services with small businesses receiving approximately $79 billion. If there is a problem, various specialists can intervene to resolve disagreements, including Procurement Centre Representatives.
Operating under the guise of small business to win set-aside contracts is a felony and carries a penalty of up to ten years in prison, a $500,000 dollar fine and permanent debarment from government contracting. The SBA has never prosecuted anyone but, it argues, competing firms tend to stop such contracts from ever being awarded – preventing illegal action from taking place.
If there is a contract set aside for small business and there are questions regarding the potential winner of the contract, the rules allow for an interested party to file a size protest against that firm.
Jenkins says dealers’ fears over losing business after reporting a suspect company are unfounded.
"The federal procurement system today, compared to ten or 15 years ago, is a blind system – a lot is done electronically. In the past it was a very manual process and the contracting officers would see the person delivering the bid. With a lot of today’s procurement, the officers never know who is placing the bid until the deal is done. But I think they would want to get that information so that they are not awarding contracts to firms that are other than small."
By using all the resources at their disposal, dealers are hoping that guidelines that were originally intended to foster entrepreneurial spirit and create jobs in the US can be correctly enforced.
The question of ‘when is a pass-through not a pass-through?’ is really a matter for the SBA to decide, but it is clear that independent dealers are suffering under the weight of unfair competition and the sooner those in charge take note, the sooner the foundation of the OP community – and the US economy – will benefit from revenue that is rightfully theirs.