January 04, 2024 03:00 PM

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Money

Billions In Taxpayer Dollars Set Aside For Small Businesses Are Flowing To Big Tech

Editor’s note: NOTUS launches later this month, but we’re giving you an early look at the kinds of stories we’ll produce. Today, we’re sending a deep dive into government records that show how major tech companies dip into federal dollars intended to level the playing field for small businesses owned by veterans, women and other marginalized communities. This is a piece about power imbalances and why the government’s often rosy stats on small business contracts may not be telling the whole story.

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By Byron Tau

The first thing Joel Lipkin, the chief operating officer of Four Points Technology, often says about his company is that it is a veteran-owned small business. That designation has opened doors to billions of dollars in contracts with the federal government.

It’s money federal agencies have set aside to level the playing field between the nation’s biggest corporate giants and historically disadvantaged business owners — like women, people of color and veterans. But make no mistake: For the Chantilly, Virginia-based Four Points Technology and many others like it, Big Tech is not a competitor. Big Tech is a cash cow.

Four Points Technology resells products from Amazon Web Services, the company’s cloud computing arm; since 2008, the government has routed about $5 billion through Four Points, largely for products and services from tech giants, including Amazon. In 2022, the Department of Veterans Affairs bought nearly $200 million in Amazon Web Services capacity through Four Points. In 2021, the Department of Homeland Security needed the same and awarded Four Points as much as $31 million for “minimal” services such as managing billing. The Department of Labor made an agreement with Four Points worth up to $35 million. “Only resale service required,” the agency said in its agreement.

In May, Lipkin was seated in a studio for GovExec TV — the niche media outlet that covers the ins and outs of the executive branch — alongside a senior manager at Amazon Web Services for a panel interview sponsored by the Jeff Bezos-owned subsidiary. What his small business offers to federal agencies, Lipkin boasted, is the assurance they won’t “lose the direct relationship with AWS in terms of being able to leverage AWS’s enterprise support or professional services.” In other words, Four Points’ special sauce is making the government feel as though it is doing business with Amazon Web Services directly.

Resellers like Four Points are not supposed to be merely acting as pass-through conduits for government money to go to tech giants — federal regulation dictates that they’re supposed to add value. The value, according to executives like Lipkin, also comes in the form of managing billing or simplifying the contract. Lipkin, Four Points Technology and Amazon did not respond to interview requests.

But resellers also serve a crucial political function. By being an in-between for Big Tech, these companies help the government’s small business numbers look impressive at year-end, letting the Small Business Administration routinely give the agencies high marks. The companies see themselves as serving an important role in government contracting, playing by the rules as they’re defined today. But the flow of billions of dollars in taxpayer money raises questions about who is really benefiting from the special programs meant to correct for historic discrimination.

“There is pressure on the government to meet their agency’s goals for working with small businesses,” said Margaret Cassidy, a lawyer who specializes in contracting issues.

NOTUS analyzed federal procurement records and filed more than 50 requests for contracts under the Freedom of Information Act. These documents show that many of the contracting dollars awarded under small business programs are in fact for services and products from tech giants including Amazon, Microsoft, Oracle, VMware and many others.

Yet for 10 years straight, the Small Business Administration has given the federal government an “A” in its annual small business contracting scorecard. The SBA touted that 26.5% of total prime contracts flowed to small and disadvantaged businesses in 2022, including those owned by women, minorities and veterans. That’s a more than 4% improvement since 11 years ago, the last time Washington gave itself a “B” on its annual evaluation.

The Biden administration in particular has put agencies under even greater pressure to award federal contracts to small and disadvantaged businesses. One of Biden’s first executive orders instructed agencies to ensure businesses run by people in marginalized communities have equal access to federal dollars. In November 2023, the administration touted record-high federal contract spending — $69.9 billion — going to disadvantaged small businesses.

Scratch below the surface and it becomes clear that much of what the government is buying through set-aside programs are products that mom-and-pops do not and often cannot manufacture: advanced computer and networking equipment, enterprise software, cloud services and other highly specialized technology products. Instead, many small and disadvantaged businesses are making money by being a middleman between the government and the tech giants, reselling and distributing their products — sometimes at a markup.

Sen. Bill Cassidy (R-La.), who has sponsored legislation with Sen. Gary Peters (D-Mich.) to require federal agency reviews of software licensing practices, acknowledged this dynamic has been “going on for a long time.”

“I don’t think it’s a good way to level the playing field. It’s a way to benefit the well-connected,” Cassidy told NOTUS. Changing the system would trigger a “political firestorm,” he said. “To take it on, you’d take on a lot of people.”

The federal government is the largest buyer of goods and services in the world, spending about $700 billion with outside vendors in fiscal year 2022. Since 1953, Congress has mandated that small businesses be given a “fair proportion” of that spending. The Small Business Administration, created in the same year, helps administer numerous special programs under which federal contracts are supposed to be “set-aside” for businesses owned by women, nonwhite people, Native tribes, veterans and other members of historically underrepresented or marginalized groups. A governmentwide mandate set by law says agencies should try to award 23% of all contracts in a given year to small businesses.

The Departments of Homeland Security and Labor — two agencies that purchased Amazon cloud computing services through Four Points — both received A+ grades in their most recent small business evaluations. Left unanswered is how many of those contracts are merely for tech products and services that small businesses simply don’t offer. The federal government makes only limited information available about public spending and without filing FOIA requests, it’s impossible to get a holistic view of what agencies are buying — or how widespread the practice is of putting a Main Street gloss on a Silicon Valley product. Neither agency responded to a request for comment.

Many senators NOTUS spoke with, including Small Business Committee Chair Jeanne Shaheen (D-N.H.) and ranking member Sen. Joni Ernst (R-Iowa), said they weren’t aware of the phenomenon — though Ernst in the past has criticized the “easy As” that the Small Business Administration doles out every year. In a statement in September, Ernst criticized “wacky government jargon, a lack of accountability, and misplaced priorities in federal contracting” and has introduced several bills that would reform small business contracting.

Sen. Ben Cardin (D-Md.), the past chairman of the Small Business Committee, said small businesses needed to add value. “If they’re just an agent, that’s not what we are talking about, but if they’re adding value to the product, it’s a different story,” Cardin said. “We would want them to add value.”

While the total price of any contract is public, a string of federal court cases have allowed contractors to essentially argue that the unit price they charge the government is a trade secret. And the fact that tech giants are selling licenses, services or credits through dozens of different resellers makes it hard for the federal government to negotiate any volume discounts.

Hints over the years have emerged, though, that the government may not be getting the best price. A former employee filed a whistleblower suit against VMware, a multibillion-dollar technology company that makes software crucial to many web- and cloud-based programs, and a reseller named Carahsoft, alleging that the two companies overcharged the federal government millions. The two companies paid more than $75 million to the federal government to resolve the allegations. In other documents, resellers have said the industry standard is a 5% markup — one paid for by taxpayers to pad the small business numbers at the end of the year.

Tech giants have certainly adapted to the current system, building entire public sector business models around small business resellers.

VMware touts on its website that 100% of federal agencies are its customers. Yet in 2023, VMware inked only a single public contract: a relatively tiny $228,760 award from the U.S. Air Force.

That’s because VMware sells its services through resellers and distributors, providing consulting and training services to federal agencies through a “points” system brokered by resellers. These points programs can make it look like small businesses are offering significant value-added services in their contracts, like training or consulting, when really those services are being provided by VMware. VMware did not respond to a request for comment.

Take a contract between the Department of Veterans Affairs and a VMware reseller called V3Gate. V3Gate, which has separate certifications as both a veteran-owned and a minority-owned enterprise, won a contract worth as much as $81 million to provide “support and maintenance for VMware software, along with professional services and licenses.” A close examination of the V3Gate contract, obtained under the Freedom of Information Act, shows that what V3Gate is selling are points that can be cashed in for training and support from VMware staff. The V3Gate’s primary role in the contract is to handle billing and manage the exchange of points. The company did not respond to multiple requests for comment.

In a statement to NOTUS, the Department of Veterans Affairs said its contract with V3Gate, as well as its agreement with Four Points, “enabled VA to carry out its mandates to enhance Service-Disabled Veteran-Owned Small Business participation in its contracts while also providing value to the taxpayers through a total solution of IT products with value added services.”

The Department of the Interior’s Bureau of Indian Affairs issued similar contracts to acquire VMware consulting and training expertise under the Buy Indian Act, which permits the department to run its own set-aside program that benefits Native American-owned corporations. One contract shows that the bureau purchased nearly $500,000 in VMware credits under a Buy Indian set-aside with a company called Tundra Federal. Tundra Federal did not respond to requests for comment.

The contract, the department wrote, “is solely for the acquisition of VMware consulting and training credits. Once delivered after award, these credits may be utilized by [the Bureau of Indian Affairs] to directly access VMware training, consulting and professional services.” Amazon Web Services has a similar credit system for consulting and training work, as shown in a $200 million contract between Four Points and the Department of Veterans Affairs for Amazon Web Services, which NOTUS obtained via a FOIA request.

Defenders of the system say that contracting cloud services through a reseller is no different than selling canned vegetables through a supermarket. Guy Timberlake, who runs the American Small Business Coalition, a membership association that offers training and support to small business federal contractors, pointed out that profits are split between the retailer and the manufacturer in the same way that resellers and tech giants split government contracts.

“To me, being able to resell a service — this is no different than reselling a product,” said Timberlake. Managing the contract, doing the market research and helping the government customer set up and use the technology offers real value to government agencies, he argued.

But while the amount of money going to small businesses is increasing, the pool of them is shrinking. The number of small companies doing business with the government has been in free-fall over the past decade. Since 2010, there has been a 40% decrease in the number of small business contractors winning awards. And first-time contractors are down 60% from 2010, according to Federal News Network.

In short, the data suggest that it’s far from a golden age of opportunity for young companies trying to bring new and innovative products to federal agencies.

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Byron Tau is a reporter at NOTUS. Nuha Dolby, a NOTUS reporter and an Allbritton Journalism Institute fellow, and Tara Golshan, a NOTUS senior editor, contributed reporting.

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