On January 22, the General Services Administration (GSA) issued a Request for Information (RFI) seeking “pricing information” as part of a market research effort focusing on value-added reseller pricing. According to the RFI, GSA’s “recent analysis of leading Value Added Resellers (VARs) indicates significant variance in the value added services offered and the corresponding markup percentages applied to Original Equipment Manufacturer (OEM) prices.” The RFI further states that its purpose is “to gather market research and determine what additional information may be necessary to substantiate proposed pricing of IT hardware acquired through VARs under SIN 33411 and confirm that markups applied to OEM pricing result in fair and reasonable pricing.” The result of this market research effort “may include establishing additional controls to ensure the government receives fair and reasonable pricing when markups exceed a certain percentage threshold.” While the RFI is a positive step in GSA’s efforts to gain insights into the dynamic commercial IT market, it also raises procurement policy and program considerations.
IT VARs represent a robust commercial market shared services model, accounting for hundreds of billions of dollars in annual sales across the globe. As a shared services model, VARs save end users and OEM suppliers time, money, and manpower through the cost-effective performance of a host of functions and services in support of IT solutions meeting customer performance requirements. Functions and services that the end users and/or OEMs otherwise would not only have to perform, but also build into their business and cost structures, resulting in higher prices. Moreover, VARs, in developing configurations and solutions to meet customer needs, drive competition and access to ongoing commercial innovation.
The indirect and direct functions that VARs perform are part and parcel in the value-based pricing that goes into configuring, delivering, and supporting comprehensive solutions that meet customer performance requirements. The nature and extent of these functions depend on the individual VAR’s service model, any unique customer requirements, and the OEM’s unique support requirements.
The VAR indirect functions include, but are not limited to, contract administration and reporting, sales and business development, service and support staffing, insurance, bonding, warehousing, inventory management, technical training and certifications, logistics and returns. Furthermore, there are additional indirect functions and costs associated with government contracts. These include, but are not limited to, cybersecurity, including Cybersecurity Maturity Model Certification, Trade Agreements Act compliance, Buy American Act Compliance, subcontracting plans/management, Transactional Data Reporting, and general management of a host of government unique certifications and other data requests.
Direct VAR functions include, but are not limited to, customization, configuration, integration, installation, technical training, and ongoing support and maintenance. The scope of these services is driven by customer requirements. Moreover, the successful performance of these functions requires domain technical/subject matter expertise that is applied to the design and implementation of solutions to meet customer needs. Most often, VARs perform these functions on behalf of OEMS who have made the business decision to utilize VARs rather than perform them in-house. It is a cost-effective approach for both OEMs and customers, typically involving discounts from the OEM as part of the commercial VAR-OEM agreement. OEMs and their VARs should not be disadvantaged in the federal market based on their commercial business decisions. In other words, OEMs and VARs should not be asked to change their commercial business practices to compete in the federal market. The very existence of the robust commercial VAR market is evidence that the VAR structure delivers cost effective, best value solutions in comparison to other models.
The RFI’s questions regarding “markups” essentially seek a breakdown of value-added functions and associated costs. While it is appropriate for the government to understand the underlying value VARs provide to customers and OEMs, the RFI’s approach raises significant policy and program questions. Reporting and accounting for the costs associated with certain functions is a traditional cost reimbursement approach to contracting. It is inconsistent with the Administration’s strategic initiatives to increase commercial contracting which is the primary focus of the Revolutionary Federal Acquisition Regulation (FAR) Overhaul (RFO). It also is inconsistent with firm-fixed price, outcome-based contracting. Moreover, establishing certain thresholds regarding fair and reasonable pricing is only possible with detailed information regarding each VAR’s commercial business operations and associated costs. Again, a cost reimbursement approach to IT commercial solutions.
Imposing a cost reimbursement approach on VAR offered solutions would set a precedent that could extend to other contracts and industries. To the extent an OEM would choose to sell direct and perform certain functions in-house, will GSA seek similar function and cost information from the OEMs?
In the commercial market, value and price are driven by competition for sound customer requirements. It is a commercial best practice, a proven and effective model for delivering best value outcomes. It also drives innovation and cutting-edge solutions. Under the Multiple Award Schedule program and other multiple award contracts, competition at the order level for agency specific requirements guarantees cost effective best value outcomes. The discretion created by the RFO should not be undermined by processes that step back from the commercial market. Next week’s blog will focus on addressing opportunities to drive value and savings through commercial item contracting. Look for Part 2 of this blog next week in the Friday Flash.