New SBA Contracting Rule Threatens Small Business Cloud Service Resellers

Published: October 05, 2016

Acquisition ReformCloud ComputingInformation TechnologyNational Defense Authorization ActPolicy and Legislation

Changes in contracting rules pose a danger to small business resellers of cloud services.

Back in May of this year, the Small Business Administration issued a final rule implementing Section 1651 of the 2013 National Defense Authorization Act. As reported by Nick Wakeman over at Washington Technology, NDAA Section 1651 requires the evaluation of full or partial small business set-aside contracts “based on the percentage of the overall award that the prime contractor spends on its subcontractors. Specifically, the NDAA deems work done by similarly situated entities is subcontracted work for purposes of complying with the limitations on subcontracting requirement. Thus, work done by a similarly [sized] entity is counted in determining whether the applicable limitation on subcontracting is met.”

What this language means, Wakeman warns, is that whereas small business primes (or subcontractors) were “previously required to perform more than 50 percent of the work under a set-aside contract … the 2013 NDAA … changed [the focus] from labor to the price of the contract.” As Wakeman correctly concludes, this rule means that small business primes partnered with large business cloud services providers could face significant hardships competing for cloud services contracts because contracting officials now need to take into account the percentage of contract spending that will go to the large business partner once the contract is awarded.

Complying with balance of work requirements has always been a challenge for small/large business teams. The new focus on spending, however, is a critically important change as far cloud computing is concerned. As I’ve written several times over the years, determining who is winning business in the cloud market is a tricky proposition because of the number of large CSPs, like Microsoft and Amazon Web Services, who partner with smaller companies. To repeat a rhetorical question I’ve asked in the past, if a federal agency awards a cloud migration services contract to a certain company partnered with a big CSP and the migration of data represents only a fraction of the work compared to the subsequent hosting of that data, who actually gets credit for winning the business?

The chart below shows a sample of cloud solutions offered by large CSPs that have been provided by resellers, including small businesses, over three of the last four fiscal years (2013-2015). The dollar totals are awarded contract values.

The Microsoft solution shown here is its cloud-based Office 365. The AWS offerings are the variety of services provided by Amazon, including compute and storage. MaaS360 is IBM’s Mobile Device Management-as-a-Service solution. Reselling of these three solutions alone totals $854M in awarded contract value from FY 2013-2015.

This data is just the tip of the iceberg. You can see the magnitude of the impact that the new SBA rule could have.

The rub in the cloud space is that cloud computing is a game of volume and cost. Maximize the volume of storage, computing power, capabilities, etc. your company can provide while minimizing the cost of those services and you’ve got a winning proposition for government customers. This is a proposition that small businesses cannot match. They can’t compete with the big cloud providers, which is why we here at Federal Market Analysis argued years ago that the federal cloud market would eventually become consolidated into just a few big players. Unfortunately, the 2013 NDAA section and subsequent SBA rule seem poised to achieve exactly this outcome.