[Federal Register Volume 68, Number 248 (Monday, December 29, 2003)]
[Rules and Regulations]
[Pages 74833-74842]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31795]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
RIN 3245-AE80
Small Business Size Standards; Information Technology Value Added
Reseller
AGENCY: U.S. Small Business Administration (SBA).
ACTION: Final rule.
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SUMMARY: The U.S. Small Business Administration (SBA) is establishing a
new industry category and size standard of 150 employees for
Information Technology Value Added Resellers under the industry of
Other Computer Related Services, North American Industry Classification
System industry code 541519. This industry category and size standard
is being established to better apply small business eligibility
requirements under Federal contracts that combine substantial services
with the acquisition of computer hardware and software.
DATES: This rule is effective on January 28, 2004.
FOR FURTHER INFORMATION CONTACT: Gary Jackson, Assistant Administrator
for Size Standards, at (202) 205-6464 or [email protected].
SUPPLEMENTARY INFORMATION: On July 24, 2002, the SBA proposed to
establish a size standard for businesses described as Information
Technology Value Added Resellers (ITVAR) (67 FR 48419). Under the North
American Industry Classification System (NAICS), value added resellers
are classified in the Wholesale Trade Sector along with merchant
wholesalers, distributors, drop shippers, brokers, and agents. For
purposes of Federal contracting, a wholesale trade firm that provides
supplies to the Federal Government that it did not manufacturer is
small if it, including its affiliates, has not more than 500 employees.
The SBA proposed to retain the 500 employee size standard applicable to
value added resellers and other wholesale trade nonmanufacturers for
the proposed industry category of ITVARs.
In response to a large number of comments objecting to the 500
employee size standard for ITVAR, the SBA reassessed its decision to
retain the nonmanufacturer size standard for this new industry
category. As described below, the SBA has decided to establish a size
standard of 150 employees for ITVARs. This decision is based on a
review of the comments received to the proposed rule and an analysis of
the characteristics of firms in the computer services and wholesale
trade industries that are engaged in providing services along with
information technology (IT) equipment. Below is a discussion of the
comments received on the proposed rule and the size standard analysis.
Discussion of Comments
The SBA received 291 timely comments on the proposed rule. Two
hundred and seventy six comments
[[Page 74834]]
(94.8%) opposed the 500 employee size standard for ITVAR. Twelve
comments (4.1%) supported the proposed size standard. The remaining
three comments either supported a higher size standard or addressed
other issues related to the proposed rule.
Comments Opposing the Proposal
More than three-fourths of the 276 comments that strongly objected
to the proposed ITVAR size standard submitted an identical or very
similar comment. These comments stated that the average size of an
ITVAR is 15 employees and 88% have 100 or fewer employees, based on
data from the SBA and from a survey conducted by Computer News Reseller
titled ``State of the Market 2002 Research.'' Based on these facts, the
comments contended that a 500 employee size standard is inconsistent
with the Small Business Act and the foundation of the SBA. These
comments further recommended that SBA also adopt a 100 employee size
standard for nonmanufacturers under the industry of Computer and
Computer Peripheral Equipment and Software Merchant Wholesalers, NAICS
423430 (formally NAICS 421430).
The other comments opposing the proposed ITVAR size standard cited
similar data on ITVARs to argue that businesses with up to 500
employees are not small businesses in this industry and provided
additional reasons for their position. Many of these comments argued
that smaller IT businesses are not competitive against businesses with
several hundred employees. Although smaller ITVARs may be competitive
in terms of quality and service, the low margins in the industry make
them uncompetitive with larger resellers. Under the proposed size
standard, they argued that Federal agencies would tend to award
contracts to the larger small businesses at the expense of much smaller
businesses. Several comments considered a 500 employee ITVAR to be
dominant in this field, and therefore, does not meet the Small Business
Act's statutory definition of a small business which excludes dominant
businesses as small (see 15 U.S.C. 632(a)(1)). Several comments also
criticized the 500 employee size standard as merely an attempt to help
Federal agencies to achieve their small business goals.
Comments Supporting the Proposal
The 12 comments supporting the proposed ITVAR size standard gave
several reasons for their position. Many of these comments noted that
many firms outgrow the $21 million receipts-based IT industry size
standards because a sizable proportion of receipts on Federal contracts
are for the purchase of hardware and software from manufacturers rather
than strictly for services performed by ITVAR firms. Related to this
point, one comment stated that the proposed ITVAR size standard allows
larger small businesses to continue to operate in an industry category
after they outgrow other IT industry size standards. Another comment
supported the proposed size standard by comparing the activities of
value added resellers with small businesses that function as an order
processing or clearing house for the resale of computer and related
products. The comment contended that small businesses that provide
staff involved in engineering, re-configuration, systems integration,
and turnkey operations must have a large number of employees to perform
these functions and to grow to compete with large businesses. One of
the supporting comments also recommended adding a receipts-size
standard of $50 million with the proposed 500 employee size standard to
prevent large businesses from qualifying as small.
Comments on establishing an ITVAR Industry Category
The SBA received seven comments on the issue of establishing an
industry category for ITVAR. All seven commented in support of the new
category. Three of these were from comments that opposed the 500
employee size standard. One comment recommended changing the proposed
service percentage range of 15% to 50% of contract value in the ITVAR
definition to a range of 0% to 100% since contracts exclusively for
hardware also include an implicit services component that contractors
will provide to their customers.
The SBA's Response to Comments
The SBA agrees that 500 employees is not an appropriate size
standard for ITVARs. As the comments pointed out, a large number of
firms engaged in this activity are much smaller than 500 employees. A
business can enter into the ITVAR industry at a relatively small size
and grow into a highly competitive business well before it reaches 500
employees. The reasons given for comments in support of the proposed
size standard support focused on being eligible as small businesses for
large-sized contracts after firms have grown beyond the $21 million
computer services size standard.
While the SBA agrees that a size standard lower than 500 employees
should be adopted, it does not agree that 100 employees is the
appropriate size standard. The reasons provided by those comments
focused on the average employee size of ITVARs and the percent of
ITVARs with 100 or fewer employees. As described more fully below, the
SBA considers several industry characteristics to assess a size
standard for an industry. Average firm size is one industry factor,
which is compared to the average size firm in other industries. The
percent of industry firms at various sizes is not used. This factor is
not as useful as other industry characteristics in assessing a size
standard. The statistic is overwhelmingly driven by the concentration
of firms with only a few employees. These firms have much turnover and
account for an insignificant proportion of industry employment and
receipts. For example, ITVARs with less than five employees comprise
71% of industry firms but account for between 6% to 7% of industry
employment and sales. A more useful measure to assess the economic
significance of firms of varying sizes in an industry is the
distribution of industry receipts by firm size. Data on this
characteristic is discussed in the size standard analysis below.
Based on a review of ITVAR industry characteristics, the SBA is
adopting a 150 employee size standard, which it believes more
sufficiently considers the overall characteristics of the types of
firms engage in ITVAR activities. In addition, 150 employees is
equivalent to the average number of employees of firms under the $21
million size standard for computer services (NAICS 5415 industry
group). Since firms in these industries also act as ITVARs, the SBA
believes that it is beneficial to firms in these industries to have a
consistent size standard, even though the size standard measures
differ. As discussed as options in the proposed rule, the SBA
considered proposing the $21 million receipts size standard and an
employee equivalent of 150 employees. An employee size standard is
considered a better measure of the size of ITVARs operation than
receipts since a substantial proportion of their receipts merely
reflect the dollar value of equipment and software sold.
The SBA does not agree with the comment recommending changing the
percentage of services that must be present in an ITVAR contract range
from 0% to 100%. It is unlikely that a contract for computer equipment
would later include a significant amount of services. As explained in
the proposed rule, the purpose of the ITVAR industry category is to
treat computer contracts with a meaningful amount of computer services,
but where the majority of
[[Page 74835]]
contract dollars consists as equipment, in the same manner as other
computer services contracts. Removing the requirement for a specific
percentage of services defeats the purpose of the rule and would
unintentionally change the size standards applicable to
nonmanufacturers of computer equipment and for computer services.
Size Standards Methodology: Congress granted the SBA discretion to
establish detailed size standards (15 U.S.C. 632(a)(2)). The SBA's
Standard Operating Procedure (SOP) 90 01 3, ``Size Determination
Program'' (available on SBA's Web site at http:/www.sba.gov/library/soproom.html) sets out four categories for establishing and evaluating
size standards: (1) The structure of the industry and its various
economic characteristics; (2) the SBA program objectives and the impact
of different size standards on these programs; (3) whether a size
standard successfully excludes those businesses which are dominant in
the industry; and (4) other factors if applicable. Other factors,
including the impact on other agencies' programs, may come to the
attention of the SBA during the public comment period or from the SBA's
own research on the industry. No formula or weighting has been adopted
so that the factors may be evaluated in the context of a specific
industry. Below is a discussion of the SBA's analysis of the economic
characteristics of an industry, the impact of a size standard on SBA
programs, and the evaluation of whether a firm at or below a size
standard could be considered dominant in the industry under review.
Industry Analysis: Section 3(a)(3) of the Small Business Act (15
U.S.C. 632 (a)(3)), requires that size standards vary by industry to
the extent necessary to reflect differing industry characteristics. SBA
has two ``base'' or ``anchor'' size standards that apply to most
industries--500 employees for manufacturing industries and $6 million
in average annual receipts for nonmanufacturing industries. SBA
established 500 employees as the anchor size standard for the
manufacturing industries at SBA's inception in 1953 and shortly
thereafter established a $1 million average annual receipts size
standard for the nonmanufacturing industries. The receipts-based anchor
size standard for the nonmanufacturing industries was adjusted
periodically for inflation so that, currently, the anchor size standard
is $6 million. Anchor size standards are presumed to be appropriate for
an industry unless its characteristics indicate that larger firms have
a much greater significance within that industry than the ``typical
industry.''
When evaluating a size standard, the characteristics of the
specific industry under review are compared to the characteristics of a
group of industries, referred to as a comparison group. A comparison
group is a large number of industries grouped together to represent the
typical industry. It can be comprised of all industries, all
manufacturing industries, all industries with receipt-based size
standards, or some other logical grouping.
If the characteristics of a specific industry are similar to the
average characteristics of the comparison group, then the anchor size
standard is considered appropriate for the industry. If the specific
industry's characteristics are significantly different from the
characteristics of the comparison group, a size standard higher or, in
rare cases, lower than the anchor size standard may be considered
appropriate. The larger the differences between the specific industry's
characteristics and the comparison group's characteristics, the larger
the difference between the appropriate industry size standard and the
anchor size standard. SBA will consider adopting a size standard below
the anchor size standard only when (1) all or most of the industry
characteristics are significantly smaller than the average
characteristics of the comparison group, or (2) other industry
considerations strongly suggest that the anchor size standard would be
an unreasonably high size standard for the industry under review.
The primary evaluation factors that the SBA considers in analyzing
the structural characteristics of an industry are listed in 13 CFR
121.102 (a) and (b). Those factors include average firm size,
distribution of firms by size, start-up costs, and industry
competition. The analysis also examines the possible impact of a size
standard revision on SBA's programs. The SBA generally considers these
five factors to be the most important evaluation factors in
establishing or revising a size standard for an industry. However, it
will also consider and evaluate other information that it believes
relevant to the decision on a size standard for a particular industry.
Public comments submitted on proposed size standards are also an
important source of additional information that the SBA closely reviews
before making a final decision on a size standard. Below is a brief
description of each of the five evaluation factors.
1. ``Average firm size'' is simply total industry receipts (or
number of employees) divided by the number of firms in the industry. If
the average firm size of an industry is significantly higher than the
average firm size of a comparison industry group, this fact would be
viewed as supporting a size standard higher than the anchor size
standard. Conversely, if the industry's average firm size is similar to
or significantly lower than that of the comparison industry group, it
would be a basis to adopt the anchor size standard or, in rare cases, a
lower size standard.
2. ``Distribution of firms by size'' is the proportion of industry
receipts, employment, or other economic activity accounted for by firms
of different sizes in an industry. If the preponderance of an
industry's economic activity is by smaller firms, this tends to support
adopting the anchor size standard. A size standard higher than the
anchor size standard is supported for an industry in which the
distribution of firms indicates that economic activity is concentrated
among the largest firms in an industry. In this rule, SBA is comparing
the size of firms within an industry to the size of firms in the
comparison group at which predetermined percentages of receipts are
generated by firms smaller than a particular size firm. For example,
assume for the industry under review that 50% of total industry
receipts are cumulatively generated by firms of 200 employees and less.
This contrasts with the comparison group (composed of industries with
the nonmanufacturing anchor size standard of $6 million) in which firms
of 64 employees and less cumulatively generated 50% of total industry
receipts. Viewed in isolation, the higher figure for the industry under
review suggests that a size standard higher than the nonmanufacturing
anchor size standard may be warranted. Other size distribution
comparisons in the industry analysis include 40%, 60%, and 70%, as well
as the 50% comparison discussed above.
3. ``Start-up costs'' affect a firm's initial size because entrants
into an industry must have sufficient capital to start and maintain a
viable business. To the extent that firms entering into one industry
have greater financial requirements than firms in other industries, the
SBA is justified in considering a higher size standard. In lieu of
direct data on start-up costs, the SBA uses a proxy measure to assess
the financial burden for entry-level firms. For this analysis, the SBA
has calculated nonpayroll costs per establishment for each industry.
This is derived by first calculating the percentage of receipts in an
industry that is either retained or expended on costs other than
payroll costs. (The
[[Page 74836]]
figure comprising the numerator of this percentage is mostly composed
of capitalization costs, overhead costs, materials costs, and the costs
of goods sold or inventoried.) This percentage is then applied to
average establishment receipts to arrive at nonpayroll costs per
establishment (an establishment is a business entity operating at a
single location). An industry with a significantly higher level of
nonpayroll costs per establishment than that of the comparison group is
likely to have higher start-up costs, which would tend to support a
size standard higher than the anchor size standard. Conversely, if the
industry showed significantly lower nonpayroll costs per establishment
when compared to the comparison group, the anchor size standard would
be considered the appropriate size standard.
4. ``Industry competition'' is assessed by measuring the proportion
or share of industry receipts obtained by firms that are among the
largest firms in an industry. In this final rule, the SBA compares the
proportion of industry receipts generated by the four largest firms in
the industry--generally referred to as the ``four-firm concentration
ratio''--with the average four-firm concentration ratio for industries
in the comparison groups. If a significant proportion of economic
activity within the industry is concentrated among a few relatively
large producers, the SBA tends to set a size standard relatively higher
than the anchor size standard in order to assist firms in a broader
size range to compete with firms that are larger and more dominant in
the industry. In general, however, the SBA does not consider this to be
an important factor in assessing a size standard if the four-firm
concentration ratio falls below 40% for an industry under review.
5. ``Impact of a size standard revision on the SBA programs''
refers to the possible impact a size standard change may have on the
level of small business assistance. This assessment most often focuses
on the proportion or share of Federal contract dollars awarded to small
businesses in the industry in question. In general, the lower the share
of Federal contract dollars awarded to small businesses in an industry
which receives significant Federal contracting revenues, the greater is
the justification for a size standard higher than the existing one.
Another factor to evaluate the impact of a proposed size standard
on the SBA's programs is the volume of guaranteed loans within an
industry and the size of firms obtaining those loans. This factor is
sometimes examined to assess whether the current size standard may be
restricting the level of financial assistance to firms in that
industry. If small businesses receive significant amounts of assistance
through these programs, or if the financial assistance is provided
mainly to small businesses much lower than the size standard, a change
to the size standard (especially if it is already above the anchor size
standard) may not be necessary.
Evaluation of Industry Size Standard: The SBA reviewed data on
firms in two industry categories to evaluate a size standard for
ITVARs. Most ITVARs operate either in the Computer Systems Design and
Related Services industry group (NAICS 5415) or in the Computer and
Computer Peripheral Equipment and Software Merchant Wholesalers
industry (NAICS 423430, formally code 421430). Instead of equally
combining the data from these two industries, the SBA adjusted the data
by the proportion of sales of firms that provide both services and
equipment. Data from the U.S. Bureau of the Census show that firms in
the Computer Systems Design and Related Services industry that provide
both services and equipment generate 23% of total industry receipts
(see Sources of Receipts or Revenue, 1997 Economic Census,
Professional, Scientific, and Technical Services, Subject Series,
EC975545-LS, U.S. Bureau of the Census, August 2000). In the Computer
and Computer Peripheral Equipment and Software Merchant Wholesalers
industry, firms providing both equipment and services (service
contracts, installing computers, and sales of integrated systems)
generate 14% of total industry sales from these and all other
activities (see Commodity Line Sales, 1997 Economic Census Wholesale
Trade, Subject Series, EC97W425-LS, U.S. Bureau of the Census, August
2000). The results of combining the two industries are evaluated using
the SBA's size standards methodology described above.
The SBA is aware of ITVAR data from private sector sources. The SBA
considered these data but decided not to use them for three reasons.
First, it is unclear whether the private sector data collected include
the receipts and employees of affiliates. Second, whether the data
separately show the receipts and employees of all industry activities
and from just ITVAR activities. These are key conceptual features of
the Census Bureau data that the SBA relies upon to evaluate size
standard. Without taking those factors into consideration, misleading
data on firm size may be relied upon. Third, private sector data
usually consist of a limited sample that tends to miss smaller sized
firms. Given these uncertainties, the SBA decided to assess the Census
Bureau data.
Tables 1 and 2 below show the structural characteristics for the
derived ITVAR industry and for two size standards comparison groups.
The first comparison group is comprised of all industries with a $6
million receipts-based size standard, referred to as the
``nonmanufacturing anchor group.'' A firm with $6 million in receipt
size in these industries has, on average, 65 employees. SBA assumes
that this size standard is appropriate for a nonmanufacturing industry.
This is the most logical set of industries to group to assess whether
the anchor size standard is appropriate. The second comparison group
consists of the nonmanufacturing industries with the highest receipt-
based size standards established by the SBA. The SBA refers to this
comparison group as the ``nonmanufacturing higher-level size standard
group.'' This group's size standards range from $21 million to $30
million. Firms within this size range average in size between 165
employees to 230 employees. If an industry's characteristics are
significantly larger than those of the nonmanufacturing anchor group,
the SBA will compare them to the characteristics of the higher-level
size standards group. By doing so, the SBA can assess whether a size
standard should be among the highest size standards or somewhere
between the anchor size standard and the highest size standards.
Industry Structure Considerations: Table 1 lists three evaluation
factors for the ITVAR industry and the two size standards comparison
groups. These include two measures of average firm size and start-up
costs (as measured by nonpayroll receipts per establishment), and the
four-firm concentration ratio.
[[Page 74837]]
Table 1.--Industry Characteristics of the ITVARs Industry, the Nonmanufacturing Anchor Group and Higher-Level
Size Standard Group
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Average firm size Start-up Costs
--------------------------------------------------- Four-firm
Non-payroll concentration
Category Receipts receipts per Employee ratio
(millions) Employees establishment equivalent (percentage)
(millions)
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IT value added reseller....................... $3.47 14 $2.42 10 18.3
Nonmanufacturing anchor group................. 0.95 11 0.56 6 14.4
Higher-level size standard group.............. 4.60 21 1.80 14 26.7
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The average employment size of an ITVAR of 14 employees is about
the same as for the nonmanufacturer anchor group level of 11 employees.
In terms of average receipts size, ITVARs average receipts size are
more than triple that of the nonmanufacturer anchor group's average
receipts size. This difference reflects the larger proportion of
equipment sales by ITVARs than by firms in other nonmanufacturing
industries. Since the size standard under consideration is based on
number of employees, the evaluation of this factor will not be based on
average receipts size, but is shown for information. The average firm
size of ITVARs is two-thirds of the higher size standards group's
average employment firm size of 21 employees. Based on the ratio
between the ITVAR's and the two comparison groups' average firm size, a
size standard at or slightly above the nonmanufacturer level is
supportable, or between 65 to 100 employees.
The nonpayroll receipts per establishment indicator is a
measurement of entry barriers. Based on this measure, start-up costs
for ITVARs are almost five times larger than those of the
nonmanufacturer group and about one-third of the higher-level size
standard group. As with the average firm size factor, the receipts
levels are misleading when considering an employee size standard. To
make this measure more useful, the receipts levels were adjusted by the
sales per employee for each industry category to show what number of
employees it would take, on average, to earn those levels of receipts.
This conversion shows that ITVARs with 10 employees generate the
estimated average nonpayroll receipts per establishment. This level
falls in the middle between the employment sizes calculated for the
nonmanufacturer anchor and higher size standards comparison groups, 6
and 14, employees, respectively. This industry characteristic supports
a size standard between the nonmanufacturer anchor and higher size
standard group levels, or between 100 to 125 employees.
The ITVAR industry's four-firm concentration ratio is estimated to
be 18.3%. This is derived from a weighted average of the four-firm
concentration ratios of 23% for the Computer and Computer Peripheral
Equipment and Software Merchant Wholesalers industry (NAICS 423430,
formally code 4421430) and 15.5% for the Computer Systems Design and
Related Services industry group (NAICS 5415). A ratio of 18.3%
indicates that a small number of businesses do not dominate this
industry. As discussed earlier in the description of the size standards
methodology, this is not an important factor in assessing a size
standard when the four-firm concentration ratio is below 40%.
Table 2 below shows data on the distribution of receipts by firm
employment size. For this factor, the SBA is evaluating the cumulative
size of firm that accounts for predetermined percentages of total
industry receipts (40%, 50%, 60%, and 70%). The table shows firms up to
a specific employment size, along with all other smaller firms, account
for a specific percentage of total industry receipts.
Table 2.--Percent of Receipts by Firm Size of the ITVARs Industry, the
Nonmanufacturing Anchor Group, and the Higher-level Size Standard Group
[Number of employees]
------------------------------------------------------------------------
Size of Size of Size of Size of
Category firm at firm at firm at firm at
40% 50% 60% 70%
------------------------------------------------------------------------
IT Value Added Reseller............. 250 1,000 >2,500 >2,500
Nonmanufacturing Anchor Group....... 35 64 130 307
Higher-level Size Standard Group.... 188 391 1,051 >2,500
------------------------------------------------------------------------
The ITVAR industry consists of firms many times larger than firms
in the nonmanufacturing anchor group. ITVARs with 250 employees and
less obtained 40% of the industry's total receipts whereas firms of 35
employees and less in the nonmanufacturing anchor group obtained 40% of
the industry's total receipts. For the other size distribution
percentages, ITVARs more than 15 times the size of the firms in the
nonmanufacturing anchor group. These data support an ITVAR size
standard significantly above the anchor nonmanufacturing level of 65
employees.
Relative to the higher-level size standards group, ITVARs that
obtained 40% of industry sales were approximately one-third larger than
the size of firms that cumulatively obtained 40% of industry receipts
in the higher-level size standard group (250 employees and 188
employees, respectively). The size of ITVARs is more than twice the
size of firms for the higher-level size standard group at the 50% and
60% levels. At the 70% level, firms of at least 2,500 employees and
less cumulatively captured that proportion of industries sales for the
ITVAR industry and the higher-level size standard group. The analysis
of
[[Page 74838]]
these distributions of receipts support a size standard no less than
the highest employee-equivalent size standard of the higher-size
standards group and up to about twice that level, or between 230 to 400
employees.
SBA Program Considerations: As part of the review of a size
standard, the SBA reviews how a change might impact its programs. Most
of the impact of a change to the ITVAR size standard will occur in
Federal contracting. Data are not collected on Federal contracts
designated as ITVAR contracts. These types of contracts are reported in
several industry categories. For purposes of the ITVAR size standard
analysis, the SBA sorted data by NAICS codes and the Federal
Procurement Data Center's (FPDC) Product and Service (PCS) codes to
assess small business participation in Federal contracting. Under the
existing size standards, an ITVAR contract is classified under a NAICS
manufacturing code since the majority of the dollar value of an ITVAR
contract (as defined in the proposed rule) is for computer equipment.
Some of these contracts, however, are also classified under a wholesale
trade code, albeit improperly. The SBA examined contracts awarded
during fiscal years 2001-02 in three NAICS industries--Electronic
Computer Manufacturing (NAICS 334111), Other Computer Peripheral
Equipment Manufacturing (NAICS 334119), and Computer and Computer
Peripheral Equipment and Software (NAICS 421430). From these contracts,
ITVAR contracts were identified as those that the contracting agency
had also designated the services PSC of ``Automatic Data Processing and
Telecommunication Services'' (PSC codes D301 through D399). The
resulting list of contracts therefore consisted primarily of computer
equipment but also require related services to be performed by the
contractor.
The SBA recognizes that this set of Federal contracting data only
approximates Federal ITVAR contracting. However, the types of contracts
identified capture the types of activities described by the ITVAR size
standard description. Also, the large volume of contracting identified
by the SBA's approach ($925.7 million) is highly likely to capture
significant trends in small business participation. For these two
considerations, the SBA believes that data are sufficient to assist in
evaluating an ITVAR size standard.
Table 3 shows the amount of estimated ITVAR Federal contracting for
fiscal years 2001-02.
Table 3.--Federal Contracts for Information Technology Value Added Resellers, Fiscal Years 2001-02
----------------------------------------------------------------------------------------------------------------
Actions Dollars
--------------------------------------------------------------------------------
Fiscal year Small Small
Total business Percent Total business Percent
----------------------------------------------------------------------------------------------------------------
2001........................... 1,514 714 47.2 $405,048,000 $143,432,000 35.4
2002........................... 1,790 937 52.3 $520,676,000 $137,987,000 26.5
2001-02........................ 3,304 1,651 50.0 $925,724,000 $281,419,000 30.4
----------------------------------------------------------------------------------------------------------------
Source: SBA estimates from the Federal Procurement Data System, U.S. General Services Administration.
These data show small businesses obtaining half of ITVAR contact
actions. These small business awards represent about 30% of the total
dollar of contract awards. Compared to the share of total industry
receipts, small ITVARs obtained 45.5% of total industry sales. This
discrepancy between the small business shares suggests that small
businesses as a group are less competitive in the Federal ITVAR market
than in the private sector. The overall level of small ITVAR
participation in Federal contracting does not support the need to lower
the current 500 employee size standard.
The comments opposing the proposed 500 employee size standard,
however, argued that many small businesses are not competitive against
the larger small businesses that are hundreds of employees in size. The
SBA examined this point in greater detail. The data show that larger
small businesses, those between 200 to 500 employees, accounted for
only one-fifth of the ITVAR contracts awarded to small businesses.
Furthermore, most contracts identified as ITVAR contracts were full and
open contracts. In terms of the dollar value of all Federal ITVAR
contracts, the larger small businesses obtain 6.2% of contracts
dollars, which is slightly below their estimated 8.7% share of total
industry sales. Thus, it does not appear that a compelling argument
exists that Federal ITVAR awards to small businesses are dominated by
the larger small businesses.
The SBA believes that much of the concern about larger small
businesses dominating small business awards are associated with
contracts exclusively for IT equipment. The SBA is examining in a
similar manner those Federal contracts and will assess the implications
of its findings on the nonmanufacturer size standard.
The 7(a) Loan Guaranty Program is SBA's primary business loan
program. Table 4 below summarizes the number and amount of 7(a) loans
that SBA guaranteed to firms in the two industries comprising ITVARs
over the past two fiscal years. The SBA does not identify firms below
an industry level to more specifically identify ITVARs.
Table 4.--7(a) Loans in NAICS 421430 and NAICS 5415
------------------------------------------------------------------------
FY 2001 FY 2002
------------------------------------------------------------------------
No. Amount No. Amount
------------------------------------------------------------------------
7(a) Loans.................... 227 $41,802,575 921 $139,293,461
-----------------------------------------
Average Loan Size............. 184,152
151,242
------------------------------------------------------------------------
Source: SBA internal data base.
[[Page 74839]]
Small business eligibility for an SBA 7(a) guaranteed loan is based
on the size standard of the primary industry of the applicant. For
ITVARs that are primarily engaged in the Wholesale Trade Sector, the
applicable size standard is 100 employees. For ITVARs primarily engaged
in computer services, $21 million in average annual receipts is the
applicable size standards. Computer services firms near the $21 million
size standard average in size between 125 to 150 employees.
A review of the distribution of 7(a) loans by employment size of
the firm shows that only 10 loans, amounting to $6.6 million, were made
in fiscal years 2001-02 to firms of 100 or more employees. Moreover,
all of these loans were to firms in the computer services industries,
with only one loan to a computer wholesale trade firm of more than 50
employees. These loans represent only 1% of the number of loans and
less than 4% of the dollar value of loans in the two ITVAR industries.
This experience indicates the current size standards are not hindering
access to this program for small ITVARs. Thus, no need exists to change
the current size standards to broaden access to capital for small
ITVARs.
Overview: Based on the above analysis, SBA is adopting a 150
employee size standard. All of the industry factors support a size
standard lower than the current 500 employee size standard. The factor
of distribution of receipts suggests a size standard in the range of
230 to 400 employees since the industry consists of larger-sized
businesses that obtain more than half of industry receipts. The
industry factors of average size firm and nonpayroll receipts per
establishment support a size standard between 65 to 125 employees. The
four-firm concentration ratio is a neutral factor. The assessment of
program considerations does not indicate a size standard change from
the current 500 employee size standard for Federal contracting or the
100 employee size standard for ITVAR in Wholesale Trade. In light of
the comments strongly supporting a 100 employee size standard, the SBA
believes the evaluation of the industry characteristics should give
greater consideration to the smaller range of size standard levels
supported by the data, or between the 65 to 230 employee levels. The
SBA believes a 150 employee size standard is an appropriate balance
between the available information on the industry and the strong view
of the comments for a size standard significantly below 500 employees.
In addition, 150 employees would be equivalent to a $21 million
employee size standard applicable to Federal computer services
contracts. Since many ITVARs provide primarily computer services,
having a size standard at a similar level results in these firms being
small for both computer service contracts and ITVAR contracts. The SBA
believes this administrative consideration is both practical and
desirable. It results in a common size standard for closely related
activities and avoids complicating the size standards with a
significantly different size standard level applicable to small
businesses that operate in the two industry activities.
Dominant in Field of Operation: Section 3(a) of the Small Business
Act defines a small concern as one that is (1) independently owned and
operated, (2) not dominant in its field of operation, and (3) within
detailed definitions or size standards established by the SBA
Administrator. When the SBA evaluates a size standard, it considers
whether a business concern at or below a size standard could be
dominant in its field of operation.
For this assessment the SBA generally considers the market share of
firms at the contemplated size standard, or other factors that may show
whether a firm can exercise a major controlling influence on a national
basis in which significant numbers of business concerns are engaged.
The SBA has determined that no firm at or below a 150 employee size
standard would dominate the ITVAR industry on a national basis. The
average size firm meeting the size standard of 150 employees generates
approximately 0.1% of total industry receipts. This level of market
share effectively precludes any firm at or below the proposed size
standard from controlling this industry.
Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork
Reduction Act (44 U.S.C. Ch. 35), and the Regulatory Flexibility Act (5
U.S.C. 601-612)
The Office of Management and Budget (OMB) has determined that the
final rule is a ``significant'' regulatory action for purposes of
Executive Order 12866. Size standards determine which businesses are
eligible for Federal small business programs. This is not a major rule
under the Congressional Review Act, 5 U.S.C. 800. For purposes of
Executive Order 12988, the SBA has determined that this rule is
drafted, to the extent practicable, in accordance with the standards
set forth in that order. For purposes of Executive Order 13132, the SBA
has determined that this rule does not have any federalism implications
warranting the preparation of a Federalism Assessment. For the purpose
of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, the SBA has
determined that this rule would not impose new reporting or record
keeping requirements. Below is a regulatory impact a of this size
standard change.
Regulatory Impact Analysis
1. Is there a need for the regulatory action?
The SBA is chartered to aid and assist small businesses through a
variety of financial, procurement, business development, and advocacy
programs. To effectively assist intended beneficiaries of these
programs, the SBA must establish distinct definitions of which
businesses are deemed small. The Small Business Act (15 U.S.C. 632(a))
delegates to the SBA Administrator the responsibility for establishing
small business definitions. It also requires that small business
definitions vary to reflect industry differences. Establishing an
industry category and size standard for ITVARs more realistically
applies small business eligibility requirements under Federal contracts
that combine substantial services with the acquisition of computer
hardware and software.
2. What are the potential benefits and costs of this regulatory action?
The most significant benefit to businesses obtaining small business
status as a result of this rule is eligibility for Federal small
business assistance programs. These include SBA's financial assistance
programs and Federal procurement preference programs for small
businesses, 8(a) firms, small disadvantaged businesses (SDB), and small
businesses located in Historically Underutilized Business Zones
(HUBZone). Through the assistance of these programs, small businesses
may benefit by becoming more knowledgeable, stable, and competitive
businesses.
The benefits of a new industry category and size standard would
accrue to two groups. First, small businesses competing for ITVAR
Federal procurements that contain requirements more similar to industry
practices. Second, Federal agencies that will be able to more easily
classify IT contracts that combine equipment purchases and services.
Newly defined small businesses would benefit from the SBA's
financial programs, in particular its 7(a) Guaranteed Loan Program.
Currently, an ITVAR primarily engaged in wholesale trade qualifies for
these loans if they
[[Page 74840]]
have 100 or fewer employees. This final rule would expand eligibility
to about 60 additional firms. Since over the last two years only one
loan was guaranteed to a computer wholesaler with more than 50
employees, it is unlikely that this rule would expand the use of the
7(a) Program.
Newly defined small businesses would also benefit from the SBA's
economic injury disaster loan program. Since this program is contingent
upon the occurrence and severity of a disaster, no meaningful estimate
of benefits can be projected.
The SBA estimates that 192 currently defined small businesses
(those firms that qualify as a nonmanufacturer under a 500 employee
size standard) would lose small business status and not be eligible
businesses for Federal small business procurement preference programs.
The benefits of the rule in Federal contracting will be in terms of
clarifying requirements on Federal contracts combining IT supplies and
services and increasing Federal procurement opportunities for small
businesses that are much smaller than 500 employees. It is uncertain
how much additional contracting may go to the small businesses with 150
or fewer employees. The SBA expects many of the Federal contracts
obtained by ITVARs between 151 to 500 employees would be awarded to the
smaller small businesses. This is estimated to be between $10 million
to $25 million annually.
This rule is not expected to increase administrative costs to the
Federal Government associated with bidders for Federal small business
procurement programs, additional firms seeking SBA guaranteed lending
programs, and firms eligible for enrollment in SBA's PRO-Net data base
program. For the limited number of businesses affected by this rule, it
is unlikely to materially change the costs associated with compliance
and verification of small business status and protests of small
business status, since mechanisms are currently in place to handle
these administrative requirements.
The costs to the Federal Government may be higher on some Federal
contracts as a result of this rule. With a more appropriate contract
requirement for IT value added service, Federal agencies may choose to
set aside more contracts for competition among small businesses rather
than using full and open competition. The movement from unrestricted to
set aside is likely to result in competition among fewer bidders for a
contract. The additional costs associated with fewer bidders, however,
are likely to be minor since, as a matter of policy, procurements may
be set aside for small businesses or under the 8(a) and HUBZone
Programs only if awards are expected to be made at fair and reasonable
prices.
The final size standard may have distributional effects among
currently defined small businesses and the newly defined small
businesses. Although the actual outcome of the gains and losses among
these small businesses cannot be estimated with certainty, it is likely
that a transfer of some Federal contracts from small businesses above
150 employees to those under 150 employees. An analysis of Federal
ITVAR contracts for fiscal years 2001-02 showed about $57 million was
awarded to small ITVARs of about 200 employees to 500 employees. Of
these contracts, $23 million was awarded under the 8(a) Program to
firms within that size range. If contracting officers continued with
about the same level of 8(a) contracting and decided to set-aside
additional ITVAR contracts, $10 million to $25 million annually could
be shifted from small ITVARs above 150 employees to those with less
than 150 employees.
The creation of an ITVAR industry category and size standard is
consistent with SBA's statutory mandate to assist small businesses.
This regulatory action promotes the Administration's objectives. One of
the SBA's goals in support of the Administrator's objectives is to help
individual small businesses succeed through fair and equitable access
to capital and credit, government contracts, and management and
technical assistance. Reviewing and modifying size standards when
appropriate ensures that intended beneficiaries have access to small
business programs designed to assist them. Size standards do not
interfere with State, local, and tribal governments in the exercise of
their government functions. In a few cases, State and local governments
have voluntarily adopted the SBA's size standards for their programs to
eliminate the need to establish an administrative mechanism for
developing their own size standards.
Final Regulatory Flexibility Analysis
Under the Regulatory Flexibility Act (RFA), this rule may have a
significant impact on a substantial number of small entities.
Immediately below, the SBA sets forth a final regulatory flexibility
analysis (FRFA) of this proposed rule addressing the reasons and
objectives of the rule; the SBA's description and estimate of the
number of small entities to which the rule will apply; the projected
reporting, record keeping, and other compliance requirements of the
rule; the relevant Federal rules which may duplicate overlap or
conflict with the final rule; and alternatives considered by the SBA.
(1) What is reason for this action?
As discussed in the supplemental information, the purpose of this
final rule is to establish more reasonable and eligibility requirements
and size standard for Federal IT contracts that combine the acquisition
of computer equipment and services. The adopted changes will better
assist small ITVARs in obtaining Federal contracts.
(2) What is the objective and legal basis for the rule?
Section 3(a) of the Small Business Act (15 U.S.C. 632(a)) gives SBA
the authority to establish and change size standards. Size standards
are developed on an industry basis and vary by industry to reflect
differing characteristics of firms in an industry or other appropriate
factors regarding an industry. This rule establishes an industry
category of ITVAR that SBA believes is necessary to appropriately apply
its small business assistance program to small businesses in this
category.
(3) What is SBA's description and estimate of the number of small
entities to which the rule will apply?
SBA estimates that approximately 1,737 small businesses could
receive assistance as a result of this proposed rule. In SBA's PRO-Net
data base, 1,760 businesses indicated that they are wholesalers of IT
equipment and are capable of providing some other services. All but 23
of these firms have 150 or fewer employees. It cannot be determined how
many could actually meet the requirements of the ITVAR definition.
Thus, the actual number of affected businesses is likely to be smaller.
A few small computer manufacturers could be adversely affected by this
rule since small business set-aside, 8(a), or HUBZone contracts
classified under the ITVAR industry would not apply the nonmanufacturer
rule. However, the SBA believes the impact would be minimal since the
ITVAR contracts are most likely not currently being awarded to small
manufacturers under these programs.
Description of Potential Benefits of the Rule: The most significant
benefit to businesses obtaining small business status as a result of
this rule is their eligibility for Federal small business assistance
programs. These include SBA's financial assistance programs and Federal
procurement preference
[[Page 74841]]
programs for small businesses, 8(a) firms, SDBs, and small businesses
located in HUBZones.
In fiscal years 2001-02, $925.7 million were awarded in contracts
that were primarily for IT equipment but also included services. Small
businesses received $281.4 million. The SBA estimates that
approximately $10 million to $25 million in additional Federal
contracts could be awarded annually to smaller small businesses under
the ITVAR 150 employee size standard. Most of these contracts would
consist of a potential transfer from ITVARs with between 150 and 500
employees to small ITVARs with fewer than 150 employees. This does not
represent the creation of new contracting activity by the Federal
government, merely a possible reallocation or transfer to different
sized firms.
The SBA does not believe any additional loans would be made under
its 7(a) Guaranteed Loan Program as a result of changes the SBA is
proposing in this rulemaking. ITVARs primarily engaged in wholesale
trade are currently eligible for this program if they have 100 or fewer
employees. In the last two years, only one 7(a) loan was made to
wholesale trade firm with more than 50 employees.
Description of Potential Costs of the Rule: The changes in size
standards as they affect Federal contracting are not expected to add
any significant costs to the Federal Government. As a matter of policy,
procurements may be set aside for small businesses or under the 8(a)
and HUBZone Programs only if awards are expected to be made at
reasonable prices. Although fewer small businesses will be competing
for ITVAR contracts, the large number of small businesses should have
little discernable impact on competition. Similarly, this rule should
not result in any added costs associated with the 7(a) Program. The
amount of lending authority SBA can make or guarantee is established by
appropriation.
The competitive effects of size standard revisions differ from
those normally associated with other regulations which typically burden
smaller firms to a greater degree than larger firms in areas such as
prices, costs, profits, growth, innovation and mergers. A change to a
size standard is not anticipated to have any appreciable effect on any
of these factors, although small businesses, 8(a) firms, or SDBs
between 150 to 500 employees may be less successful in competing for
some Federal procurement opportunities. On the other hand, with more
realistic eligibility requirements, Federal agencies may increase the
overall number of contracting opportunities available under these
programs, and this could result in greater opportunities for businesses
much smaller than the current size standard.
(4) Will this rule impose any additional reporting or record keeping
requirements on small businesses?
This final rule does not impose any new information collection
requirements which require OMB approval under the Paperwork Reduction
Act of 1980, 44 U.S.C. 3501-3520. A new size standard does not impose
any additional reporting, record keeping or compliance requirements on
small entities. Changing size standards alters the access to SBA
programs that assist small businesses, but does not impose a regulatory
burden as they neither regulate nor control business behavior.
(5) What are the relevant Federal rules which may duplicate, overlap or
conflict with the final rule?
This final rule overlaps rules of other Federal agencies that use
the SBA's size standards to define a small business. Under section
3(a)(2)(c) of the Small Business Act, unless specifically authorized by
statute, Federal agencies must use SBA's size standards to define a
small business. In 1995, the SBA published in the Federal Register a
list of statutory and regulatory size standards that identified the
application of the SBA's size standards as well as other size standards
used by Federal agencies (60 FR 57988-57991, dated November 24, 1995).
The SBA is not aware of any Federal rule that would duplicate or
conflict with establishing size standards.
(6) What alternatives did the SBA consider?
The SBA cannot estimate the impact of a size standard change on
each and every Federal program that uses its size standards. In cases
where an SBA size standard is not appropriate, the Small Business Act
and the SBA's regulations allow Federal agencies to develop different
size standards with the approval of the SBA Administrator (Sec.
121.902). For purposes of a regulatory flexibility analysis, agencies
must consult with the SBA's Office of Advocacy when developing
different size standards for their programs.
SBA considered revising its definition of a manufacturer. On April
1, 1999, the SBA published in the Federal Register a ``Request for
Comments'' asking for comments on a modern definition of the term
manufacturer and a new definition for ``Remanufacturer'' (64 FR 15708,
dated April 1, 1999). The SBA received only six comments on this issue,
none of which provided sufficient information to support a revision to
the SBA's current manufacturer definition. After further review, the
SBA now believes that establishing an ITVAR industry category is a more
effective approach to addressing the size eligibility requirements of
nonmanufacturers providing substantial services along with IT products
on Federal contracts.
As discussed in the proposed rule, the SBA considered three other
size standards along with its proposed 500 employee size standard. One
of those alternatives was the 100 employee size standard advocated by
many of the comments. As explained in this final rule, the SBA believes
that available industry data and Federal contracting trends support a
size standard much lower than the proposed 500 employee size standard
but higher than 100 employees.
List of Subjects in 13 CFR Part 121
Administrative practice and procedure, Government procurement,
Government property, Grant programs--business. Loan programs--business,
Small businesses.
0
For the reasons set forth in the preamble, the SBA amends part 121 of
title 13 of the Code of Federal Regulations as follows:
PART 121--SMALL BUSINESS SIZE REGULATIONS
Subpart A--Size Eligibility Provisions and Standards
0
1. The authority citation of part 121 continues to read as follows:
Authority: 15 U.S.C. 632(a), 634(b)(6), 636(b), 637(a), 644(c)
and 662(5) and sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188, Pub.
L. 106-24, 113 Stat. 39.
0
2. In Sec. 121.201, in the table ``Small Business Size Standards by
NAICS Industry,'' under the heading Subsector 541--Professional,
Scientific, and Technical Services, revise the entry for 541519 to read
as follows:
[[Page 74842]]
Small Business Size Standards by NAICS Industry
------------------------------------------------------------------------
Size standards Size standards
NAICS codes NAICS U.S. industry in millions of in number of
title dollars employees
------------------------------------------------------------------------
* * * * * * *
------------------------------------------------------------------------
Subsector 541--Professional, Scientific and Technical Services
------------------------------------------------------------------------
* * * * * * *
------------------------------------------------------------------------
541519.......... Other Computer Related $21.0 ..............
Services.
------------------------------------------------------------------------
EXCEPT.......... Information Technology .............. \18\150
Value Added Resellers
\18\.
------------------------------------------------------------------------
* * * * *
0
3. In Sec. 121.201, add footnote 18 at the end of the footnote
section, under the table to read as follows:
Footnotes
* * * * *
18. NAICS code 541519--An Information Technology Value Added
Reseller provides a total solution to information technology
acquisitions by providing multi-vendor hardware and software along
with significant services. Significant value added services consist
of, but are not limited to, configuration consulting and design,
systems integration, installation of multi-vendor computer
equipment, customization of hardware or software, training, product
technical support, maintenance, and end user support. For purposes
of Government procurement, an information technology procurement
classified under this industry category must consist of at least 15%
and not more than 50% of value added services as measured by the
total price less the cost of information technology hardware,
computer software, and profit. If the contract consists of less than
15% of value added services, then it must be classified under a
NAICS manufacturing industry. If the contract consists of more than
50% of value added services, then it must be classified under the
NAICS industry that best describes the predominate service of the
procurement. To qualify as an Information Technology Value Added
Reseller for purposes of SBA assistance, other than for Government
procurement, a concern must be primarily engaged in providing
information technology equipment and computer software and provide
value added services which account for at least 15% of its receipts
but not more than 50% of its receipts.
Dated: September 24, 2003.
Hector V. Barreto,
Administrator
[FR Doc. 03-31795 Filed 12-24-03; 8:45 am]
BILLING CODE 8025-01-P