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FCW : July 30, 2015
July 30, 2015 FCW.COM 31 Invariably, financial people will do what they are trained to do — apply mathematics to the question and attempt to derive an answer. That answer will appear to be true to the best of everyone’s knowledge. But it will be formulaic and not based on some definitive concrete truth. It will depend on which customers were fit into the vague definition of VAR/Sys- tem Integrator. It will also depend on the algorithm used to determine the discount num- ber, which can vary greatly depend- ing on whether an average or median is used and whether unique one-time transactions are excluded. At the end of the day, numbers will be supplied for all the categories of customers, and their ultimate accuracy will be dependent on the interpretation of who fits which category and the cal- culations that were used to determine discounting at one moment in time. An extreme penalty Unfortunately, now the trap has been set. The CSP submittals are the basis of representations that the government relies on to determine that pricing is appropriate. When, at a later date, it determines that there are flaws in the CSPs, it might use the False Claims Act to say the govern- ment relied on fraudulent information to make payments that it otherwise would not have made — that the pric- ing was “defective” because the gov- ernment relied on false information. The False Claims Act levels an extreme penalty — as much as $11,000 for each transaction, regardless of the actual value of the transaction. A single transaction for $100 incurs the same fine as a transaction for $1 million. Damages also might be calculated and added to the fines. It adds up very quickly. Once CSPs have been submitted, the software company is on the hook to monitor its representations for changes and to inform the government immedi- ately when an update is in order. Now Murphy’s Law kicks in. Because the numbers were derived through a one- time-only process (because nobody else has ever asked for that data in that way before), the whole exercise can get lost in the day-to-day urgency of business. Despite CSPs’ importance, people move into new roles or forget how the numbers were achieved, business models change, and products come and go. Very quickly, it can reach the point where the original CSPs no lon- ger make sense. It’s quite easy to imagine how a com- pany could find itself uncertain of how the original numbers were derived. It isn’t intentional fraudulent behavior. It’s human behavior. A possible solution In the wake of the iconic $800 toilet seat and other procurement scandals, Congress passed the Federal Acquisi- tion Streamlining Act in 1994. FASA’s major feat was to define the notion of commercial products, state a pref- erence for the procurement of those products and lessen the regulatory burden on their providers. In FASA’s spirit of reducing the regulatory bur- den and inherent danger of contract- ing with the government, it would be helpful if the government requested important information in ways that gave commercial companies a better chance to accurately comply. Because the CSP report is inherent- ly an interpretive exercise, perhaps it could be abandoned for an alternative that achieves the government’s goal of price analysis while aligning more closely with how companies keep their own records. One suggestion would be to do away with the current CSP discount form and replace it with a simple mathe- matical algorithm that could be easily reproduced in a standard report at any time. A simple request could involve asking a company to compile all the software sales it transacted under the GSA order ceiling of $500,000 and compare that revenue number to what would have been received if all sales had been done at list price. The differ- ence between the two is the effective average discount rate for all non-large sales. If the government could look at that rate and ensure that its proposed dis- count was equal to or better than that, would that not meet the objective of fair and reasonable pricing? Further- more, the software company and the government would have an effective and easy way to measure compliance at any time. The current CSP system does not work well for anybody. The interpretive nature of the exercise means the gov- ernment could routinely be getting data that is well intentioned but suspect. Furthermore, the fact that any CSP can form the foundation of a very expen- sive False Claims Act undermines the spirit of FASA, has the potential to chill commercial companies’ willingness to contract with the government and could ensnare companies that are not willfully misrepresenting their pricing information. It is time to move to a more simpli- fied and fair way to measure pricing equity — one that serves the purpose of getting the government a fair price while not unfairly trapping an other- wise responsible contractor. n Michael Garland is a former vice president at BearingPoint Technolo- gy Procurement Services and senior vice president at Siemens Enterprise Communication. He is currently under contract with the federal gov- ernment supporting IT acquisition modernization. 0730fcw_030-031.indd 31 7/14/15 9:22 AM
July 15, 2015
August 15, 2015