Originally published in Government Services Insider, June 2007, Volume 42
The May Insider addressed at length the recently unsealed Department of Justice False Claims Act suits against Accenture, HP and Sun. The complaints focus on various discounts, rebates and kickbacks from software and hardware makers that allegedly were received but not reflected in reseller or systems integrator billings to the government. Our main point was that a government victory in court, or large settlements, would change markedly the business model that the IT industry uses to meet multifaceted customer needs.
Even small settlements or defendants' wins in court could cause some noticeable changes in business practices, in our view. In any case, the three suits, which mention at least fifty companies with which the defendants do business, continue to roil the IT industry. They are generating various degrees of anxiety, consternation, and even fear in some companies, based on our own and others' contacts with a firms (not a statistically valid sample, BTW). In addition, the suits have caused some firms, though unmentioned in the suits but involved in alliances with systems integrators, to hunker down and re-examine their alliance business practices.
To obtain some preventative lessons learned from the three suits, we talked with Tony Fuller, a partner in the 50-person government contractor group in accounting firm Beers and Cutler. He says he frequently addresses client issues that involve civil or criminal False Claims Act liabilities. Fuller estimates that experts in the firm's consulting group spend about a third of their time trying to keep clients out of trouble-reviewing proposal strategies and proposals, rebutting audit findings, or dealing with government compliance and enforcement matters.
Some Beers and Cutler clients are members of alliances orchestrated by the three defendants. However, Fuller made it clear that he has no ongoing work regarding the three unsealed cases, but says it's "likely" that he will at some point.
Root of the problem. These cases "could become massive," he says, because so many firms in the IT industry are prospectively involved-and their challenges are similar when it comes to disclosure. Fuller says the vulnerable contractors are those "that in many instances did not sufficiently disclose their pricing and discounting practices."
Further, he says that "It's very difficult for large companies to fully disclose the nature of the relationships that they have with other companies and what that means for pricing with the government." Under a GSA schedule, he says, "You need to disclose not only standard pricing practices, but also your nonstandard practices." Fuller says that some companies simply don't do a sufficient analysis before submission, or the submission isn't clear, complete or current enough to be responsive.
He notes that even veteran federal contractors may not have internal information systems systems that capture or serve up this data conveniently. These systems need to pull data from all parts of the company, not just the part selling to the federal government. Multiply that by lots of products and the dealing possible in many sales, and the pricing practices and prices offered/paid data become a large data set.
"Most-favored customer pricing." Fuller observes that this concept is often misunderstood. He says that although it's usually the government's negotiating objective to get the lowest price that anyone pays, companies don't have to propose that; it's subject to negotiation. Regardless, though, Fuller says, offerors need to reveal their lowest prices as part of the pricing practices disclosures; if the lowest prices are not offered to the government, the companies need to explain why. He described a client's recent price proposal where a 20-page narrative was prepared to explain why 30 percent of the company's customers got a better deal than the government. Fuller reports that the logic withstood government inspection.
Keeping current. Contracts that require full disclosure of pricing practices at the outset also must be updated for the contracting officer as changes occur, Fuller says. He adds, however, that this "never really happens because the companies don't have a mechanism to alert the right person that something changed and that it's time to notify the contracting officer."
Accordingly, he urges clients to take advantage of upcoming option-period submissions to make full, current, and complete disclosures of pricing changes. He advises that this process start as much as six months before the submission. The goal is to pick up changes, such as a new business development fund in the cost base, or a new alliance benefit, and disclose them.
Preventive measures. Fuller says Beers and Cutler is sometimes involved at the front end of a proposal effort and helps to shape pricing strategy and then reviews its translation into the proposal. In other cases, he's called in to review draft proposals. "I try to be a pit bull," he says.
Asked if the three recent suits have caused him to alter his approach to the disclosure effort, Fuller replies, "No, because my advice has always been to fully meet disclosure requirements. I was able to tell clients, ‘We're covered.'" He advises at least an annual scrub of pricing disclosures by an internal review or trusted third party as a way of easing the process of actual proposals and updates to the government.
What about alliance members? Though many of them are mentioned in the three unsealed suits, no firm identified as an alliance member has become a defendant (except in the sense that the three defendants deal with each other's alliances). Fuller said he's unsure why that's so and wouldn't rule it out in the future. He says, "contracting officers will say ‘I want to know what these vendors' pricing is and identify any concessions they give'" to others.
In the case of the GSA schedules, he said the manufacturers have to make the same disclosures that they would if they were selling directly to the government. These vendors submit disclosures directly to GSA so the reseller (or systems integrator) does not have access to the proprietary information involved.
Thus, though not directly selling to the government, these suppliers have the same disclosure responsibility and burden. Fuller says some of these manufacturers firms can be as prone to the same internal information and disclosure problems as those billing the government. He said he's working with some right now, apart from the FCA suits.
For more information, contact Tony Fuller.