Services and Software Pick Up the Pace

hen the White House decided it needed help maintaining its desk-top computers and keeping its World Wide Web site up to date last year, it went to the Transportation Department to accomplish the acquisition.

Using DOT's Information Technology Omnibus Procurement (ITOP), the White House contracted with Northrop Grumman Corp. to provide the support services for 2,200 PC and Macintosh users in 13 sections of the Executive Office of the President. The contract could be worth $50 million in revenues for Northrop Grumman over its five-year maximum term-and at least $9,800 in revenues for DOT, as a fee for its acquisition services.

The competitive procurement took only four months, and it evidently resulted in a happy customer. Northrop Grumman got 93.7 of a possible 100 customer satisfaction rating points for its White House performance during its first rating period. The high rating means extra fees for the contractor, under the performance-based contract. The White House also has added more work to the service agreement since its inception, according to Northrop Grumman officials.

The White House arrangement is a good example of several key trends in federal procurement of information technology:

• It's a purchase of services, which is the biggest growth area within the IT category. Agencies are turning to contract employees for help with system maintenance and operations, programming, procurement, high-level planning, and grunt work such as data entry. Sometimes the work is done in agency offices, and sometimes not. In one extreme example, the Army Reserve temporarily outsourced its chief information officer position, hiring a Unisys Corp. manager through ITOP.
• There's a premium on speed, efficiency and quality. Agencies and vendors alike are under pressure to eliminate paperwork. They must get products and services to the customer quickly, and speed is not an acceptable excuse for shoddy work. Online buying with government purchase cards is increasing substantially, and some card-holders can buy $25,000 worth of goods or services at one time.
• The growth in the federal IT market is occurring mostly in civilian agencies, while IT spending in the Defense Department is leveling off. Big-name defense contractors like Northrop Grumman are following the money.
• Agencies are letting other agencies undertake the nuts-and-bolts procurement work for them. The preference for one-of-a-kind contracts is fast disappearing in the face of pressure to cut the numbers of contracting officers, lawyers and other procurement staff. Entrepreneurial agencies are awarding indefinite-quantity contracts such as ITOP, then encouraging other agencies to buy through those contracts, for a fee. The fees support the contracting shop operations.
• Agencies are moving away from the huge, 10-year systems development programs that occupied center stage in the 1980s. Given the speed of technological change, it seems unwise to sit down in 1998 and plan out a program that won't be complete until 2008. There's considerable risk associated with such an approach, which is why agencies are adopting one-step-at-a-time strategies and buying in smaller increments.
• The lack of grandiose programs hasn't cut into IT spending. In fact, after leveling off around $28 billion this year, federal information technology spending is poised for a new upswing and will grow to almost $30 billion in fiscal 1999, according to forecasters at Federal Sources Inc., a market research and consulting company in McLean, Va.

Agencies are buying both goods and services through the General Services Administration's Federal Supply Schedule and from other agencies' contracts, known as governmentwide acquisition contracts (GWACs). A newer buying vehicle is the blanket purchasing agreement (BPA), in which agencies negotiate discounts from GSA schedule prices by holding out the prospect of volume purchases.

In the new procurement environment, agencies wishing to buy more than $2,500 worth of IT can simply compare three GSA prices to meet the requirements for competition. In some cases, they need not look at any other prices. For example, the $600 million Telecommunications Integrator Services (TELIS) contract, which GSA, acting on behalf of the Energy Department, awarded to Electronic Data Systems Corp. in a competitive acquisition last year, is considered "pre-competed," and agencies buying through this GWAC are under no obligation to issue a competitive solicitation or check prices.

Explosive Growth

Thanks to BPAs and streamlining of the GSA schedule program, schedule sales are skyrocketing. William Gormley, assistant commissioner for acquisition of GSA's Federal Supply Service, says the 900 IT contractors on the schedule collectively will increase their sales by almost $1 billion this year, as they did in fiscal 1997. Total IT sales for fiscal 1998 could well exceed $4 billion. Next year Gormley expects to do an extra $500 million in schedule sales stemming from last-minute year 2000 repairs.

In this new procurement environment, many activities take place below the surface. "Billions of dollars of spending have gone off the radar screen," Dornan says. His company uses agencies' annual IT spending forecasts, submitted to the Office of Management and Budget, as the basis for its yearly forecasts. Then it tries to locate the specific programs where the IT spending will occur. It's getting harder, Dornan acknowledges.

Federal Sources long has been regarded as the leader when it comes to pointing would-be federal IT contractors toward contract opportunities within agencies. Lately it has some new customers: the agencies themselves. Dornan says they've been using Federal Sources' database services to evaluate the opportunities for selling IT products and services to other agencies.

That's occurring because of the proliferation of GWACs, in which agencies contract with one or more vendors to supply indefinite quantities of products and services for the agency's own use and also for other agencies. The other agencies pay the agency that originated the contract a fee, usually around 1 percent or 2 percent, for administering the contract. By Federal Sources' count, there are at least 200 GWACS, BPAs and other indefinite-delivery, indefinite-quantity contracts available to federal agencies.

Business under such vehicles is done via task orders for services or delivery orders for products. These can be issued competitively, on the basis of a mini-competition for the specific job, or without further competition. The potential for improper sole-source contracting has alarmed some policy-makers in the executive branch and Congress.

In April, G. Edward DeSeve, acting deputy director for management at the Office of Management and Budget, warned agencies to halt so-called "directed task orders" issued to preferred contractors without competition under GWACs and BPAs. A new Federal Acquisition Regulation provision tightening up the rules was expected this summer.

Meanwhile, Peter Levine, of the minority staff of the Senate Armed Services Committee, told contractors the size of task orders being issued goes "far beyond the scope of anything Congress contemplated" when it authorized BPAs in the 1994 Federal Acquisition Streamlining Act. When agencies are undertaking a large IT project, he implied, they should use more conventional procurement techniques.

He referred to ITOP (without naming it) when criticizing GWACs that permit directed task or delivery orders. "They undermine the very purpose of the provision" in FASA that encouraged agencies to buy through GWACs, Levine said. "At some point, Congress is presumably going to have to step in."

Orders are indeed growing in size. In fiscal 1996, Federal Sources' Dornan says, only 80 Federal Supply Service schedule IT orders placed by agencies were worth more than $1 million. Last year, there were 262 orders exceeding $1 million. "An order for $18 million is not uncommon these days," says FSS' Gormley.

And within weeks of Levine's remarks, GSA issued a press release touting the issuance of a $192 million, five-year GWAC task order to Computer Sciences Corp. on behalf of the Agency for International Development for a variety of network, computer support and systems work, including year 2000 repairs. GSA's Federal Systems Integration and Management Center (FEDSIM) awarded the work competitively.

Beyond Expectations

The volume of GWAC business also has surprised many. For example, when DOT chose the 20 ITOP contractors in May 1996, it expected the $1.13 billion in contracts (that amount is the ceiling on the indefinite-quantity agreements) to last seven years. Two years later, task orders totaling $767 million had already been issued and DOT was preparing for a new round of ITOP procurement.

Agency officials want to award contracts worth a maximum of $10 billion in the aggregate for the seven-year ITOP II. But a vendor organization, the Coalition for Government Procurement, has asked Congress to halt the second ITOP procurement, saying it duplicates GSA schedule contracts and the program has suffered from administrative lapses. Vendors have complained about the new procurement environment, saying there are too many GWACs that force them to spread themselves too thin. But Clinton administration officials feel that so far the benefits of stepped-up competition and speed outweigh the negative aspects.

Some other examples of GWACs for IT:

• Three National Institutes of Health contracts whose sales for the first seven months of fiscal 1998 totaled $185 million. The contracts supply desktop hardware and software, integration and other services, and imaging and related systems.
• NASA's Scientific and Engineering Workstation Procurement (SEWP) II, a $1.8 billion program noted for its low (0.75 percent) agency fees and reliance on automation to keep orders moving. The contracts with 15 vendors provide high-end PCs and Unix computers, plus related networks and services. Two dozen federal agencies use SEWP II.
• The Energy Department's TELIS contract, which covers telecommunications products and services, such as telephone switches and satellite networks. First-year sales were almost $45 million, less than expected, and DOE accounted for less than half the sales. An agency that's ready to buy through TELIS can make arrangements to do business with EDS in less than half a day, according to EDS program manager Ken Bessmann.

Agencies that once focused on price as the primary reason to select one proposal over the others in a contract competition now are taking broader views of best value. And one major factor considered is the contractors' past performance. In some procurements today, past performance is the most important factor in contractor selection.

Commercial Practices

That's one way the federal IT marketplace is moving closer to the norms in the business world. Another is the tendency to buy commercial, off-the-shelf (COTS) products. Agencies are using commercially available hardware and software as the building blocks of unique federal systems. A recent study by the Technology Research Institute of Sudbury, Mass., found more than half of future Defense Department weapons systems will be based on COTS products.

Though PCs, local area networks and commercial database systems are their building blocks, agencies still are building big systems. President Clinton's budget for 1999 lists more than two dozen ambitious programs, including the Census 2000 processing system, the Federal Aviation Administration's air traffic control modernization, and updated systems for weather forecasting. The Education Department is spending $290 million this year for systems to support student loan and grant programs, a figure that will grow to $347 million next year.

Federal Sources Inc. counted 493 major IT procurements in progress in April, collectively worth about $81.3 billion. The biggest one, of course, is the IRS prime contract for tax systems modernization, which could be worth billions. The top two services and software contractors, Lockheed Martin. and Computer Sciences, submitted proposals in June, and an award is expected late this year.

For big federal IT projects, buying off-the-shelf systems is just the beginning. Substantial expertise, usually supplied by contractors, is needed to glue the parts into a functional system customized to fit the agency. Indeed, the purveyors of a new class of "off-the-shelf software"-the enterprise resource management system-typically make a substantial portion of their revenues through delivering the professional services required for custom installation of the software.

These enterprise applications manage documents, financial transactions, human resources operations, supply inventories and related areas across an entire federal agency. Although a few companies, such as American Management Systems and Oracle, have been selling enterprise applications to federal agencies for several years, there are a host of new entrants into the marketplace.

Only one of these, Peoplesoft, which specializes in human resources management systems, has made substantial sales of its own products. According to GSA, Peoplesoft sold software and services totaling $20.6 million through the GSA schedule during the first seven months of fiscal 1998.

Familiar Names

For the most part, the names on this year's Top 50 IT Contractors list are familiar ones. Lockheed Martin held onto its No. 1 spot with almost $2 billion in sales, down only slightly from last year. Lockheed Martin's market share also shrank slightly, from 8.7 percent to 7.4 percent. But if the company's bid to acquire No. 2 Northrop Grumman should go forward despite opposition from antitrust officials, their combined sales of IT alone could top $3 billion.

BTG Inc., a Fairfax, Va., systems integrator, appears among the top 10 IT contractors for the first time this year. However, early in 1998 BTG sold its product sales division to competitor Government Technology Services Inc. (No. 21 last year), a move that's likely to cut into total BTG sales to the government in fiscal 1998.

One of the companies displaced from the top 10 was General Motors, whose customary appearance high on the list of IT contractors was due largely to its ownership of Hughes Data Systems, acquired late in 1997 by Raytheon Co. The GM figures also may include some sales by Electronic Data Systems Corp., which GM divested in June 1996.

The other company that moved out of last year's top 10 was Unisys Corp., which dropped from No. 8 to No. 12. Unisys, originally a mainframe computer manufacturer, is recasting itself as primarily a services supplier. Although it is the No. 8 hardware provider, it shows up as the No. 5 provider of services and software.

Market Concentration

"More business is moving to the top of the food chain," Federal Sources' Dornan says, as the leaders expand their market shares. Mergers and acquisitions contribute to this trend. Squeezed in the process are small and mid-sized businesses, some of which are joining the merger parade themselves. For example, Dunn Computer Corp. of Sterling, Va., bought a larger competitor, International Data Products Corp. of Gaithersburg, Md., this spring. Both companies build PCs and install computer systems for federal agencies.

For the year ahead, the trends that shaped 1997 and 1998 are likely to remain dominant. One much-discussed factor that finally is having a noticeable effect is the year 2000 problem. The possibility of breakdowns in information systems and technical infrastructure at the turn of the century has forced agencies to focus management attention and resources on system repairs.

Because agencies have been forced, for the most part, to make year 2000 repairs within their normal IT budgets, other systems projects have had to be deferred. Both non-IT spending and IT spending (such as the Defense Commissary Information System modernization) are feeling the pinch.

Meanwhile, this summer's hottest news has surrounded the announcement of the winners of two huge "seat management" contracts. The Outsourcing Desktop Initiative for NASA and the GSA Seat Management program offer agencies new options for contracting out the provision, support and operation of PCs and local area networks. Agencies choosing to go down this road will hire a single contractor to deliver computing services to the desktop, much as they once did with telephone systems.

No one knows whether this new approach will win many customers, but many of the top IT companies in the federal marketplace threw their hats into the competition for one or both seat management programs.

So far, says Federal Sources chairman Thomas L. Hewitt, the excitement about outsourcing is "all talk, but the talk is getting a lot louder." In any case, federal IT contractors are betting that downsizing pressures, new emphasis on results, and the shortage of experienced IT professionals will force agencies to keep turning to contractors for help.