Agencies Look Beyond Y2K

t the end of August, the Treasury Department will shut down the walk-up windows in 37 cities where members of the public buy and redeem Treasury bills, notes and bonds. It's one of the final steps along a path toward doing all Bureau of the Public Debt securities business online.

For the last two years, the bureau has been encouraging its 620,000 customers who are individual investors to use the telephone and the Internet for their purchases and other transactions. The campaign has succeeded. Fewer than 2 percent of the customers still visit the offices. About half use phone or the Internet; the other half still use mail.

"Our customers are expecting that we will use technology to provide good, solid customer services to them in the future," says Jane F. O'Brien, the bureau's assistant commissioner. The bureau will set up call centers at Federal Reserve banks in Boston, Dallas and Minneapolis next year to centralize the process of handling customer transactions via a toll-free phone number.

The call centers and the agency's Web site (www.publicdebt.treas.gov) will provide more, faster and better service while saving the bureau about $5 million a year, O'Brien says. The call center staffs will have more up-to-date and detailed information on hand for answering customers' questions and will be available 12 hours a day.

Top officials at the Bureau of the Public Debt expected at least a small public outcry when they announced the end of walk-up service in May. Instead, O'Brien says, "people are embracing it even faster than we might have thought." Customers have taken the time to write and thank the bureau for improving its services via the phone and Internet, she says, and complaints are along the lines of "why did it take you so long to do this?"

Bureau officials were expecting to release a request for proposals for the call center equipment this summer. They hope the centers can be operational early in 2000.

Y2K Under Control

A couple of years back, such a timetable would have seemed unlikely. The conventional wisdom then was that the year 2000 changeover would bring the application of new information technology to a halt by now. IT professionals and managers would be working 18-hour days to get old systems in shape for the century change and planning for new systems would take a back seat to keeping existing systems operable.

But the century date change now is viewed as manageable. That's not to say that no problems will occur after midnight on Dec. 31. But the Bureau of the Public Debt is not alone among federal agencies when it says on its Web site: "We . . . believe our systems-mission-critical and otherwise-are ready for the century date change."

It's been an impressive drive to this point, and a costly one. Agencies have spent almost $7 billion to achieve Y2K readiness. That sum has bought a level of confidence in the repairs that has been rising by the month. But agencies still have unfinished Y2K business, especially with systems they have designated as non-mission-critical. Even if an agency can keep operating without such systems, there no doubt will be some inconveniences and difficulties before all the systems are fixed.

One bug or error can bring down a system, and until the clocks strike midnight on Dec. 31, no one can be quite sure what will happen. The remaining weeks before then will be spent in last-minute testing and retesting, in hopes of minimizing the uncertainty.

Harris Miller, president of the Information Technology Association of America, says that although 95 percent of federal Y2K repairs have been completed, the last 5 percent of such projects always is the most difficult. The situation "still is a major challenge," he says, although he acknowledges being "a lot more optimistic than I was."

IT companies have been sharing the agencies' pain. Although Y2K has prompted some replacements of computer hardware and software, plus substantial purchases of systems remediation and testing services, it also has led to a drop-off in sales this year, according to many who sell IT products and services to the government. "No one is rolling out new programs," says Joe Duffy, a federal sales executive for Oracle Corp., the government's leading supplier of database software.

Pent-Up Demand

Duffy and other IT vendors are expecting government sales to pick up early in the new calendar year. "There is a pent-up demand for systems changes," says Dennis J. Fischer, who heads the General Services Administration's Federal Technology Service, "and there'll be some money freed up."

Federal IT market analysts at Federal Sources Inc. in McLean, Va., predict that the government's IT spending will grow by 4 percent, or $1.2 billion, in the coming fiscal year, reaching almost $34.5 billion. The Defense Information Systems Agency will be the top Defense Department spender, at more than $3.5 billion. The Air Force remains the spending champ among the military services, with more than $3 billion in IT expenditures budgeted for fiscal 2000.

"I think a lot of money is going to be spent to fix DoD logistics" systems and processes, says Robert A. Dornan, the top analyst at Federal Sources. Logistics will get the biggest single chunk of IT funding in the Air Force and the Navy, he says, and in the Army will get almost as much as command and control systems. The three services' logistics IT spending for fiscal 2000 will add up to more than $1 billion.

The Transportation Department will see a sharp increase in its IT spending, to about $2.6 billion, and will outspend the other civilian agencies, according to Federal Sources. Most of the increase is due to Federal Aviation Administration modernization. DOT will spend more than 20 percent of its fiscal 2000 operating budget on IT, Federal Sources says. Other agencies that will spend more than 10 percent of their budgets on IT are the Treasury and Commerce departments, NASA and the Social Security Administration.

Security: 'A Huge Item'

What will agencies be buying? It's widely believed that some of the money newly freed up from Y2K remediation will be spent on information security measures.

"Security is a huge item-particularly if you toss in privacy and the other issues that go with it," says John R. Dyer, principal deputy commissioner of the Social Security Administration. The security technology his agency needs is not available at any price, he complains.

Security concerns, which result in a lack of trust in electronic transactions, are the major impediment to doing more government business electronically, says Paul D. Grant, co-director of the federal electronic commerce program. "We're held to a higher level of expectation by the citizens," Grant adds, explaining that unavailability of Web sites or other security glitches are tolerated in commercial sites but not in government ones.

In January, the White House called for spending $1.46 billion in the coming fiscal year to finance research into protection technology, improved detection and notification of hacker attacks, more sharing of countermeasures and creation of a "cyber corps" of experts who could respond to attacks on agencies' systems. Several months earlier, in Presidential Decision Directive 63, President Clinton declared that "every department and agency of the federal government shall be responsible for protecting its own critical infrastructure, especially its cyber-based systems. Every department and agency chief information officer shall be responsible for information assurance."

The push for information security is leading agencies to acquire new hardware and software products as well as hire consultants to advise them on protecting their data and transmissions. Although the scope of Clinton's directive extends well beyond information security, many observers agree that IT is the focus of most agencies' efforts to date.

Telecom Transition

Agencies also will be making the transition to the new FTS 2001 long-distance communications services procured by the Federal Technology Service. The transition is difficult because it requires agencies to re-evaluate their need for various services and consider options they may have ignored until now. Every federal phone user will get new or upgraded long-distance service before it's over. The switchover could take another year or two, but the low rates offered under the contracts with MCI WorldCom and Sprint provide agencies with powerful incentives to get on with it once their Y2K problems are under control.

Even though agencies will cut their long-distance unit costs by two-thirds under FTS 2001, they are spending money now for management, engineering and analytical services to prepare for the transition. GSA and its Interagency Management Council have set aside $14.2 million to help agencies, but transition expenditures will far exceed this amount.

By and large, federal telecommunications spending isn't changing much from year to year, according to experts such as Fischer. He says the significant drop in rates has been offset by increases in volume. That's in keeping with his goals. "As we become a more electronic government," Fischer says, "we want to get the communications costs so low that they're not a factor" in decisions.

Product Purchases Level Off

Across government, computer hardware and software sales are level or declining slightly, according to Federal Sources Inc. One major reason for this is the increasing standardization of IT products. Buyers-even those with very sophisticated needs-expect to get commercial off-the-shelf (COTS) products and have them work together predictably and reliably. Speeded-up acquisition processes coupled with the COTS approach are giving agencies "the latest technology at super-competitive, incredible prices," says Steven Kelman, the former director of the Office of Federal Procurement Policy.

When IT products are standardized, it's easier to compare features and prices and buy wisely. Prices tend to stabilize or drop, because it's difficult for vendors to justify high prices for a product that does the same thing as a competing product costing hundreds of dollars less. Falling prices are commonplace in today's PC market, and some experts are predicting that the standard office computer will cost $500 or $600 within a year.

Within the last year, EMachines Inc. of Irvine, Calif., which sells PCs for $399 to $599, opened for business and achieved the No. 4 rank among manufacturers of PCs for retail sale, outselling Apple Computer and Packard-Bell. The company is marketing its stand-alone computers to first-time PC buyers for home use, but its systems are more powerful and fully featured than some of those in federal offices today. Such prices don't include a monitor or printer, but most federal desktops already have these accessories.

Severe price pressures are contributing to profit erosion at some established computer companies, including Compaq Computer, the nation's No. 1 PC maker. Direct-sales PC companies, led by Dell, Micron and Gateway, are doing somewhat better than those that rely on resellers, in both the federal market and the broader computer market. Dell, in fact, rose from No. 12 on the Government Executive hardware suppliers' list last year to No. 4 this year. It achieved the highest rank of any company that makes only PCs, servers and related gear.

Dell and its competitors are offering more services and custom options to their government customers as the competition intensifies. For example, Dell maintains "premier pages" for almost 60 federal agencies on its Web site. When a federal employee opens his agency's Dell page, he or she gets information about prices, configurations and other specifics that apply only to the contract or blanket purchase agreement between Dell and that agency.

These kinds of customer services go hand in glove with the deregulated IT buying that has become the norm in the last few years. A decade ago, a federal professional would have been fortunate to receive a new computer within two years after getting his or her boss to sign off on the purchase. Now delivery within weeks or even days is common, thanks to a series of procurement reforms and the push to adopt best commercial practices within government.

Low prices and easier purchasing notwithstanding, some leading federal IT executives predict that agencies soon will buy less hardware and software and instead will simply sign service contracts under which contractors provide and maintain computers, networks and other gear.

"I believe there is an inexorable trend where we are buying more services and investing less capital," GSA's Fischer says.

"Agencies are having much more difficulty getting budget dollars" for IT, Fischer says. Although he doesn't say so, agencies also are discovering how difficult it is to manage, operate and maintain their own systems, particularly in this era of labor shortages. These two pressures, along with the trend toward using COTS technology, are forcing agencies to consider alternative approaches to acquisition.

No Inventory

"I don't want to own anything," says James J. Flyzik, deputy assistant secretary of the Treasury for information systems and vice chair of the federal Chief Information Officers Council. "I want services." Flyzik's department has operated one of the world's largest private telecommunications networks, but now it is changing direction and will buy communications services, rather than switches, from service providers, rather than equipment manufacturers.

Treasury also is one of the agencies embracing a "seat management" strategy for its desktop computers at headquarters, using a GSA program to acquire a comprehensive package of local area network and PC support services for 1,600 employee "seats." Wang Government Services of McLean, Va., will manage the hardware and software and replace them on a schedule laid out in its 10-year contract.

GSA and NASA are using seat management contractors and also selling the services to other agencies. When GSA and NASA awarded their contracts more than a year ago, GSA officials predicted that seat management would take off like a rocket, but that hasn't been the case. Now, however, the concept may be catching on. The Health Care Financing Administration is among the other agencies taking the plunge.

Rent-a-Program

Seat management frees agencies from the burdens of owning PCs. Once purchased, hardware and software soon become obsolete, and require expensive maintenance and support. The procurement of desktop computers under seat management is often compared to purchasing electricity or water from utility companies. The vendor is paid according to the level of service delivered, including the number of desktops served, speed of response and frequency of upgrades.

Many in the IT industry are predicting that businesses and government agencies soon will acquire software in much the same way. It's in keeping with the trend to invest less capital and pay per transaction or unit of usage. William A. Woodard, president of Affiliated Computer Services' federal unit, ACS Government Solutions Group Inc., says his federal customers "want to pay by the drink," whether it's seat management or other kinds of services.

ACS is one of the rising stars on this year's list of the top computer services and software providers, moving up to the 10th spot on the list. In the same list, Science Applications International Corp. (SAIC) moved up from No. 10 to No. 4. Federal Sources' Dornan says the second-tier companies-those below the top 15-are the ones that have experienced the most dramatic gains, and much of their growth has come at the expense of small and minority-owned companies.

Between 1996 and 1998, according to Federal Sources, small businesses and small disadvantaged businesses lost $1 billion in annual federal business. During that period, procurement reforms made it easier for agencies to choose suppliers quickly, and lawmakers and regulation-writers removed some of the rules favoring small businesses.

New Powerhouse

SAIC announced in June that it would acquire Boeing's Information Services unit, which SAIC officials said could add $300 million to their company's federal revenues this year. Boeing is the No. 5 IT contractor on our list, and SAIC is No. 10.

Among other companies affected by mergers and acquisitions, BTG, last year's No. 8 IT contractor, sold its PC reseller business to competitor Government Technology Services Inc. and dropped to No. 32. GTE, meanwhile, was being acquired by Bell Atlantic this year, except for GTE's Government Systems unit. That unit was sold to General Dynamics., the defense contractor, which formed a new Information Systems and Technology group in 1998 from a series of acquisitions. Even before the GTE deal, General Dynamics officials projected that the group's 1999 revenues would top $1 billion. General Dynamics is likely to show up on future lists of top IT contractors if all goes as planned.

The perennial No. 1 IT contractor, Lockheed Martin, could move down on the list in future years if Lockheed Martin sheds its federal systems integration unit and some others that provide IT to the Postal Service and other agencies. The company was reviewing divestiture options this summer.

The GSA schedule program, meanwhile, continues its rapid expansion. IT schedule sales reached the $2 billion level in fiscal 1996 and were about $4.5 billion last year. "They plan to grow that program at $1 billion a year," Federal Sources' Dornan says. Oracle, the government's No. 1 database supplier, has seen its GSA schedule business quadruple in the last several years, Duffy says.

Agencies continue to get discounts and other concessions from the standard schedules through blanket purchase agreements, or BPAs. For example, ASAP Software Express, a reseller headquartered in Illinois, has a five-year BPA to supply the Navy with standard Microsoft Corp. desktop software. Company officials say the agreement calls for discounts of up to 50 percent from standard GSA pricing.

Other vehicles are giving the schedules a run for their money, however. Agencies such as the National Institutes of Health and the Transportation Department are selling IT services and products to other agencies, using benefits such as flexibility, useful Web catalogs and speed of delivery as selling points.