Phone Frenzy

ust last year, federal agencies with offices in New York City were paying $30 per month per phone line for local telephone service. But under a set of new federal telecommunications contracts awarded recently, that price is supposed to drop to just $4 per phone.

That's a $26 reduction per line-nearly 90 percent.

Under a new strategy executed by the General Services Administration's Federal Technology Service, government agencies are beginning to benefit from the lowest local and long-distance phone prices ever.

The core of the strategy is what former FTS Commissioner Dennis Fischer calls "fair and relentless competition." FTS has taken advantage of the 1996 deregulation of the telecommunications industry and has incorporated the new spirit of competition into the core of its new array of voice, video and data transmission contracts.

But the agencies that acquire telecommunications services through FTS are not yet seeing the full effect of all the competition because the transition to the new arrangements has been slow. In fact, many federal offices in New York are still paying $30 per line.

Creating Competition

"My sense is that we are just beginning to see and take advantage of really true competition," Fischer says. "But the whole industry needs to do some self-examination and shaping."

For about two decades, the telecommunications industry was separated into distinct camps: long-distance providers and local service providers.

But with enactment of the 1996 Telecommunications Act, the rules of engagement changed. Long-distance providers like AT&T Corp., MCI WorldCom Inc. and Sprint Communications Co. were allowed to enter the local markets. And local service providers could attempt to enter the long-distance arena in their regions after complying with a list of 14 requirements.

The government's effort to write competition clauses into telecommunications contracts is a bellwether for the communications industry as a whole. The shift toward competition has gone slowly, but now it may be gaining momentum.

Under the FTS 2000 contracts held by AT&T and Sprint for most of the 1990s, competition was limited. Though GSA did pit the two contractors against each other in periodic price recompetitions, agencies were assigned to one carrier or the other and required to buy long-distance voice services through FTS. Video and data transmission services were available as options.

But when federal telecommunications managers got together to help formulate what would become FTS 2001, they wanted the best the industry had to offer and they wanted it cheap. During planning meetings for the new system, an idea emerged that played off the 1996 telecom act. The group decided that in FTS 2001 the two contract winners would compete against one another for agencies' business, as opposed to GSA assigning agencies like it did with FTS 2000.

One result was very low voice rates. In FTS 2001's beginning stages, federal customers are paying 4 cents per minute for long-distance calls. By the end of the eight-year contract, that figure will drop to less than 1 cent per minute.

"Competition is what has made this country great," Fischer says. "Competition is difficult sometimes. But the best thing to do is to inject it whenever you can."

GSA put competition at the core of its telecom strategy for both long-distance and local service. The agency also decided to make a wider array of services available through the new program.

"The smartest way for the government to buy is to purchase services," Fischer says. Through outsourcing, he says, the government can harvest the innovation of the private sector.

"Voice services cost 32 percent more on the FTS 2000 contract than under the current FTS 2001 pricing," says Robert P. Bubniak, associate deputy assistant secretary for telecommunications at the Veterans Affairs Department. Bubniak heads the Interagency Management Council, which advises FTS from a customer perspective. "Frame relay services cost about 56 percent more on FTS 2000. When the second year of FTS 2001 pricing comes along, prices go down."

But FTS wasn't satisfied with accepting good prices for the short term. As a result, FTS also included what Fischer calls the "crossover element" in its strategy. Under this approach, FTS 2001 contractors could, after a forbearance period, offer local phone services to federal offices.

The flip side is true as well. If a telecommunications company wins a local service contract, that firm can eventually offer both local and long-distance services to agencies there, as long as the FCC approves.

Fischer labels the strategy the "constant entry thesis." The government, he says, should "have an arrangement of a business nature with every telecom provider that can add value to government operations."

New York Stories

The constant entry thesis is already playing out in new local service contracts, known as Metropolitan Area Acquisition (MAA) contracts. FTS awarded AT&T the first three contracts in Chicago, New York City and San Francisco in the first round of MAA competitions. This gave AT&T some local federal phone business for the first time.

These awards came soon after AT&T's FTS 2001 loss to MCI WorldCom and Sprint. AT&T bid aggressively for the MAAs in order to get back into the federal market.

"Private firms are getting it in terms of competition," Fischer says. "Most of the industry knows how to compete. The others that have not competed in the past are learning real fast."

FTS recently awarded the Buffalo, N.Y., MAA to both AT&T and Bell Atlantic Federal. The two companies will slug it out in a territory where Bell Atlantic used to have a monopoly. Robust competition in the local telephone service arena is still emerging, Fischer says.

But a fierce battle is emerging between Bell Atlantic Federal and AT&T. Bell Atlantic Federal will soon enter a territory where AT&T once had a monopoly: long-distance phone services for federal agencies. Bell Atlantic is the first regional Bell company authorized by the Federal Communications Commission to offer long-distance services. It can do so only to customers in New York state.

This means that because Bell Atlantic Federal won a portion of the Buffalo MAA, it can now offer its entire breadth of services to federal customers in New York City. This is important because AT&T theoretically won the business from Bell Atlantic when it prevailed in the first round of MAA contract awards.

Nine months into AT&T's New York contract, however, Bell Atlantic hasn't actually conceded many lines. The company argues it owns the lines inside each building with local telephone service that give building occupants access to the local phone network.

Bell Atlantic says AT&T must either purchase such lines or pay rental rates for using them. The New York state public utility commission is on Bell Atlantic's side.

"This is a historically touchy subject," says Washington communications attorney Hank Levine, who has been a consultant to FTS. "Approximately 8 to 12 inches of Federal Communications Commission orders over well over a decade detail this awesomely complicated and uncertain issue."

The conflict means that some federal government offices in New York City are still paying the $30 per phone rate for local calls. AT&T says GSA hasn't yet decided how to deal with the situation. GSA officials say they have told AT&T to pay the rental fees for now.

Fischer says he is annoyed about the slow pace of the turnover process. "When you have the kind of savings we've got under FTS 2001 and the MAAs and we're not realizing them because transitions are not going the way we wish they would, we get frustrated. The customers get frustrated," Fischer says.

"Federal offices in New York are still paying $30 per phone per month," he says, "and when you have a chance to pay $4 per month per phone, you want to move as quickly as can to do that." Fischer says he has seen other examples of slow transitions around the country.

Free-for-All

While local negotiations drag on, AT&T is in discussions with FTS to offer long-distance services as an offshoot of its four MAA contract wins. Such services would not be restricted to customers in the four MAA cities. Rather, any agency anywhere in the country could purchase long-distance service from AT&T.

"FTS is now in the position to augment the contracts so that industry can bring agencies an integrated, end-to-end suite of telecom services," says John Dougherty, AT&T's vice president for
government markets.

Competition between AT&T and the Baby Bells, such as Bell Atlantic, is occurring all over the nation and not just within the government sector. Another Baby Bell, SBC Communications Inc., recently submitted to the Texas public utilities commission for approval a request to compete for long-distance customers. AT&T wants the FCC to withhold approval for SBC to offer long-distance services, contending that entry into the long-distance business should be a reward for a local provider who in good faith opens up its local service area and competes.

Meanwhile, Bell Atlantic's transition practices in the consumer market have garnered attention from the FCC. The company recently agreed to a consent decree that will give rebates to New York state customers that attempted to switch to AT&T but were hindered by Bell Atlantic software problems.

If it seems like the new deregulated structure is a free-for-all, it just may be. That's why some federal officials are cautioning against being swept up in the tide of competition.

"Competition is always welcome," Bubniak says. "But getting best value has to remain paramount."

"If in fact you squeeze vendors too hard after coming to an agreement, that results in ill will," he says. "So I think that competition has to be done in a fair and equitable manner."

Bubniak is concerned that federal long-distance business not be opened too far too soon. The FTS 2001 contract guarantees Sprint and MCI minimum revenues of $750 million each. Bubniak says the two contractors should get those revenues before MAA contractors are invited to share in the long-distance program. Even so, the vendors agree that GSA is acting in the government's best interest. "GSA is fostering competition and customers are starting to see benefits," says AT&T's Dougherty. "GSA is leading the business market."

The End-to-End Transition

As companies begin learning to compete in this new marketplace, another, more technological change is under way: The line between local and long-distance services and providers is blurring.

"The speed of convergence is going to pick up from both ends," Fischer says. Eventually, Fischer says, he sees the "industry melding together. The companies will provide end-to-end services where it all comes together."

"You will ultimately deal with one firm," he says.

"Federal agencies have fewer and fewer resources and don't have the capacity to address billing issues from a multiplicity of vendors," Bubniak says. For this reason, many agencies would like have just one vendor for all their telecom needs, he says. "The government is held to a pretty high standard when it comes to defending telecom expenditures."

"The contract vehicle you buy from is going to be irrelevant," says AT&T's Dougherty. "Soon AT&T will be allowed to offer end-to-end services. FTS' whole plan over the last four years has been to offer a comprehensive set of contracts, whether local or long-distance, in addition to integration, so that their customer base has a full suite of capabilities to acquire."

Sprint is now offering a unified voice, data and video transmission service called Ion. "Sprint Ion is a convergence of services," says Zane Shankar, the company's group manager for FTS 2001 advocacy. "All services will be brought via one service provider to the customer. That's voice and data packaged into one network. A manager could allocate bandwidth and manage his own network from his or her desktop. It's voice, video and data over the Internet in one system." The service is not yet available to federal agencies, however.

But until this convergence shakes out, most agencies will be consumed with their transition and migration to FTS 2001 services.

Veterans Affairs is currently migrating from Sprint's commercial data services to Sprint's FTS 2001 offering. Veterans Affairs also used portions of the Sprint FTS 2000 contract and is transitioning those to FTS 2001.

While the new services pique Bubniak's interest, he is concerned about doing the transition and migration right. "You can never have enough bandwidth," he says. And he hopes to gain one thing from his agency's moves besides technical advances: "Hopefully we'll have one throat to choke, one vendor to go to to resolve our issues."

Planning is vital. If agencies detail their needs and the assets used at a given site, Bubniak says, it's possible to cut costs by combining services and eliminating duplication. "If agencies can get various elements of their organizations to cooperate, they can probably derive some cost savings," he says.