Phone Fight

n April 26, Sandra Bates, commissioner of the General Services Administration's Federal Technology Service, was in the hot seat before the House Subcommittee on Technology and Procurement Policy, which oversees her agency. Next to her was a panel of executives from the world's biggest telecommunications companies. Bates was about to take fire from both sides.

Early in the hearing, chairman Tom Davis, R-Va., warned Bates that she would need all the luck she could muster to make it through unscathed. He raked Bates over the coals for what he saw as the agency's severe mismanagement of a key telecommunications contract, questioning GSA's motives, its planning and, ultimately, its leadership. He then turned to the companies, which blasted the agency for shutting them out of the government long-distance market to the detriment of federal agencies.

The furor revolved around GSA's management of FTS 2001, the eight-year contract for long-distance and data services for the federal government. With an $11 billion price tag, FTS 2001 is one of the largest non-defense federal contracts in history. The successor to FTS 2000, which awarded the entire federal long-distance market exclusively to Sprint and AT&T more than 10 years ago, FTS 2001 promised and has delivered some astoundingly low prices for long-distance service. Today, most agencies are paying as little as 3 cents per minute under FTS 2001, which was awarded to Sprint and MCI WorldCom, acing AT&T out of the contract.

But the dream of dramatic savings has been deferred for other agencies. Under FTS 2001, GSA expected agencies to migrate from FTS 2000 to the new contract within two years. Every agency was responsible for submitting orders for services to GSA to begin the transition. That arduous process has been plagued by problems since the beginning, and now some agencies are facing the threat of drastically higher prices for long distance.

The transition is now more than a year and a half behind schedule. Some agencies that haven't moved off FTS 2000 are paying an average of 10 cents per minute for long-distance service. Linda Koontz, director of information management issues for the General Accounting Office, testified before Davis' committee that the lagging transition has cost the government $74 million in lost savings. And GAO says it's possible that prices could rise to more than $1.00 per minute by year's end.

The chance that some agencies' rates might rise 3,000 percent above the 3-cent-per-minute average prompted Davis to grill GSA and the telecom companies for answers. "You'd be crazy to pay $1 a minute," he said at the April hearing. "You'd be better off going down to a phone booth and putting your coins in."

Only agencies that still buy long distance from AT&T under special bridge contracts extending FTS 2000 risk the rise to $1 a minute. Under FTS 2000, all agencies were required to purchase long distance from AT&T and Sprint. AT&T lost the competition for FTS 2001, but GSA negotiated the bridge contracts to prevent AT&T customers from losing long-distance service while they made the switch to a new carrier. But as AT&T lost business to its competitors, it raised prices to compensate for lower revenues. The target for completing the transition was Dec. 6, 2000. But the changeover didn't go as anyone had planned. Even though GSA pressed AT&T customers to switch quickly to new carriers, many of them had problems giving AT&T the boot because of the uphill battle of transition.

FTS 2001 was designed to create intense competition for federal customers among long-distance providers. GSA hoped the competitive furor would drive down prices, improve service and bring cutting-edge technologies to the federal market. The contract provides a range of services, from voice communications and data transmission to Internet connections. Unlike its predecessor, the new contract is "voluntary," meaning agencies are free to use FTS 2001 vendors or to make deals with other long-distance providers, including AT&T. GSA expected that when FTS 2001 became available, agencies would quickly place orders for new service and the transition from the old contract would be swift. Once that transition was complete, GSA planned to open the contract to competitors beyond Sprint and MCI WorldCom.

GSA held two initial rounds of competition for FTS 2001. Sprint won its place in December 1998, and MCI WorldCom followed in January 1999, edging out AT&T. GSA now plans to reopen competition by the end of this summer. To do that, the agency has awarded local telephone service contracts called Metropolitan Acquisition Agreements to several vendors in major cities. Many of those companies are leading national providers of long distance and data services. Once companies have served the government locally, they will be eligible to compete for federal long distance business under FTS 2001. Conversely, once GSA reopens the contract, Sprint and MCI WorldCom will be eligible to compete to provide local service for federal agencies.

Bedeviling Details

The failures of the three-year-old FTS 2001 have left Congress, the long-distance firms and GSA scratching their heads over how it fell apart and whether it can survive. Anthony D'Agata, vice president and general manager of Sprint's government systems division, partly blames his industry for the snail's pace of the transition from FTS 2000. From the beginning, prospects for meeting the schedule were grim. The nationwide net of wires and telecommunication infrastructure was dangerously overloaded in the late 1990s, he says.

FTS 2001 required winning firms to provide a host of services never before offered, such as Internet connection and the ability to electronically transfer massive amounts of information. But FTS 2001 coincided with the explosion of dot-com businesses and the rapid growth of the telecommunications market. Companies promising consumers high-speed Internet access and e-commerce Web sites fighting for market dominance scrambled to build up their foundations of routers, servers and extra lines so they could be the first to deliver services. They devoured space on the existing telecommunications network to such an extent that there was little room left to add the services promised under FTS 2001.

"The technology wasn't there," D'Agata says, and no one in the industry was prepared to handle the problem. On top of that, the volume of new orders from agencies making the jump off FTS 2000 doubled in less than one year after the contract was awarded. That placed enormous strain on all telecom companies and equipment manufacturers to get products and services up and running immediately to avoid a crippling telecommunications traffic jam.

GSA bears equal blame with the long- distance providers for failing to foresee the many hurdles to a rapid transition from one long-distance contract to the other, says Dennis Fischer, commissioner of GSA's Federal Technology Service from 1997 to April 2000. Fischer says the transition approach was well planned, but that no one could have predicted what happened. "We knew it would be a big effort," he says. "There was a lot of time allowed, it just wasn't enough."

Moving an entire agency from one long-distance provider to another is nothing like the seamless switch of a residential phone line. Though voice line transitions are relatively easy, even for large organizations, the majority of requests for FTS 2001 were for data lines, D'Agata explains. Every system involved in directing data to its proper destination-lines, switches and e-mail addresses-had to be inventoried by hand before the agency could decide what new services and equipment to order.

Many players, including GAO, cast some blame for the fumbled transition on agencies for not placing their orders fast enough to complete transition by December 2000. "We expected to be handed a set of customers on the day we received the contract," says Jerry Edgerton, senior vice president of MCI WorldCom's government markets division, because GSA had told agencies to move quickly with their FTS 2001 orders. Yet WorldCom received orders from agencies as late as September 2000-20 months after WorldCom won the contract. D'Agata says his company is still identifying agencies operating under the FTS 2000 contract.

Agencies, on the other hand, have their own horror stories of long-distance switchovers run amok. The Treasury Department's Office of the Comptroller of the Currency, for example, was so frustrated by Sprint's inability to meet deadlines or provide enough resources to carry out the transition on time that it threatened to pull out of FTS 2001 altogether. Sprint convinced Treasury office to restart its program, but only after a six-month halt in the changeover. Even agencies that successfully switched to new FTS 2001 providers found themselves in precarious financial straits due to rampant billing errors by Sprint and WorldCom.

The National Park Service, Bureau of Land Management, Tennessee Valley Authority and bureaus within the Agriculture Department all were incorrectly billed by MCI WorldCom at commercial rates higher than those promised under FTS 2001. GAO has documented that collection activities were brought against some agencies for nonpayment, and in a few instances phone service was disconnected. Fixing bills and getting phone service restored used up agency staff time and funds that could have been devoted to completing the FTS 2001 transition. GAO says the problems arose because GSA failed to require contractors to have appropriate billing systems in place by the time agencies began submitting requests for FTS 2001 service. GSA still is resolving problems with MCI WorldCom and Sprint, GAO reported in March ("FTS 2001: Transition Challenges Jeopardize Program Goals," 01-289). Many agencies also postponed their transitions to new long-distance providers in order to focus on preparing for technology problems they anticipated would be associated with the coming of the year 2000. Fischer says the postponements frustrated GSA, but concedes he can't fault agencies for their hesitation to put the long-distance transition before dealing with Y2K.

As a result of Y2K worries, the FTS 2001 changeover didn't begin in earnest until January 2000. Adding to the delay, GSA gave vendors target dates rather than hard deadlines for completing their changeovers. Edgerton says that once Y2K was over, some agencies moved quickly and secured good prices under FTS 2001. "Then we had some hangers-on," he laments, agencies that were too exhausted from preparing for Y2K to tackle another intimidating project.

Sprint's D'Agata also faults the design of the contract for much of the mayhem. "There was no compelling urgency to completing transition," he says, because use of the contract was voluntary. Some AT&T customers chose to stall, believing the company would eventually get into the FTS 2001 contract and offer them lower prices. AT&T did little to discourage such thinking, tantalizing customers with promises of re-entry into the contract and suggestions that they hang on through the bridge contracts until the company could re-qualify for long distance competition, Fischer says. (AT&T declined to answer questions for this story.) GSA assured agencies the company would not return to the market until the FTS 2001 transition was complete, but some would not be moved. Without naming names, Fischer says at least three agencies refused to switch providers. Today, as prices on the bridge contract continue to go up, these agencies are in the midst of moving off FTS 2000, just like everyone else.

Earnest Money

In designing FTS 2001, GSA knew it had to offer enough incentive to attract long-distance firms to the table. Bates says the major companies told GSA it had two choices if it wanted to create a contract lucrative enough to make bidding worthwhile: Either make participation mandatory for all agencies or pony up some serious cash on the front end.

GSA chose the latter strategy. It guaranteed each of the winning vendors $750 million in revenues, money they would receive from the government regardless of the amount of business or new competition allowed under the contract. Agencies were not required to use FTS 2001, but had many opted out, "we would be in trouble," Bates says. She adds that GSA initially expected the revenue guarantees would be met in 2001, about a year after competition for long distance was supposed to be reopened to all players. But as long-distance rates under FTS 2001 began to plummet and the transition crumbled, it was clear those targets wouldn't be met.

The pressure of fulfilling the revenue obligations along with the need to keep customers on board despite price spikes for some agencies and the painfully slow transition sent FTS 2001 into the tailspin that landed Bates and the telecom companies in front of Davis' subcommittee. Davis expressed his concern about the government's $1.5 billion revenue promise. The minimum revenue guarantees were a great idea, Davis says. "But when you go to a late transition, it just throws sand in the gears." Certainly GSA didn't expect the timeline for meeting the revenue guarantees to stretch so far. The agency has revised its initial prediction and says the commitment will be fulfilled by 2004. Sprint and MCI WorldCom might have hoped they'd have their money in hand before then, Bates says, but they'll have to wait.

The FTS 2001-motivated attacks on GSA by Davis and others perplex some observers. Fischer says all the fuss about the delayed transition obscures the fact that the contract drove down long-distance costs for the government. It also opened the door to more advanced technologies and created a competitive environment, which is exactly what GSA always wanted. To say that snags make the contract a failure "is very unfair," he says.

Bates says GSA doesn't feel targeted, but she does question the timing of Davis's April hearing in which he took the agency to task. By then, GSA already was closing the door on transition-it was 96 percent complete, she says. Early this summer, Bates said the transition was 99 percent finished. Davis argues that his hearings goaded GSA to speed up resolution of the problem. Before April, he insists, the agency was far from completing 96 percent of the transition.

GAO said in its report that as of February, only 88 percent of FTS 2001 transition orders were complete. Notably behind schedule were changeovers of large frame relay networks, used to speed up overall data transmission, which were little more than half finished, according to the congressional auditors. What's more, GAO reports, as the end of the transition nears, the time it takes to switch over services increases.

Fanning the Flames

AT&T has taken heat from all sides because of its slowness in moving agencies off the bridge contracts. The company still provides long distance service for about 500 federal sites, most of them in remote locations, says John Harrison, who oversaw the FTS 2001 transition for GSA. Those extensions will expire in December.

AT&T lately has fanned the flames by challenging the FTS 2001 contracts with Sprint and MCI WorldCom. In April, the company filed a protest at GSA, insisting the contract be recompeted because GSA had relaxed the transition timeline requirements of FTS 2001 after it was awarded, thereby materially altering the agreement.

GSA's lawyers denied the charges that the agency had changed the rules and charged that AT&T was out of line to complain when its continued ability to do long-distance business with the government three years after losing the contract was a direct result of transition delays. "For AT&T to come forward...to challenge the length of the transition is disingenuous," the attorneys wrote in response to the contract challenge. "AT&T knew that the 12-month transition time frame...had changed when the government entered into negotiations with AT&T in the fall of 2000 to extend its...bridge contracts."

AT&T withdrew the complaint and refiled it with GAO, contending that the transition was supposed to occur in twelve months or less, and that since it had taken so much longer, FTS 2001 was invalid. GAO determined that the contract was specifically written to allow flexibility in the transition schedule, and that AT&T knew this. GAO dismissed the company's protest in June.

Until Next Time

Even though the fur's been flying, no one is ready to junk FTS 2001. D'Agata charges that the oversight process has been politicized, and that GSA and the agencies should be applauded for saving hundreds of millions of dollars with rates 30 to 50 percent below market prices. "It's silly that there's any noise [about costs]...when the savings are greater than anyone anticipated," he says.

It's possible to realize even greater savings by going outside FTS 2001, as the Treasury Department has proved. Beset by snags, Treasury froze its transition and designed its own contract. Today, the agency buys toll-free services from AT&T; purchases long distance from Sprint and MCI WorldCom through FTS 2001 and uses Qwest and Sprint under a Treasury-negotiated communications system contract. Treasury uses low prices under the FTS 2001 contract as a ceiling when it negotiates with other vendors. "In all cases," says Treasury chief information officer James Flyzik, "we negotiated these arrangements to be prices equal to or better than FTS 2001 prices."

Flyzik says his program complements GSA's because it injects wide-scale competition into the market. "It's going to encourage creativity and innovation in the FTS 2001 contracts," he says, especially when it comes to future acquisitions of more complex telecommunications services, such as digital and wireless technologies. If every other agency had adopted this kind of quilted contract approach, Flyzik believes the government would be saving more money now.

While the costly FTS 2001 transition is being put to bed, Sprint and MCI WorldCom's competitors anxiously await their opportunity to enter the fray. Qwest now has four MAAs, and Jim Payne, vice president of the company's government systems division, holds Bates to her word that competition for long distance will be opened by the end of the summer. Until all agencies are switched over, Payne's company is locked out of the long-distance competition. By Sept. 22, Payne says, he expects to be serving long-distance customers. In the meantime, GSA is trying to keep all the sparring companies as happy as possible. "It's tough," Bates admits. "In this industry, there are lots of choices and differing business goals."

Fischer takes the long view. "In the macro sense, [FTS 2001] has been a tremendous success," he says, because taxpayers saved money, the government will save money in the end and new technologies have been put to work. Once competition begins, prices that are hovering near zero could drop even lower, squeezing companies of all sizes.

Then comes 2007, when the contract must be renegotiated.