Magazine

Bracing for Backlash

July 1, 2002

By Shane Harris

Schedule 70's past is rife with controversy. Despite its immense popularity, vendors and federal employees at first resisted the innovations that made the schedule what it is today. William Gormley was the architect of the changes when he served as an assistant commissioner at FSS in the mid-1990s. The 1994 Federal Acquisition Streamlining Act, made all the schedules nonmandatory-previously, agencies had to buy through them. That change plus the decision to fund FSS with fees forced the agency to pay close attention to what and how agencies wanted to buy, turning the schedules into flexible, easy-to-use acquisition staples. It was Gormley's idea to forgo appropriations and instead stake the schedules' future on a 1 percent fee. He also kept a close eye on technology vendors' sales and began to track that information on a quarterly basis, providing him with more information about the customers' buying habits. So many agencies have come to rely on GSA's schedules, especially Schedule 70, as integral components of their acquisition processes, that vendors view holding a schedule contract as the government's de facto stamp of approval. Technology companies feel pressure from prospective federal customers to sign up for the schedules. Newark Electronics, an electronics component reseller in Chicago, just signed on with FSS in May. Doug DiVenere, Newark's government business director, says the company had been selling to the federal agencies for years, with annual sales as high as $15 million. But Newark's sales staff reported that they were turning down business because some agencies would buy only through the schedule. The company had no alternative but to snag the all-important schedule contract Federal agencies flock to the schedules because they're so easy to use. Most schedule users can simply call the required three vendors to solicit bids and then make a deal with one of them. Schedules cut out the middleman. When buying through other governmentwide contracts, agencies must place orders through the agency that manages that contract. The schedules allow agencies to contact vendors directly and to use the government's enormous buying power to negotiate even lower prices than those the vendors have listed. (Vendors are required to offer schedule prices that match those they give their best commercial clients.) A giant computer maker-Dell, for example-can ship 3,000 desktops in a matter of days to a contracting officer at the Defense Department as easily as it can ship one to an individual buyer. And the contracting officer can negotiate deep discounts based on the size of the order and Defense's valued client status. The first major sign of a backlash against the technology schedules and governmentwide contracting in general came last year. In November, the schedules program was nearly derailed by a provision in the 2002 Defense appropriations bill that would have required Defense contracting officers to notify all schedule-holders any time the department intended to buy more than $50,000 in services. The provision, which was eventually softened, was aimed at addressing widespread concerns in the public and private sectors that contracting officers frequently fail to solicit the minimum three bids the schedules require, or do so only as cover for a decision to buy from a favored vendor. In a November 2000 report, the General Accounting Office revealed that many Defense contracting officers had failed repeatedly to seek competitive offers from multiple schedule-holders because they were not even aware of GSA's requirements to do so. FSS officials are mounting a campaign to teach schedule users the dos and don'ts of government purchasing. Roger Waldron, the agency's counsel, says many of them need the education, as the GAO report demonstrated. FSS is producing a series of instructional videos for the training sessions it holds at annual meetings of schedule users across the country, Meade says.

Growing concern that technology buying has become too fast and loose has prompted scrutiny of the General Services Administration schedules and other innovative contracts.

ompanies, White House officials and an influential legislator are questioning the existence of two of government's most popular technology buying vehicles. That scrutiny may be the first signal of a broader backlash against procurement reforms that have begun to transform the $52 billion federal technology market. The General Services Administration's Federal Supply Service manages the largest and most influential set of governmentwide technology contracts, known as the multiple awards schedules. Its fellow GSA agency, the Federal Technology Service, also runs large tech contracts, but FTS also offers its federal agency customers assistance in running competitions among companies and in managing deals once they are awarded, a service FSS doesn't provide. Technology companies, lawmakers, GSA and White House officials are questioning whether the operations and contract offerings of FTS and FSS are overly duplicative and the two should be merged.

Technology vendors have grown weary of competing governmentwide contracts, which award slots on the contracts to many firms, but leave the companies to drum up business on their own. Over the past six years, agencies as far-removed from technology purchasing as the Transportation Department and the National Institutes of Health have established open, multiple-company contracts through which other agencies have bought billions of dollars in technology goods and services. Companies begrudge the time and money necessary to compete to win space on the many different governmentwide contracts. Currently, they are directing their frustration at FSS and FTS, but other government-wide contracts could be next.

White House procurement officials have been critical of governmentwide contracts, especially the schedules, as well. They are concerned the big, broad contracts have turned the technology market into a free-for-all in which federal buyers steer business to most-favored vendors eschewing competitive bidding. Angela Styles, administrator of the Office of Federal Procurement Policy, has said that agency contracting officers need to relearn the "acquisition basics" of competition. What's more, critics argue that the easy-to-use governmentwide pacts encourage purchasers-especially those seeking services- to buy before carefully defining what they are trying to achieve.

FSS and FTS are lightning rods for contracting concerns because of the important role they've played in shaping the way agencies buy technology. FSS administers the schedules, a network of pre-awarded governmentwide contracts for a huge array of items and services-everything from office furniture to cleaning supplies and pest control to public relations. Agencies bought $22 billion of these and other items last year through more than 50 different schedules, which FSS groups into categories based on the type of products or services sold. But one schedule far outshines the rest: Schedule 70, a wide-ranging contract for information technology goods and services. Schedule 70 sales- $11 billion in fiscal 2001-accounted for half the sales of the entire schedules program last year and 60 percent of spending through all governmentwide technology contracts, operated by dozens of agencies beyond GSA. FTS also runs a number of governmentwide technology contracts, but in addition it provides other managerial services for federal agencies, such as writing contracts, handling vendor competitions and managing the deals with the winning firms. FTS sold about $6 billion in technology goods and services this way last year.

It would seem that the proliferation of federal contracts with many winners would please the technology industry. After all, more contracts create more opportunities for companies to sell. But in addition to resenting the time and expense involved in competing for so many contracts, vendors are irked that FSS and FTS, two agencies within the same organization, require them to compete for separate but similar contracts. An audit commissioned by GSA Administrator Stephen Perry and conducted by consulting firm Accenture found in April that FTS and FSS duplicate each other's sales and marketing efforts and offer the same products and services. In the technology industry, that redundancy has become intolerable.

Agencies love the schedules because they're so easy to use. As long as contracting officers abide by procurement rules requiring them to solicit an appropriate number of bids, they usually can execute a transaction in a matter of days. One million of the 4 million items sold on the GSA schedules also can be purchased online through an electronic ordering system called GSA Advantage.

Business at FSS has been booming since the mid-1990s, when the agency stopped taking congressional appropriations and chose to support itself by taking a 1 percent cut of vendors' quarterly sales. FSS also charges customers a 1 percent fee for every purchase. Sales on Schedule 70 keep all the other schedules afloat. As a former GSA official puts it, the sale of computers subsidizes the sale of toilet seats. If FSS didn't control the IT schedule, it couldn't fund its operations.

FSS Commissioner Donna Bennett is proud of the leading role her agency has played in shaping the way government buys technology. "[Our] role...is to create a market, and that's exactly what we've done," Bennett said in May at a conference for technology executives hosted by Federal Sources Inc., a McLean, Va., technology market analysis firm. But Bennett also takes account of industry's concerns about having to compete so many times for business opportunities. At the conference, she likened the acquisition reforms of the 1990s that gave rise to new contracts to a pendulum that swung across the contracting world and changed everything in its path. The pendulum now is swinging back, she added; that's forcing GSA and other agencies to consider whether the technology buying has become too fast and loose. At least within GSA, technology sales efforts are in turmoil, according to Larry Allen, the executive director of the Coalition for Government Procurement, a technology industry lobbying association in Washington. GSA is in the midst of an identity crisis and vendors want FTS and FSS to work together, Allen told the House Government Reform Subcommittee on Technology and Procurement Policy in April. Accenture's audit suggested that efficiency would improve if the sales and marketing divisions of FTS and FSS were merged. The criticisms may have opened the door just wide enough for GSA chief Perry to instigate even bigger changes, perhaps merging the two agencies. At the April hearing, Perry said he was considering appointing an associate administrator to oversee FTS and FSS and to report directly to him on what management improvements could be made.

Despite the potential for GSA shakeups, no one in the technology industry or in government doubts that Schedule 70 will continue as the technology-purchasing vehicle of choice for many agencies as it has for the past several years.

Making the Big Leagues

But the most important decision Gormley made, the one that catapulted the schedules into the major leagues, was his decision to add technology services to the offerings on Schedule 70. Federal sales of computer hardware and software were flat in the mid-1990s. Hardware and software purchases were being edged out by purchases of services, such as outsourcing, consulting and engineering that included installation of hardware and coding and loading of software. Gormley believed the technology schedule had to keep up with the times. "[It] really needed to reflect what the economy was about." Some federal employees viewed Gormley's plan to add services to Schedule 70 as heresy. They feared their jobs would be endangered if their agencies got quick and easy access to private sector technology experts. Gormley recalls pitching his plan to a skeptical audience and being shouted down by a union member from the back of the room who challenged whether Gormley had the legal right to do what he was proposing.

Some technology companies weren't any keener on his idea. Many of those firms already were offering services on governmentwide contracts run by other agencies. Why would they want one more set of hoops to jump through to sell the same services on yet another contract? In addition, the schedules operated under different rules than did the single-agency contracts services providers were used to. Winning a schedule contract is akin to receiving a hunting license. It permits a company access to the federal market through a purchasing vehicle of choice, but doesn't guarantee sales. To win business, companies had to make organizational changes, such as creating sales and marketing teams to deploy into agencies and hunt up orders on a daily basis. In that sense, government began to look a lot more like a commercial customer. That was attractive to technology firms, since they would be able to sell commercial products and services more easily, but it also forced them to change their sales practices before some of them were ready.

Gormley sympathized with the vendors-and the government's technology corps. But in the end, majorities favored change. Many companies sought quicker and easier ways to sell services to a wide range of customers. And agency buyers, just like commercial ones, wanted more than just widgets; they wanted experts to keep those goods in working order and to perform complicated, time-consuming tasks such as managing networks and analyzing data. Gormley knew that if he could get services onto Schedule 70, FSS would have what technology customers wanted most, and the agency would gain new power in shaping the technology market.

Sure enough, when Schedule 70 began offering services, sales went through the roof. In 1998, the year after services were first offered, the schedule's sales totaled $4 billion, with $1.3 billion in services. Just a year later, services sales edged ahead of products to $3.4 billion. Today, services account for two-thirds of all Schedule 70 sales-as of May, agencies had purchased $6.2 billion worth. Hardware sales barely broke the $2 billion mark last year, and software tallied up a paltry $576 million.

Stamp of Approval

Schedule 70 is the mainstay of FSS' arsenal, but it's not the only contract around. Schedule 70's cousin schedules make it easy to quickly buy a vast array of goods and services beyond technology. The schedules program was put to the ultimate test in the days after the Sept. 11 attacks on the World Trade Center and the Pentagon. Agencies displaced by the destruction of the World Trade Center and part of the Pentagon had to start over from scratch, procuring computers, software, office furniture, telephones and office supplies. They relied on the schedules to do it, and in some cases, the goods they bought were delivered the same day they were ordered.

The Defense Department is one of the biggest and more innovative users of Schedule 70. The Air Force Information Technology Superstore sells hardware and software through blanket purchase agreements, a network of discounted deals it strikes with schedule vendors to create its own miniature technology schedule. Col. Neal Fox, who runs the Superstore, says that since schedule rules already lock vendors into their best prices, he can conduct subsequent competitions on his blanket agreements to drive prices even lower.

FTS, FSS's rival within GSA, also is a large technology schedule user. Even FTS officials admit that, for some buys, Schedule 70 can't be beat, especially since the schedules allow users to negotiate directly with vendors to further reduce prices. FTS officials like Schedule 70 so much they'd like to run it themselves. Regional officials say privately that FTS, which they regard as the government's leader in technology acquisition management, is the natural choice to run the program. Of course, moving Schedule 70 from FSS would put the other schedules at risk.

FSS Acting Assistant Commissioner For Acquisition Patricia Meade now manages the schedules. She says Schedule 70 has succeeded because of its breadth and because vendors can easily add new items as soon as they hit the market. Technology manufacturers and resellers can put new goods and services on their list of offerings as easily as they can put them on a retailer's shelves.

Vendors simply apply for a contract modification any time they want to sell a new item through the schedule. If FSS agrees the addition is in the best interest of the government, the new item is listed. Meade says the agency receives more than 10,000 requests for modifications on all schedules each year.

Companies are constantly "pounding on our door" to beef up their offerings, Meade says. FSS is reviewing all its schedules to determine which ones to eliminate and what new markets to add, all in the hope of increasing the program's popularity with federal buyers. Officials are tight-lipped about which new markets they plan to target-and why. But they note the sizable increase in the government's IT budget for fiscal 2003 (from approximately $45 billion in fiscal 2002 to $52 billion), and they're confident that Schedule 70 will continue to be the contract of choice. Overall market trends and the modifications companies make in their schedule offerings and prices will drive future decisions. This summer, FSS is rolling out a new version of its E-Buy system, which will allow vendors to view agencies' requests for price quotations online, and in some cases, by specific product or service categories. Meade hopes the improved E-Buy will help FSS more accurately gather sales information, which would especially improve the agency's ability to understand customers' technology procurement needs.

Backlash

In addition to concerns about the schedules' proper use, the debate about FSS and FTS continues. The technology industry has more friends on Capitol Hill than do the two agencies. Rep. Tom Davis (R-Va.), chairman of the House Subcommittee on Technology and Procurement Policy, counts many Schedule 70-holders among his constituents and campaign contributors and has led the effort to get rid of the overlaps that are causing companies so much grief. Davis has chastised FTS officials for charging what he considers excessive service fees-sometimes as much as 80 percent-on their contracts. FTS officials say the assistance they provide agencies justifies high fees. But technology companies that are moving increasingly into the services market clearly are unhappy that FTS offers agencies the help they would like to provide.

Merging FTS and FSS could reduce the steady downward pressure on prices created by competition among federal contracts for technology products and services. Companies would welcome some relief. Agencies have wielded the power of their large customer bases to drive prices down to unsustainable levels in some cases through the schedules and other contracts, according to Coalition for Government Procurement chief Allen. No business transaction can truly succeed unless both parties leave something on the table, he says. In the case of GSA, and possibly other governmentwide contracts, technology vendors believe it's time for the government to give.

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