Fast but Loose

It's not completely clear what led a group of federal buyers in Bremerton, Wash., to spend $37 million earmarked for information technology on building construction. But whatever the reason, their actions between Sept. 2000 and Oct. 2002 sparked an ongoing investigation that has uncovered contracting abuses, mismanagement and financial impropriety at the General Services Administration's Federal Technology Service, one of government's most enthusiastic imitators of business practices.

Like all 11 FTS regional offices, the one in Bremerton negotiated and oversaw technology contracts on behalf of other federal agencies. FTS employees are masters of the Byzantine procurement process, and their organization is funded through fees it charges other agencies to cut through red tape. As its name implies, FTS was created to buy technology. Just technology. The amount it buys on other agencies' behalf is counted in FTS' books as revenue. The size of revenues determines the amount FTS collects in fees and whether employees receive bonuses. Thus, FTS offices work hard to bring in revenue.

In the Bremerton office, revenues increased nearly tenfold from 1998 through 2002-from $53 million to $522 million. "Key employees were rewarded for this increase," GSA's inspector general found in a March 2003 audit of the Bremerton office, concluding that the push to bring in revenue "may have contributed to [the regional office's] willingness to provide the [client] with any product." Bremerton's $37 million client was the Washington State National Guard, which ran an online education program for soldiers. The Guard needed computers and software for its courses, but also buildings for classrooms. The Bremerton employees bought everything, and paid for the work using money deposited by FTS clients in its special Information Technology Fund. That money is supposed to be used only to buy technology.

As it turns out, however, Bremerton wasn't the only FTS office stretching procurement rules in pursuit of revenues. An examination of hundreds of pages of FTS contracts, official documents and legal correspondence and interviews with current and former officials and FTS employees, as well as legal experts, reveals that questionable practices and lax management were widespread. The GSA inspector general already has documented misuse of contracts in the Kansas City, Mo., and Atlanta FTS regional offices, and he is conducting audits of all 11 offices.

Interviews and reviews of documents and investigative reports by Government Executive reveal that:

• FTS employees in at least five regional offices procured goods and services that had little or nothing to do with technology, often using funds reserved for IT purchases.
• Some of those purchases caused overstatement of FTS revenues, which determined the size of some employees' bonuses.
• FTS has struggled for years to properly manage the Information Technology Fund and keep the agency's accounts solvent. FTS might have misstated how much cash it had on hand in some years.
• Senior FTS and GSA officials in Washington knew for some time that FTS was too decentralized to allow adequate day-to-day oversight of its 11 regional offices.
• FTS has drawn fire from other agencies' inspectors general and procurement experts who have questioned its practices as well as the need for its services.

LIKE A BUSINESS

FTS always has run more like a business than a government bureaucracy, says its first commissioner, Bob Woods. In the mid-1990s, GSA wanted to break free of labyrinthine procurement rules and become "customer oriented," Woods says, making service its raison d'etre. In 1995, Woods was in charge of the government's main contract for long distance phone service. Separate GSA divisions handled local phone service and contracts for information technology. Woods saw an opportunity to combine those contracts under one roof and set up an organization that would buy and sell on behalf of any agency.

FTS was created in 1996, inspired in part by the Clinton administration's "reinventing government" effort, which sought to infuse business practices into federal management. Most fee-based contracting shops created during that era simply were resellers of technology. If a customer needed 500 computers and a data network, it could buy them through contracts run by fee-for-service operations at a number of agencies. Alternatively, agencies could buy through another arm of GSA, the Federal Supply Service, which operates a set of pre-negotiated deals with vendors, called schedules.

But FTS sought to set itself apart from the competition through its customer focus, says FTS' Bates. FTS worked hand-in-hand with customers, helping them decide what to buy and how to buy it. The agency negotiated hard with vendors and even used its competitors' contracts to get better deals. This customer focus, officials say, made FTS a "value-added reseller," and justified its higher fees.

"Grow the business" became the FTS slogan, says Dennis Fischer, the service's second commissioner, who served from 1997 to 2000. And grow it did. Revenues-the measure of what FTS bought for its customers-more than doubled from fiscal 1998 to 2003, rising from $3.4 billion to almost $8.7 billion. But it quickly became apparent that, for FTS, the stiffest competition wasn't with other contracting agencies, but among its own regional offices.

GROWING TOO FAST

As FTS grew, so did its regional offices' appetites for each other's customers. Originally, officials expected each office would hunt for business only in its geographic territory. But there was overlap from the beginning, Woods says. The regions quickly began competing and hunting for business in each other's territories-a practice called poaching. The lines separating the regions never were clean and clear, Fischer says. He and other FTS executives encouraged regions to "seize the market," he says, to take business away from offices that weren't serving customers well.

Poaching gave rise to one of FTS' biggest success stories, Charles Self, then FTS deputy commissioner, explained in an interview with Government Executive in 2000. Employees in the Kansas City office saw a new business opportunity in selling off-the-shelf technology products and simple services. The Kansas City team thought there was money to be made in this quick "drop and ship" business and that the other regions were missing the boat, Self said. Kansas City launched the Federal Acquisition Services for Technology (FAST) program, a group of contracts with a number of small and disadvantaged businesses designed to allow them to sell rapidly to the government through FTS. The program soon became popular nationwide and developed a reputation as a speedy source of technology.

But the Kansas City office also became known for its willingness to bend rules to please customers. FAST was the vehicle for doing so. The word was that Kansas City was the place to go to get a contract awarded quickly without procedural hassles, says a former Defense Department customer who asked not to be identified. Recalling an order Defense wanted very much to place, the customer says colleagues decided, "If this gets too tough, we're going go to Kansas City." The Kansas City office is one of those the IG has identified as having committed improprieties similar to those in Bremerton, and Bremerton employees used FAST contracts to make their construction purchases.

Eric Whittleton, the chief operating officer for FAST contractor Information Systems Support Inc. of Gaithersburg, Md., says FTS officials put pressure on companies to move quickly. "Once you get an order to execute something, you really are on the dime to deliver," Whittleton says. That didn't leave much time to review orders that came in from Bremerton, he notes: "How would we know that they were misusing funds?"

The Bremerton employees longed to outsell the other regions, says an employee who worked in the office. They wanted to "be the No. 1 region. That was always expressed. Whether it meant doing things legally or illegally, I don't think they cared," says the employee, who asked not to be identified. This employee also says buying building construction services under IT contracts to boost revenues was common practice. "We're doing that all over the place," the employee says. "We have several orders . . . that have construction in there right now." Bremerton "seemed to be all about revenue generation," Whittleton says. "Reaching out beyond their region. . . . It was almost like the way a contractor would view the world. It was all about business growth." To motivate FTS offices, Fischer used a business dictum: "Thrill the customer." Today he concedes, "There may have been too much thrilling."

Days after the Bremerton problems were made public, Self, the former FTS deputy commissioner, said in an interview that headquarters had known for years that the office "pushed the envelope," but senior leaders were powerless to stop the abuse. Bremerton "was just way out there . . . the most out there" of all the offices, Self said. Bremerton frequently poached, and its massive revenue growth raised red flags. When Self sent a team to Bremerton to intervene in 2001, "They just blew us off," he said. "[Bremerton] paid no attention at all to the central office." The employees "put up a fake storefront" and "showed us what data they wanted to show us" when asked to justify their revenue, Self said.

The former Bremerton employee says managers paid no mind to headquarters. The employee can't recall any visits by FTS officials. But Bremerton workers started getting nervous when the inspector general descended on the office, the employee recalls. The investigation was launched in June 2002 after new management in the region discovered the abuses and called for an audit. At that point, the employee says, Bremerton became "a very miserable place. . . . There were a lot of people who basically couldn't sleep at night."

The Bremerton case points to a larger problem with decentralization at FTS and GSA, says Eugene Waszily, GSA's deputy inspector general for audits, who is working on the FTS investigation. Lack control of regional offices has been "a long-standing organizational issue," he says. Contract programs "are shaped and defined on a national basis." But actual business under those contracts is conducted in the regional offices, he explains. Bob Suda, an FTS assistant commissioner, says, "From headquarters' perspective, we allow the regions to execute their programs as best they see fit."

Self says politically appointed GSA regional administrators and their assistants are supposed to oversee the daily work. "That's a surprise to me," says Jay Pearson, the former administrator of Bremerton's region. Pearson says FTS headquarters officials are responsible for ensuring regional offices conform to policy and regulations. And both former FTS commissioners, Fischer and Woods, say that when they noticed troubling activities in the regions, they were able to speak directly to the regional administrators and correct any problems. "Ideally, there should be some [managerial] participation from both sides," Waszily says.

But if that's the case, then why have senior officials at FTS and GSA signed off on other questionable contracts since the Bremerton issues were revealed in March, the inspector general would like to know.

COMPANY INFLUENCE

In August, for example, FTS' Denver office, working for the Defense Department, used a technology contract to acquire mental health and counseling services for U.S. troops. Officials, including Bates, later argued it was appropriate to use the IT contract because Internet technologies and computers would be used to deliver the counseling services online. Titan Corp., a technology contractor known for making weapons systems, was awarded the $229 million contract and hired another firm, Ceridian Corp., to provide the counseling.

Defense had tried to procure the counseling services earlier on its own, but ran into trouble when some companies protested they were unfairly restricted from the competition. Defense canceled the procurement. A year later, the department tapped FTS to revive it. FTS used one of its own contracts,called MillenniaLite, which is held by 11 vendors, none of them recognized mental health care providers.

The GSA general counsel approved the contract, FTS officials say, even after competing companies raised concerns about it. Attorneys for ValueOptions Inc., a Norfolk, Va.-based counseling provider vying for the contract, charged that to award counseling services this way was "comparable to arguing that you can use [a technology] contract to buy automobiles simply because they use computers." The attorneys protested that the contract "was being camouflaged."

It appears that the companies that won the contract also may have played a significant role in writing it. A draft of the request for proposals, detailing the specific requirements companies had to meet, including counseling credentials, appears to have been at least partially written by a Ceridian employee. The Microsoft Word electronic document lists as the author the name of a senior official in Ceridian's public sector division. Neither Titan nor Ceridian would comment about authorship of the document, and FTS stood by the decision to award the contract because it had been cleared by senior officials. But Waszily says the GSA inspector general's office will investigate the matter.

RED FLAGS

In Bremerton, at least one company was in a position to influence the awarding of contracts for which it was competing. The Bremerton office used its contracts with Information Systems Support to award construction work for the Washington National Guard. But at the same time, ISS held a contract with FTS to provide administrative and acquisition support. ISS employees help conduct procurements and award contracts, and they worked in the Bremerton office alongside FTS employees. Information Systems employees also had access to a database containing details of upcoming procurements.

An ISS employee's signature was found on a 1999 document recommending the FTS support contract be awarded to the firm, says FTS spokeswoman Mary Alice Johnson. FTS "cannot ascertain whether a potential conflict of interest may have resulted in an unfair competitive advantage," she says. However, in September 2003, when Information Systems once again was awarded the support contract, it had to submit an "organizational conflict of interest plan" to keep employees from benefiting from their special access. Whittleton, the company's chief operating officer, says ISS employees are required to sign an ethics statement promising not to disclose FTS-related information to people inside or outside the company.

Practices such as paying contractors to help award contracts their companies might win, and awarding contacts to vendors that may have helped write them, have raised concerns about FTS. In the case of the mental health contract, the potential conflict "raises a red flag" and "urges the idea of a second look," says Steven Kelman, who headed the Office of Federal Procurement Policy during the Clinton administration. Kelman was an architect of the acquisition reforms that have helped organizations like FTS prosper.

Investigations over the past two years also have revealed that FTS may have broken rules in order to stay financially solvent. In June 2002, the Defense Department inspector general reviewed a series of deposits made by an Army agency into the Information Technology Fund, the account FTS uses to pay for contract work. FTS' customers can keep money in the fund for up to five years as long as they identify the work they plan to use it for. But the audit found that the Army agency had "improperly 'banked' " about $2.8 million for which work requirements weren't defined. No justification was provided for keeping the money in the IT fund. FTS was enabling the Army to park the money until documented requirements for projects could be developed "well into the next fiscal year," according to the Defense IG investigators.

Since there was no demonstrated work requirement for the funds, an Antideficiency Act violation might have occurred, the investigators concluded. The law prohibits spending more money than is available in an appropriation. Government employees who break it may be subject to a fine, a prison sentence, or both. Concern about the potential for running afoul of the Antideficiency Act weighed heavily on FTS managers, former commissioner Fischer says. FTS' financial solvency was determined solely by how much money was in the IT Fund, he explains. Fischer constantly was aware that spending more than was in the fund would be a violation. But FTS often failed to collect payments from its customers to replenish the fund until after work had begun. For years, GSA noted in its annual reports that FTS customers, particularly in the Defense Department, were late on their payments and that this threatened the fund's positive balance.

In audits conducted in November 2000 and March 2001, GSA's inspector general found FTS "continually [provided] goods and services to its customers without obtaining adequate funding" to cover costs. One FTS office overspent by more than $6.3 million from 1993 to 2000, resulting in "material misstatement of past years' income." It also booked about 85 percent of its business on an "advance bill basis," counting future work as revenue before it actually began, IG investigators found. Under federal regulations, FTS cannot count future years' revenue toward the balance of the IT Fund, which is measured annually.

FTS has spent tens of billions of dollars from the fund over the past several years, GSA documents show, and has come close to running in the red. In the late 1990s, the fund dipped so low that FTS used money transfers from the Public Buildings Service, another GSA agency, to keep itself solvent, the inspector general said. Yet FTS regional offices have advertised the IT Fund's flexibility to their customers, trumpeting its usefulness for storing funds an agency might otherwise have to return as unspent at the end of a fiscal year. A piece of promotional literature from the FTS Denver office proclaims, "Use it or Lose it? Not with GSA FTS!" and tells customers, "When you obligate funds . . . with GSA FTS, the funds lose their fiscal year identity." The GSA inspector general took issue with this entire practice. "Sound management practices dictate that an organization must keep expenses in line with expected revenues or go out of business."

'PERVERSE PROFIT MOTIVE'

FTS already had undergone significant changes before its contracting and management problems were laid bare. In December 2002, FTS' authority to create new contracts was given to its sister agency, the Federal Supply Service, which runs the schedules program. The reorganization was done, in part, to let FTS focus on what it did best-sales and customer service. FTS now serves primarily as a sales force for the schedules, though it still manages telecommunications contracts.

But in light of recent revelations, observers are beginning to question whether FTS has been realigned enough. "I think [there] needs to be a reorganization beyond what we've already seen," says Melissa Wojciak, the deputy staff director of the House Government Reform Committee, which oversees FTS and GSA. Though FTS sees itself as a business that must grow, "that's not their job, and unfortunately that's led to the problems they've had," Wojciak says. The agency needs to focus on its "service role" and on providing those services on a "limited basis," she says. "I think they've lost sight of that mission."

FTS might have lost sight of more than that, and in the process might have tarnished the whole fee-for-service concept, says Angela Styles, President Bush's first director of the Office of Federal Procurement Policy. FTS has "a perverse profit motive," because the agency charges fees and measures itself and employees by "how much money they bring in the door," Styles says. Because contracting shops see themselves as businesses, others might behave as FTS has. "The agencies are going to drive toward getting more money," she says. Styles suggests that the profit motive could lead to even worse transgressions. "If you cross the line, are you willing to take a bribe?" she asks. "I think it's a very fundamental question we have to ask. Is this too high a price to pay? I think it is."

Woods says some Bremerton FTS employees certainly skirted the rules. But he questions the seriousness and importance of their misconduct in the larger scheme of FTS operations. Sure there was coloring outside the lines, he says, "But the question is, how fat was that crayon?"

FTS Commissioner Bates told lawmakers on the House Government Reform Committee in Oct. 2003 that overreacting to isolated contracting abuses could set the agency back. "We may find instances where too much emphasis was placed on getting new customers. . . . But we certainly don't want to return to a time in our life where innovation is discouraged and acceptable risk is discouraged."

Even GSA Administrator Perry contends that, despite the abuses, FTS offices purchased goods and services customers "did need and want. . . . Thankfully [there was] not a failure to provide a valuable product or service." Fischer agrees, noting that the fact that FTS still is growing demonstrates there's a need for its services. Like any company, FTS identified a market and seized it, he says. Fischer never discounted the need for oversight or the requirement that FTS play by a different set of rules than corporations, but he says, "When you stripped everything away, we were a business."

A business that may prove too costly to keep.