Tech Insider: Government rides the market bust

GovExec.com. techinsider The technology sector has been taking a beating the past few weeks as investors have grown weary over news that federal investigators are poking around the books of more and more companies. Mention the words "accounting practices" and "federal" in the same breath and stock prices and spirits drop fast. It seems reasonable to ask the question: Given all the volatility in the technology market over the past two years and recent revelations of dubious bean-counting, what is the government doing-and what can it do-to protect itself from getting into business with financially unstable companies? The answer is it's not doing much, nor is it required to. Current and former government contracting and acquisition officials say agencies attempt to assess a prospective vendor's financial health before awarding a contract. But at least two companies that have filed for Chapter 11 bankruptcy protection-Global Crossing and Winstar-are both federal contractors. Winstar provides local telephone service for several agencies and Global Crossing holds a few contracts for network services. By all accounts, both companies are carrying out their agreements with the government, even though their futures are entirely uncertain and their value has been eviscerated. Contracting officers are supposed to have back-ups built into contracts that allow other vendors to come in and take up the work in the place of a company that goes out of business. "It's not like you're just left high and dry," said Dennis Fischer, a former commissioner of the General Services Administration's Federal Technology Service, and now vice president of government services at Visa USA. And by awarding contracts to multiple vendors, the government gives itself even more wiggle room. Contracting officers and acquisition personnel perform the appropriate legwork and due diligence to make sure a contractor is up to snuff, both in terms of future financial viability and current bookkeeping practices, experts say. And ultimately, it's their responsibility alone. "[The] government has to decide how much due diligence [is appropriate] for the job at hand," said Bob Woods, Fischer's FTS predecessor and now president of business applications solutions at ACS Government Solutions Group Inc., a Rockville, Md., provider of technology services. Woods knows about the power the government wields in the technology market. Under his watch, the FTS brought Sprint, a company then not known in the federal sphere, into the competition for the government's phone business in the mid-1990s by awarding it a seat with AT&T on the FTS 2000 contract for long-distance service. In that case, the government took full advantage of increased competition and is still reaping the benefits-prices on the follow-on to FTS 2000 are hovering in the neighborhood of 2 cents a minute. As telecomm companies suffered possibly their worst year ever in 2001, government agencies raked in savings. A company's financial wherewithal is really none of the government's concern, said Warren Suss, president of Suss Consulting Inc., in Jenkintown, Pa. Agencies shouldn't ask whether a company will weather a market downturn or a bankruptcy proceeding, but whether it can perform under the terms of its contract. But as the commercial market weakens and more companies look for work in the federal sector, many argue that the government needs to remember its role-to foster commerce, not to add to companies' mounting woes. Since the acquisition reforms of the mid-1990s gave contracting officials a green light to make the market more competitive by awarding contracts to new companies, agencies have developed a reputation for playing hardball. "There's been a tendency to set up some rather high level and…superficial checklists for quality," Suss said, "and then to…make an award based on price." Contracting officers are supposed to make awards in terms of a best overall value, not on price alone. "In some ways, there's been terrible price erosion in the marketplace," he said. Some argue that new companies without the staying power the federal market demands are gaining entrée to it with low-balled bids-all because the government wants new blood. Agencies can afford to lose a contractor. New products have been brought to market as the technology sector has rapidly expanded and agencies, in some cases, have been able to exploit them at rock-bottom prices. Uncle Sam has been sitting pretty in the tech bubble, and he still might not know it has popped. Such blindness to market realities isn't unique to government. Many former federal officials are puzzled about why so many companies thought they were immune from the laws of supply and demand during the technology buildup. Take telecommunications firms, which spent billions laying fiber optic cable around the world, only to find that the demand for the product was minuscule. "Everyone assumed they'd be the only guy putting cable in the ground," Woods said. "I don't know what the hell they were thinking." But that ultimately points back to the question of whether the government should be doing business with speculative companies in the first place. Disgruntled vendors say government has a broader responsibility to buoy commerce in the nation. Some in government say that's bunk. Companies have been putting the screws to each other for years, so why can't government do the same? That argument's not going to be settled any time soon. But on one topic, both sides are unanimous. Government should be in the business of doing business well. And, like it or not, signing contracts with fly-by-night companies isn't smart business.