Tech Insider: A question of responsibility

What's to be done with federal contractors who have plummeted into bankruptcy or have had their public reputations shredded by accounting scandals?

It's a question on a lot of people's minds these days as the list of contractors that have gone broke or come under federal investigation for their bookkeeping practices grows ever longer. That has forced some agencies to take a hard look at whether they should be doing business with companies that might cease to exist.

Should contractors that violate securities laws and defraud their investors with falsified accounting figures still have the right to do billions of dollars in work for the United States?

The fact that disgraced telecommunications contractors like WorldCom-which provides telephone and data service to just about every agency in the government-have filed for Chapter 11 bankruptcy, doesn't mean they'll have their contracts pulled out from under them.

And that shouldn't be surprising, agency procurement chiefs say, because this kind of thing happens all the time, and the government has learned how to handle it.

"Every year there are some number of companies with whom the government does business who go into bankruptcy and get liquidated," says David Drabkin, the head of procurement for the General Services Administration, which overseas the contracts of WorldCom, Qwest, AT&T, Sprint and thousands of other telecom and technology companies, most of which aren't bankrupt and aren't being probed by federal authorities.

Bankruptcy and inflated revenue figures don't matter so much to the government when determining whether a company should keep its contract. Whether the company is capable of performing under the terms of that contract is what's important. If it can do that, contracting officers label the firm "responsible."

Being "nonresponsible"-to use the government's term-doesn't simply mean a company has been reckless or has broken laws. It means the company can't do the work the contract requires. And that's what determines whether a firm remains a contractor or gets the axe.

Take Enron, for example, which GSA suspended from future federal contracts in March. GSA acknowledged Enron's ethical failings, but justified the suspension in an administrative light. Enron's "internal control irregularities" were troubling, GSA said, because the government depends on a company to keep its own house in order so that it can effectively do its work.

But even though a determination that a company is nonresponsible is supposed to be based on objective considerations, the finding itself can be a damning indictment of a firm. For example, Global Crossing, the telecom company that filed for Chapter 11 protection in January, was deemed nonresponsible during competition for a Defense Department contract for the Defense Research and Engineering Network. That finding probably killed the company's chances of doing business with the department for a long time.

WorldCom, whose financial and ethical woes eclipse Global Crossing's, has yet to be found nonresponsible on any of its contracts, and still is performing work. That means the company may well be sold off in pieces before an agency has the chance to give it the boot under a finding of nonresponsibility. Under federal bankruptcy laws, WorldCom's contracts are considered assets, so a bankruptcy court would have to approve any termination by the government.

But if a contractor decides to liquidate its assets, how can the government be certain some other company will rush in to take the defunct vendor's place? Drabkin says the possibility that no company would show up to take over a dissolved firm's work isn't lost on contracting officers. GSA is looking at the telecom market in particular to make sure a firm could step in for WorldCom, if needed. "It would be unacceptable for our phones to go dead or our Internet service to go away," Drabkin says. "You can be assured that people are considering what options they might have should something happen and companies wouldn't be able to perform."

But Drabkin admits that procurement officials are concerned that some contractors may just be too big and too specialized to be replaced. There are only so many WorldComs out there. Not just any company can handle its massive and demanding workload.

If a company does become the proud new owner of a government contract, how easy is it for agencies to make the change? If the contract is a big one, particularly for complicated services like telecom, it's not as simple as flipping a switch.

Just ask GSA. The agency spent more than two years, beginning in 1999, trying to move long distance customers from AT&T to Sprint and WorldCom under the FTS 2001 contract. Why did it take so long? Switching from one provider to another was vastly harder than anyone in government or industry had anticipated, GSA officials say.

A few years from now, the dust will have settled on the financial shenanigans of the past several months, and government contract work will still be chugging along. Disgraced executives will become poster children for corporate indulgence, and then they'll be largely forgotten. But when it comes to their former employers' relationships with the government, at least in legal terms, their standing won't be based on ethics so much as responsibility. When the government's primary concern is keeping the phones turned on, that kind of objective assessment serves agencies well and protects their interests.