Contractors Suffer Blows in Budget Battle

By Lisa Corbin

August 15, 1996

The 13 continuing resolutions federal agencies endured during the budget battle earlier this year took their toll on information-technology contractors as well. For the first half of 1996, IT acquisitions ran at about 70 percent of their normal rate as government organizations postponed or even canceled all but mission-critical technology purchases. Shutdowns that

furloughed almost 300,000 federal employees also forced systems integrators to put hundreds of workers on leave. All told, the budget battle cost companies thousands of dollars a day in lost revenues.

Now that the omnibus budget appropriations bill has been passed, companies are gearing up for a bustling fourth quarter as agencies rush to spend money before the fiscal year concludes at the end of September. By the time the buying spree is over, the Office of Management and Budget predicts 1996 information-technology purchases will total $25.6 billion. (That number excludes about $25 billion for non-reportable IT items such as Defense Department command and control system components.)

Although federal spending on computer and telecommunications products this year will total roughly the same as in 1995, in real terms spending will be slightly lower. Part of the reason is that more than 30 current IT programs have been funded at 1995 levels. However, some of the biggest IT spenders-the Air Force, the Army, the Navy, NASA and the departments of Energy, Health and Human Services, Transportation and Treasury-actually reported moderate increases in spending.

Prospects are brighter for 1997, due in large part to pent-up demand and the release of new procurement-reform regulations. Although industry analysts differ on exact numbers, most agree that federal IT spending will reach at least $26 billion next year as agencies use computer systems to compensate for downsizing.

"With the number of federal employees declining and resources more scarce, there is certainly a significant incentive for the government to become a world-class user of technology," says John Koskinen, deputy director for management at OMB. "In some ways we just don't have any choice but to keep on spending money [on information technology]."

Recent initiatives have made it easier for agencies to procure commercial, off-the-shelf hardware and software. Changes in the General Services Administration's Multiple-Award Schedule (MAS) program, for instance, have enabled vendors to treat government buyers the same as private customers. Companies no longer have to obey 30-day price freezes and are allowed to offer spot pricing and special discounts to agencies. In addition, tedious review and justification procedures have been eliminated.

Contractual mandatory-use provisions are being eliminated as individual schedule periods expire and new contracts are awarded. GSA also is moving to convert all MAS contracts from one-year agreements to five-year deals with five additional one-year options. Longer-term contracts are expected to help agencies reduce administrative costs and provide continuity with the vendor community.

Maximum order limitations have been removed so that contractors can accept orders of any size. The lifting of these barriers has prompted some large systems integrators, such as PRC, to get on GSA schedules for the first time.

Government organizations now can use the MAS program to conduct indefinite delivery, indefinite quantity (IDIQ) procurements by negotiating blanket purchase agreements with multiple-award schedule vendors-thus eliminating the costs and time-consuming procedures associated with open market buys. As a result of this rule change, organizations such as the Federal Aviation Administration and the IRS recently decided not to recompete large IDIQ technology contracts. Instead, those agencies will obtain goods via the MAS program.

GSA is using multiple task orders for several IT support service procurements known as multiple award, indefinite quantity (MAIQ) contracts. Eight contractors are competing for $840 million worth of IT services on the MAIQ contracts, which are open to all federal organizations.

"Agencies doing large volume buying now can maximize discount opportunities and negotiate the best deals for their needs," says William Gormley, assistant commissioner of the Federal Supply Service's Office of Acquisition. "Blanket purchase agreements and MAIQ contracts are making procurements easier so that agencies can devote more of their resources to primary missions."

But despite significant improvements in the MAS program, agencies are still awarding sizable IDIQ contracts for computer and telecommunications products and services. Some of the larger procurements this year include the Defense Information Systems Agency's $2.5 billion Defense Enterprise Integration Services II contract, the Social Security Administration's $1 billion Intelligent Workstation/LAN award, the Air Force's $1 billion Desktop V deal and NASA's $825 million SEWP II procurement.

More IDIQ contracts are expected once GSA's Board of Contract Appeals cedes its jurisdiction over IT bid protests to the General Accounting Office's procurement law group. That change, which will occur this month, was one of many dictated by the 1996 Information Technology Management Reform Act. Some agencies-hoping to avoid lengthy protest disputes-are waiting to award big contracts until the torch is passed to GAO, which is seen as a less hostile forum because it omits the type of extensive discovery procedures used by GSBCA.

Introducing CIOs

Another development delaying some IT acquisitions this year is the reengineering of the federal information resources management infrastructure. New procurement-reform legislation dictates that all Cabinet agencies must replace senior IRMs with chief information officers, who will be responsible for rationalizing information-technology investments across enterprises. Some agencies who fear program overhauls are postponing big IT acquisitions until CIOs are named. Although all CIOs are supposed to be in place this month, more than half of the posts were still vacant in early July.

Part of the problem is that the government is still trying to define the role of the federal chief information officer. Should CIOs should be career civil servants or political appointees? Is computer knowledge a necessity or will good management skills suffice? And should the post be combined with other positions such as chief financial officer?

The interagency Chief Information Officer Council recently developed a methodology for helping agencies recruit CIOs. Duties of a CIO, according to the council, should include strategic planning, budgeting and development of performance measures for information-technology programs.

Responsibility for reviewing those performance measures now falls to OMB, which took over IT oversight responsibilities from GSA when the 30-year-old Brooks Act was repealed earlier this year. Although agencies still have to comply with governmentwide technology and security standards, they are largely free to buy what they want without getting permission from a central authority. The only catch is that agencies now must tie strategic plans to budgets and set up qualitative performance measures for those investments. Projects that fall more than 10 percent behind performance targets may be halted by OMB.

Many observers inside and outside government predict agencies will have a tough time learning to treat IT budgets as if they were capital investments-especially after decades of centralized oversight. Few federal organizations have experience in designing performance measures for gauging the impact of information technology on core missions. The consensus, however, is that the time has come for agencies to be accountable when it comes to IT spending.

"Although federal information-technology obligations now total at least $25 billion annually, what the government is getting in return for these expenditures in unclear," says Christopher Hoenig, director of GAO's Information Resources Management/Policy and Issues Group. "Real opportunities exist to boost organizational performance, but the risk of failure is ever present and must be vigorously managed to ensure success."

GAO has called for disciplined management processes combined with a shift to procurements involving more off-the-shelf commercial products. The agency also favors smaller projects, since they cost less and are easier to monitor. Some agencies even are moving to fee-for-service programs, which provide fresh revenue to supplement dwindling appropriations.

Efficient IT Procurement

The Federal Acquisition Streamlining Act (FASA) of 1994 encouraged agencies to try innovative procurement methods such as "best-value" source selections, which have been heartily endorsed by the National Performance Review. Instead of awarding contracts solely on the basis of low price, agencies now are considering other factors such as past performance, management capabilities and technical superiority. They also are using performance-based specifications instead of detailed specifications that designate exactly the type of technology to be used.

"By letting vendors define requirements, agencies are getting cost-effective solutions for their mission-critical systems," says Gary Murray, chief executive officer of Sylvest Management Systems Corp., a federal systems integrator. "After all, the success of companies is predicated by the success of agencies."

Results from FASA-based reforms have been promising. Agencies are procuring IT products and services faster and more efficiently, with more emphasis on customers and less obsession with risk. The Transportation Department's new $1.1 billion Information Technology Omnibus Procurement, for instance, was awarded in only four months.

Both the Air Force and the Social Security Administration have been experimenting in recent IT buys with a new procedure known as "two phase advisory down-select." Using this method, contracting officers rely on vendor qualification statements and site visits. Bid evaluations are based on oral presentations and prototype demonstrations instead of lengthy written reports.

Organizations such as the Environmental Protection Agency and the Navy are doing paperless procurements by processing contracts on-line. EPA completed one complex information-technology procurement in less than nine months-compared to two years under the old system. The agency estimates that electronic procurement saved more than $114,000 in paper costs and postage on that contract alone.

The Federal Aviation Administration is using Integrated Product Teams for its IT procurements. With this innovative approach, contracting officers work closely with planning, program, legal and management staff-as well as users. The FAA predicts the team concept will reduce procurement times by 50 percent and save the agency at least $200 million over the next three years.

Some of the most dramatic procurement reforms are still to come. OMB's Office of Federal Procurement Policy, in conjunction with the Federal Acquisition Regulation Council, is rewriting sections 12 and 15 of the 1,600-page Federal Acquisition Regulation (FAR), the blueprint for federal procurement. By revising these sections, which cover competitive contract negotiations, OFPP hopes to explicitly authorize innovative source-selection techniques-such as oral presentations-that encourage a more open exchange of information among buyers and sellers.

"We have no choice but to continue to move our acquisition system from an obsession with process to an obsession with delivery of results," says OFPP administrator Steven Kelman. "The best is yet to come, because proposed regulations are very aggressive."

Hardware and software companies are concerned, however, about future procurement reforms, especially in the area of bid-protest procedures. The Industry Coalition on Information Technology recently was created to develop industry positions on new legislation such as the IT Management Reform Act. The group hopes to influence government acquisition procedures.

"The biggest problem from the contractor's point of view is the size of the investments and the time it takes to do government procurements," says Edward Hammersla, executive director of federal operations for Informix Software. "In the federal world, we don't begin solving the problem until the procurement process is complete, by which time the technology could be outdated."

This year Congress will lose two of its biggest champions of information technology and procurement reform when Sen. William Cohen, R-Maine, the head of the Senate Governmental Affairs subcommittee on oversight of government management and Rep. William Clinger, R-Pa., chairman of the House Government Reform and Oversight Committee, retire from public service. There are no IT or procurement experts in line to replace them, so the next generation of IT overseers faces a steep learning curve.

Consolidating Data Centers

One of the priorities of those overseers will be supervision of federal data center closings. The Office of Management and Budget has directed agencies to cut the number of data centers from 205 to less than 100 by June 1998. Some of the small and mid-size processing centers will be consolidated, while many government mainframe operations will be shut down entirely.

OMB's revised Circular A-76 on "Performance of Commercial Activities" advises data center directors to benchmark their operations with private-sector processing centers. Those cost comparisons are expected to help directors decide which centers to retain. Workloads from closed centers will be handled by interagency service agreements or farmed out to contractors.

GSA's Federal Computer Acquisition Center plans to issue a final solicitation this month for at least three 10-year IDIQ contracts to provide civilian agencies with mainframe round-the-clock processing support. Each outsourcing contract is expected to support about 10 clients.

These "virtual data centers" will represent one more step by the government toward privatization. The Electronic Industries Association estimates that outsourcing accounted for two-thirds of all federal spending on information technology last year. And that trend is likely to continue as lower budgets force agencies to contract out computing operations that are not mission-critical, such as payroll.

Agencies doing the most outsourcing this year include the Air Force, Army, Navy and the Health and Human Services, and Transportation departments. The IRS is hoping outsourcers will help it resuscitate its $8 billion Tax Systems Modernization project, which was the subject of a scathing GAO report recently.

One of the most prevalent outsourcing jobs this year will be labor-intensive date conversions required to solve what's become known as the year 2000 (Y2K) problem. On Jan. 1, 2000, six-digit date fields in computer programs will read 01-01-00-causing machines to interpret the date as Jan. 1, 1900, instead of Jan. 1, 2000. This misinterpretation will cause computers to crash or to make costly and potentially dangerous miscalculations unless dates are re-written on mainframe computer code.

Likely candidates for Y2K outsourcing are small, disadvantaged firms that qualify for the Small Business Administration's 8(a) program. Since the deadline for fixing year 2000 problems is a short time away, agencies will not want to waste time. One way of sidestepping time-consuming bidding practices is to award sole-source contracts directly to minority-owned companies.

Internet projects will also be candidates for outsourcing. As agencies continue to offer World Wide Web sites to the public-more than 1,000 at last count-they will need help setting up home pages and integrating appropriate networking hardware and software. Electronic commerce systems incorporating electronic data interchange and other technologies also will require a high degree of systems integration and outsourcing.

Other hot information-technology areas this year are "intranets"-types of internal Internets-and imaging and workflow products. In an effort to produce performance-based measurements, agencies also are expected to purchase financial-management software that can relate budget numbers to program strategies.

"Agencies will depend heavily on information technology as they reengineer their organizations to become more results oriented," says Robert Deller, director of market-research services at Global Systems and Strategies. "IT is the facilitator for better service at lower cost."


By Lisa Corbin

August 15, 1996

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