The Army has turned to the private sector to solve its logistical nightmare of scrapping an aging supply-chain computer system and designing a new one.

"We used telephones and the fax machines because the system was not fast enough. We could not trust the system to do the work in time, so we circumvented the system," says Pierson.

For the most vital supplies, she says, inventory clerks traveled overseas with shipments, providing real-time updates on their progress via telephone and immediately letting managers back in the United States know when a critical order made it to the field. The clerks couldn't update the inventory records on the logistics computer system until they returned, she says.

"When [the logistics computer system] was developed 30 years ago, it was the premier system for the Cold War but it doesn't support the more agile force of today," says Pierson. That lament has become common among Army leaders, inventory clerks and managers who track the Army's worldwide flow of $9 billion in weapons and other supplies and $4 billion in spare parts each year.

Like many agencies, the Army is struggling with computer systems that have fallen generations behind rapidly evolving commercial technologies. In the balanced-budget era, agencies often sacrifice information technology overhauls in favor of other spending priorities, such as maintaining staff and programs. For the Army, buying new weapons and other equipment has taken precedence over modernizing the IT hardware and software that track those supplies.

Even agencies that have invested in upgrades have found new systems are not always a panacea. To operate updated systems, agency managers must find the time and money to retrain in-house IT workers or find the dollars to lure new IT specialists to the government in a tight labor market. After fielding a new system, agencies must plan for future software and other technology upgrades if they want to keep pace with commercial companies.

The Army's supply chain is composed of two aging mainframe computer systems (the Standard Depot System and Commodity Command Support System) that use software written in 1970s computer code and require complex methods to communicate among thousands of separate tracking and ordering programs. The system's greatest weakness is that information is not updated in real time, but rather every few days. Inventory managers never precisely know stock levels and cannot accurately track shipments. Also, they must call in technical support personnel to perform in-depth data analysis.

Now, after years of patchwork repairs and underfunded modernization efforts, the Army will have a new supply chain system by 2004. The Army's new system will borrow from the latest commercial processes and technology used by many Fortune 500 companies for up-to-the-minute tracking of inventories and shipments and sorting through data for trend reporting and other analysis. All Army supply chains will operate on one system, and eventually the system will be linked with those of commercial vendors for electronic purchasing.

"We need to have a system to manage logistics, but building and maintaining software is not a core competency of the Army. There are a whole lot of folks in industry capable of doing that," says Army Maj. Gen. Charles Cannon, the service's acting deputy chief of staff for logistics. As a result, the Army did not take a traditional approach to modernizing its supply chain but instead blazed a new trail that other agencies are expected to follow as they face large-scale IT overhauls. The Army decided that buying equipment, retraining workers and hiring new ones was too costly and would not provide the best possible supply-chain operations. So, the Army instead chose to lay off the workers who maintained the system and hired Computer Sciences Corp. (CSC) of El Segundo, Calif., to design, build and operate a new supply-chain system over the next 10 years for $680 million. The Army's Wholesale Logistics Modernization contract, also known as Log Mod, marks the first time an agency has outsourced the entire modernization and operation of a major IT system.

"Agencies and companies have watched this contract as a bellwether for future outsourcing. If this had not gone through, people would not have thought IT outsourcing had much of a future. This shows it does," says Phil Kiviat, president of the Kiviat Group, an information technology consulting company in Potomac, Md.

Agencies increasingly have outsourced IT services, like desktop support and some software design, over the past five years. But the Army's Log Mod contract is the first to turn over all IT operations for a specific function to a contractor.

The Army's Log Mod program is a case study in the financial, personnel and technological challenges agencies face in modernizing IT systems. While technologies and their uses may differ, any agency manager can learn from the Army's experience how the service reached its decision, crafted a soft landing for its workers and structured a unique performance contract with CSC.

How It Happened

For much of the 1990s, the Army wanted to overhaul its logistics systems, but the Pentagon withheld money from all the services for logistics systems modernization because DoD officials wanted to develop a single, joint system. But by 1997, that effort, spearheaded by the Joint Logistics Service Center in Dayton, Ohio, had failed due to unique service requirements, service rivalries and immature technology.

"It's different to provide logistics automation for a ship than it is for a battalion moving around on a battlefield," Cannon says. Once the joint program was scrapped, the Army reviewed its alternatives for modernizing its own system, he adds.

The Army settled on three options and a price tag for each. Costs for the following plans were calculated over 10 years:

• Keep the work in house by having federal employees maintain the old system and develop a new one ($581 million).
• Form a partnership with a contractor for a new system while using federal workers to maintain the existing one ($425 million).
• re a contractor to maintain the old system and develop a new one ($420 million).
• Operating and maintaining the current system costs the Army about $40 million annually, says Paul Capelli, Army program manager for the wholesale logistics modernization program. He declines to offer a savings figure for operating the new system, saying the Army is more concerned with improving service. An April 1999 analysis for Business Executives for National Security, a defense lobbying group in Washington, predicted the service could save as much as $4 billion over 10 years by cutting its inventory with better tracking technology.
  

With the bulk of modernization funds earmarked for buying tanks and missiles and developing future weapons, the Army went with what it calculated to be the best bargain: contracting out the logistics system. But the Army turned to the private sector for technological reasons, as well.

"We decided to pursue a service agreement with industry and the onus is on them to keep it state of the art from a hardware and software point of view," Cannon says. The Army's contract does not spell out specific technologies or processes CSC must use, but includes broad performance parameters and requires CSC to use the latest commercial software, hardware and technological processes. The Army's technical workers were not well-versed in the latest technology and training them would have proved too expensive if the system had been modernized in-house, Cannon says.

Waiving A-76

Among the obstacles agencies face in outsourcing work, including IT projects, are governmentwide federal privatization rules and personnel regulations. Those rules give all federal workers the right to compete for their jobs and keep them if they can do the work for a better price than the contractor. Also, the personnel laws set strict guidelines for laying off employees and require agencies to receive congressional authority to offer buyouts. (For several years, DoD has had authority to offer such lump-sum payments to employees who agree to resign).

Many agencies are reluctant to outsource because of those rules, which can be time-consuming and costly to follow. The Army however, has found what will likely be a widely copied method for avoiding competitions and still outsourcing IT work.

The Army took advantage of a 1996 change in federal rules that permitted waivers of the requirement for a competition between government workers and a contractor before outsourcing. In 1996, the rules outlined in Office of Management and Budget Circular A-76 were changed to allow agencies to waive competitions if employees could not reasonably compete.

As a result, the Army did not have to hold a competition for the 460 federal software writers and other technical support personnel at software design centers in St. Louis and Chambersburg, Pa., who had upgraded, maintained and operated the logistics system since the 1960s.

"It was clear that commercial technology was better and the use and approval of a waiver would compress the cycle of going through an A-76 competition and subsequent appeals," says retired Army Gen. Johnnie Wilson, head of Army Materiel Command from 1996 to 1999.

The Army is the first agency to waive an A-76 competition. And not surprisingly, the move ran into stiff opposition from the National Federation of Federal Employees labor union chapter in St. Louis (workers in Chambersburg were not unionized). "We weren't against modernization ... What we were against was the fact that we couldn't compete against the contractor under A-76 rules," says John Morris, the St. Louis NFFE president.

The union first appealed to Army officials to scrap the waiver and hold a competition, but that idea was quickly rejected. Out of administrative options, the union sought to halt the contract award in federal court, but that too was rejected. With threats of more litigation and pressure from St. Louis-area congressmen (Rep. Richard Gephardt, D-Mo., and Rep. James Talent, R-Mo.), the union got the Army to the bargaining table last spring to hash out a soft landing for the 460 workers. "It was not the people's fault we were moving toward privatization. We owed them a soft landing," says Wilson.

The Army, CSC and the union settled on a deal for civilian employees. Those employees were guaranteed similar jobs at CSC-at the same location with comparable pay, benefits and retirement programs-for at least three years. Laid-off employees who elected to work for CSC received $15,000 signing bonuses.

Ken Auck, CSC's site manager in St. Louis, says the contractor cannot maintain the current system while it builds a new one without hiring the former federal workers. "We have a major logistics system to maintain. We need their backgrounds and skills. As we develop the new system, we will teach them the new technologies to operate it," says Auck.

The soft-landing package is similar to one the National Security Agency offered 50 of its information technology support workers whose jobs were outsourced under a five-year, $20 million service contract with CSC beginning in 1997. But at 10 times the size of that deal, the Army's package is the largest offered by any agency.

"Anybody who wanted a job, got a job," says Capelli. Of the 460 employees, 77 remained at St. Louis or Chambersburg as federal employees to monitor the contract; 214 were laid off and got $15,000 bonuses when they accepted jobs with CSC; 82 took early retirement and received $25,000 government buyouts; and 87 accepted jobs elsewhere in the federal government.

"Since we had to take a deal, this was a good deal to take," Morris says.

Decisions, Decisions

Among the more than 20 employees in St. Louis and Chambersburg who spoke with Government Executive, most believed they were offered a fair deal and that the Army and CSC clearly explained their options. However, employees' reasons for leaving or staying with the government were varied.

Phil Harkins could have stayed on as the government's top program manager in Chambersburg, but he decided to retire early from his $102,000-per-year federal job because he had topped out as a GS-15 and wanted greater job flexibility. Now, Harkins is a senior manager for CSC at Chambersburg but works only 30 hours a week at the same hourly rate he was paid by the government. "With my federal retirement benefits and what CSC is paying me, I'm quite a bit ahead of where I was," Harkins adds.

Others, like Jim York, a GS-14 project manager in St. Louis, who could have retired early with 28 years of federal service, chose to keep getting paychecks from the government. "I was concerned that CSC management would be under pressure to make the operations profitable and foresaw extra hours if I worked for them," York says.

Susan Bender, 41, a GS-11 computer analyst at Chambersburg, decided to work for CSC despite being offered a federal job with comparable pay at a facility about 45 minutes away. A longer commute was a key factor in turning down the government job. But, Baker says, CSC's offer of additional training and education-including college tuition reimbursement-also helped sway her.

After nearly three decades at the St. Louis facility, Bob Eufinger, a GS-13 system analyst retired early from the government and went to work for CSC, seeking more responsibility and promotion potential. So far, he's gotten both by overseeing software projects in both St. Louis and Chambersburg. "I am moving in higher [management] circles now and talking with folks who are able to effect change," Eufinger says.

Making the Transition

After CSC won the contract in December 1999, company officials worked on site in St. Louis and Chambersburg to ensure a smooth transition when the contract took effect July 1. But while the contract has caused few changes for inventory managers and depot operators who use the system in the field, software support employees are still adapting to new roles as either corporate employees or government contract administrators.

"In the government there's a specific set of rules and way of doing things. There's a transition former government employees have to make to the corporate way of doing things," says Harkins. For example, former government employees contacted whoever was necessary when software problems arose, but now with a contract in place there are restrictions on who can do the work and when it can be done, he says.

Marcie Key, a computer scientist in St. Louis who opted for early retirement and now oversees a support team of 11 CSC employees, says some workers are struggling to adapt to a corporate culture focused on making money. As federal workers, the support staff fixed technical glitches as they arose, but now as CSC employees, they propose software upgrades before breakdowns so CSC can increase profits, Key says.

"We are now soliciting work, instead of receiving it. We have to be proactive to get money from our users. Many of [the former federal workers] will adjust; some will not adjust at all. Some are just waiting until their time is up [to retire]," adds Key, noting that employees are guaranteed jobs for three years, but they still can be fired for poor performance.

As for the remaining federal workers, some still are learning their new jobs.

For the past two decades, Cindy Adams worked in Chambersburg as a management systems analyst overseeing the testing of new software programs. Adams elected to remain with the government but she says her new job, as a GS-12 personnel specialist overseeing employee appraisal and award programs for those remaining on the federal payroll, has nothing to do with her past duties. "I think I may like it in the future but I don't like the idea of changing jobs after a long career. Nothing I do now relates to my previous job," Adams says.

But Dave Bubak, an Army systems analyst in Chambersburg, says his main duty so far is training contract workers to perform his old technical support job and providing them backup as needed. "If we were given the same training and hardware as the contractors, we probably could have modernized the system a lot cheaper and faster," he adds.

Next Steps With the transition complete, CSC is now selecting a contractor to develop the brains of the new supply chain system-enterprise resource planning (ERP) software. Top ERP vendors, Oracle and SAP, are competing to provide the Log Mod software under a contract being awarded this fall.

ERP software creates a single, integrated online management system for an agency or organization's functions. For example, with ERP software, an agency can conduct personnel, financial and inventory transactions on one system rather than several. "ERP is great for agencies who are choosing not to take a stovepipe view," says Barbara Bleiweis, director of federal sales for SAP in Newton Square, Pa.

Donna Sites, a planning manager at the Army's Letterkenney Depot in Chambersburg, says a common software system is needed because the service's current IT management system for depots (the Standard Depot System) is really three separate computers that do not easily share information. The same data are often entered into each system to reconcile planning and tracking information, she says. "With the new system, there will be no need for reconciliation," says Sites.

Wave of the Future

With a tighter federal budget and rapidly evolving technology, the Army is the first, but probably not the last, agency that will modernize major IT systems through outsourcing.

"All of DoD is watching this effort. If this proves to be successful, this will be the approach taken by the other services as they divest themselves of logistics automation systems. Once it's proven in logistics, it could expand to other systems," says Cannon.

Joanne Connelly, vice president of Federal Sources, an IT market research company in McLean, Va., says Log Mod is yet another example of the government adopting commercial business practices. Commercial companies are increasingly outsourcing IT work and providing soft landings for laid off employees, she says.

"Agencies are going back to basics and focusing on their core missions. If an agency's core mission is not running a huge system, then they will pursue outsourcing," Connelly says.

Paying for Results

The Army's Log Mod program not only blazes a new trail in outsourcing information technology work but also breaks ground in how agencies negotiate performance-based service contracts.The Army recently hired Computer Sciences Corp. under a 10-year, $680 million contract to develop and operate a new information technology system for managing the service's multibillion inventory of weapons and other equipment. The service eliminated more than 400 IT support jobs under the outsourcing initiative but guaranteed most of those workers jobs with CSC.

"Our approach was built around adopting commercial business practices and moving with the marketplace. We did not want to buy an off-the-self system and make it into our own legacy system," said Larry Asch, Army business manager for Log Mod.

As a result, the Army did not give vendors detailed system requirements or performance goals when it sought bids for the work. Instead, the service asked vendors for performance goals and a price for a supply chain system that the Army could use. Once the Army got the bids, it negotiated with the two top vendors (CSC and Lockheed Martin of Bethesda, Md.) over the proposed measures, then settled on a performance-based contract that tied contractor payments to meeting those goals.

"Traditionally, agencies put all the performance measures in a solicitation and a contractor accepts them. They were never negotiated," says Steven Kelman, former administrator of the Office of Federal Procurement Policy, who worked as a consultant for Lockheed Martin on the contractor's Log Mod bid.

Kelman says the Army is the first agency to take advantage of a 1997 change in the Federal Acquisition Regulation that allows agencies to negotiate over performance measures. In the past, agencies could not bargain over performance measures as long as contractors met the requirements spelled out in the initial contract solicitation. The rule change expands agencies' bargaining power, Kelman adds.

The Army used the bargaining measure to push for more stringent performance goals, Asch says. For example, CSC proposed achieving 80 percent customer satisfaction with the new system's data processing service based on subjective user evaluations. The Army, however, pressed the contractor to agree to a 95 percent approval rating. In other cases, the Army successfully bargained to extend system warranties from one to several years. "Bargaining allowed us to negotiate the way they do in the commercial world, where everything is on the table," Asch says.

Jeff Plotnick, vice president and general manager of CSC's defense group, says contractors prefer negotiating to getting lists of specific federal requirements. "We came up with a recommendation, they came back with theirs, and we landed somewhere in the middle," says Plotnick. The performance measures are critical because they determine how much money CSC will make on the contract. About 75 percent of the contract dollars will be paid only if goals are met. "If they don't meet the minimum performance, they don't get the money," says Asch, adding that the Army pays CSC annual bonuses if goals are exceeded.

The contractor will be judged on both objective and subjective performance criteria, Asch says. Some objectives involve inventory turnover rates, fill and ship order rates, order accuracy and equipment availability. Subjective evaluations will weigh training effectiveness and user satisfaction in areas like troubleshooting and data availability. Kelman says agencies are increasingly putting performance measures into contracts, but the Army's approach is unusual because it penalizes contractors for not meeting goals. "The Army is focusing the contractor on product improvement. The Army wants to pay for results-not just effort," he adds.