AT&T unit averts a midlife crisis

Headquarters: Vienna, Va.

Leadership: Don Herring, senior vice
president.

Mike Heath, vice president of federal sales.

John Klebonis, vice president of professional
services.

Jeff Mohan, executive director of the Networx
program office.

Major offices: Oakton, Va.; Virginia Beach, Va.;
Fairborn, Ohio; San Antonio; Colorado Springs,
Colo.; Santa Barbara, Calif.; El Segundo, Calif.;
San Diego; and Honolulu.

Ticker: T on the New York Stock Exchange.

Business: Strategic business unit of AT&T
Corp.; provides integrated information technology
solutions to the federal government
based on a portfolio of network-integration
capabilities, professional services and information
technologies.

Employees: 4,000.

Major contracts: Networx Universal, Networx
Enterprise, Satellite Services-II and Enterprise
Acquisition Gateway for Leading Edge
Solutions.

Major customers: Defense Department
clients include the Office of the Secretary of
Defense, Marine Corps, Army, Navy, Air Force
and National Guard. Other federal clients
include the Treasury, Homeland Security,
Justice, State, and Health and Human Services
departments; Social Security Administration;
Nuclear Regulatory Commission; and Internal
Revenue Service.

Failure to win a spot on a major government
contract doesn't often
become an opportunity for corporate
growth and a boon to the company's later
fortunes. But that's how some AT&T Corp.
executives view missing out on FTS 2001,
the governmentwide telecommunications
contract that is being replaced by the new
multimillion-dollar Networx contracts.

"We did not win a spot on [FTS 2001],"
said Don Herring, senior vice president at
AT&T Government Solutions. "So what did
we do? We went out and purchased another
company."

To expand its footprint in the federal government
market, AT&T acquired GRC
International Inc. in March 2000 for
$220 million. It was one of the company's
first forays into the professional services
business "and one of the best things we ever
did," Herring said. "It helped diversify our
company a little more and helped buoy our
business for a period of time."

"We were fortunate enough to have the
hindsight ? or foresight at the time ? to
buy GRCI," he said, noting the company had
the expertise to combine AT&T products
and services into solutions.

Herring said acquiring GRCI was a wise
move also because of the rapid and increasing
complex improvements in information
technology. AT&T believed government
agencies would be hard pressed to keep up
with the advances on their own, he said.

The rapid changes in technology mirrored
those at AT&T, which grew through
mergers with SBC, BellSouth and Cingular
Wireless. The reconstituted AT&T has
annual revenue of $125 billion and employs
300,000 people, about 4,000 of whom are
assigned to the federal sector.

Herring declined to disclose AT&T
Government Solutions' revenue figures
because the company does not break down
its numbers by division or percentages. "But
we're certainly in the billions of dollars."

The company ranks No. 38 on
Washington Technology's Top 100 list of
the largest government contractors with
more than $500 million in prime contracting
revenue.

Last year, AT&T gained spots on the
General Services Administration's $48 billion,
10-year Networx Universal and
$20 billion, 10-year Networx Enterprise
contracts. Herring said the dual win was
sweet vindication for the loss of FTS 2001,
and he attributes it mainly to acquiring
GRCI.

"Clearly we intend to be a growth business,"
Herring said. "Compared to a couple
years ago, we feel we're in a very good spot."

SHIFT TO SERVICES

AT&T has made a major commitment to
integrate its existing business with the systems
integration business it acquired with
GRCI, said Warren Suss, president of Suss
Consulting Inc. of Jenkintown, Pa.

"They have some very significant opportunities
to build the services side of their
business" because federal budget constraints
will erode the government's ability
to operate as its own integrator and provide
its own professional services, Suss
said. "These pressures will push them in
the direction of purchasing managed services."

It's fundamental for companies such as
AT&T to transition to a services provider
model even though federal IT spending has
waned, said Rishi Sood, research vice president
at Gartner Inc. "We have the federal
IT market slowing to about 3 percent total 37
IT growth for the next year
and a half."

Nevertheless, "network
modernization represents a
major growth opportunity for
vendors, and AT&T is well-positioned
to take advantage
of that opportunity," Sood said.

"You're seeing this shift over
to the services arena," said Jeff
Mohan, executive director of
AT&T's Networx Program
Office. He said procurement
officials "aren't buying 'stuff,'
they're buying services."

There is no such thing anymore as plug
and play in selling telecommunications to
the government, Herring said. "You can't
go in and just say, 'Let me show you what
I've got.' You really have to sit down in-depth
with multiple people so you understand
what they need."

TASK ORDERS ROLL

AT&T is seeing a lot of Networx activity
now because agencies are looking for fully
integrated solutions and for someone to
operate them, Mohan said. "We had more
RFP activity here in the past month than
I've ever seen."

AT&T's biggest Networx award so far is a
$270 million task order from the Treasury
Department to build a secure, next-generation
enterprise network known as Treasury
Network, or TNet. The award is potentially
worth $1 billion.

AT&T and its team will build a widearea,
virtual private network of voice, data
and managed Internet services that will
integrate 12 Treasury agencies, including
the Bureau of Engraving and Printing, U.S.
Mint and Internal Revenue Service.

By mid-2008, AT&T Government
Solutions had secured $600 million in task
orders, including a 10-year, $292 million
award for the Homeland Security
Department's OneNet project that will consolidate
seven wide-area networks into one
secure IP network infrastructure.

Several factors are spurring the federal
emphasis on solutions: FTS 2001 expires in
2010, and GSA has set aside $150 million to
help agencies shop for the best telecom
deals, select inventory and plan for the transition
to Networx.

Also, a directive issued by the Office of
Management and Budget in August
instructed agencies to use Networx contracts
for the IT services they now receive
through FTS 2001. The memo, from Karen
Evans, OMB's administrator for e-government
and IT, also requires agencies to provide
a cost/benefit analysis to justify any
future decisions not to use Networx for new
requirements.

"AT&T is very well-positioned to take
advantage of this opportunity," Suss said.
But he added also that the company is not
the only provider of integrated professional
services. Federal agencies have tended to
opt for the large integrators and specialized
companies when they buy professional
services, he said.

RESISTANCE PERSISTS

"Agencies don't usually change patterns
without some resistance," Suss said. "So
even though conditions favor growth for
AT&T in this area, it's not going to happen
without a lot of work."

Sood agreed. He said that although
Networx opens the federal marketplace a
little more, government users still rely on
the systems integrator community, which
has been dominated by the traditional larger
integrators.

"The long-distance companies still have
a way to go in matching some
of the relationships and some
of the thought leadership positions
that the systems integrators
have in the marketplace,"
he said.

Telecoms must segue out of
simply being viewed as long-distance
or network companies
and move into the more
tangible areas of network integration,
he said.

"It's still going to be a fairly
competitive environment for
them going forward," he said.
"Out of the bunch, though, AT&T has probably
made the greatest strides toward repositioning
themselves as a network integrator,
and has been able to overcome some of
those initial obstacles that are still plaguing
the other long-distance companies."

EMPHASIS ON CONVERGENCE

Another challenge AT&T Government
Services faces is assessing precisely what
the agency chief information officers want
in terms of new communications services,
said Mike Heath, vice president of federal
sales.

With so many applications available
today, "CIOs are really worried about delivering
those mission-critical applications to
their constituents," he said. "They want a
partner that can run the infrastructure and
bring all those pieces together."

Other telecom challenges include merging
multiple data networks on one IP backbone,
providing multiple services to an
increasingly mobile workforce and ever-increasing
security requirements. "The
common things we're hearing from the
marketplace first and foremost is security,"
Heath said.

So the growing demand for convergence
of wireless and wire lines must include
security and reliability. "The pace at which
[convergence] is happening," he said, "is so
torrid that it is the next big thing."

David Hubler (dhubler@1105govinfo.com) is
associate editor at Washington Technology.

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