IRS Success Puts CSC on Cutting Edge

By Nick Wakeman, Staff WriterWinning the Internal Revenue Service's multibillion-dollar prime integration contract puts Computer Sciences Corp. and its teammates in the top tier of companies with expertise on newer, performance-based deals with government agencies. If they deliver, that is."Strategically, this is a great win for that team. The companies on CSC's team want to be seen as innovators and on the cutting edge in the government market. This is the kind of work they want to be known for," said Linda Cohen, an analyst with Gartner Group, a research firm in Stamford, Conn.The contract to modernize the agency's IT systems and business processes could stretch out for 15 years and is potentially worth $8 billion to the El Segundo, Calif.-based integrator and its partners. They are: IBM Corp., KPMG, Lucent Technologies, Northrop Grumman Corp., Science Applications International Corp. and Unisys Corp.Part of CSC's compensation will be based on the efficiencies gained by the new systems under what is being hailed as the first performance-based contract in the federal government, said Cohen. If successful, this approach is sure to be emulated by other government agencies, and the companies on the CSC team will be able to leverage the IRS win to go after that work, she said.Losing bidder Lockheed Martin Corp. of Bethesda, Md., which led a team that included Arthur Andersen and Electronic Data Systems Corp., was left licking its wounds. Several sources said Lockheed Martin's bid was foiled because its price was too high, while others said the CSC team was simply too strong. The CSC team's ability to bring best commercial practices to bear at IRS and the past performance records of the team members also tipped the decision in CSC's favor, officials said.There was talk that the Lockheed bid was 35 percent to 50 percent higher than that of CSC's, although nobody at CSC, Lockheed or IRS would confirm those numbers. "We felt we put forward a compelling proposal," said Lockheed Martin spokesman Dan Cotta. He acknowledged that price may have played a role, but said other factors also had an impact.The government gave the greatest weight to technical proposals and past performance in grading the teams' proposals, IRS officials said. Other key areas were their business approach, customer service proposals and management approach.Following the IRS prime announcement, senior Lockheed Martin officials met to discuss the loss of the IRS contract and steps the company can take to avoid future losses. Lockheed Martin is expected to announce a reduction in staff soon at its Bethesda, Md., headquarters and re-evaluate its approach to large-scale IT bidding, sources said.Cotta acknowledged that Lockheed Martin is looking for ways to cut internal costs, but said such moves are unrelated to the IRS loss.Analysts speculated another strike against Lockheed Martin may have been its involvement on teams that ran into trouble on earlier projects to modernize IRS computer systems."Maybe the IRS thought it was best to bring in new blood," said Moshe Katri, an analyst with the investment banking firm Warburg Dillon Read of New York."Clearly, this is one of the most prestigious jobs ever awarded to us," said Donald Brown, a vice president and program manager of CSC's IRS team. The company's strong team and its partnering approach to the IRS project were deciding factors in the competition, said Brown."We recognized from the beginning that the IRS doesn't have an IT problem, but a business problem," said Brown. "I think that distinguished us from our competition." In the end, some of the services, such as management consulting and business process re-engineering, that the CSC team brings to IRS may not even have IT elements, he said.The IRS, which is notorious for its problems with executing information technology projects, decided to take a new approach when developing this contract. Over the life of the contract, CSC will be responsible for finding and managing the contractors that will revamp IRS IT systems and processes.A final request for proposals for the prime contract was held up several times last year as newly installed IRS Commissioner Charles Rossotti put his personal imprint on the contract. Rossotti is the former chairman and a co-founder of American Management Systems Inc. of Fairfax, Va. "Before he came, it looked like more of a body-shop contract," Cohen said.Many industry officials believe the first 12 to 18 months will be crucial to the success of the IRS contract. Because of past IRS failures, the prime contract will get a lot of scrutiny from Congress, but this could work in the team's favor, Cohen said.If they can make some significant steps in the first year, Cohen said, "Congress will look at the other agencies and say, 'Who's next?' " CSC's strategy will be to spend the next six months building its management infrastructure at the IRS. "We want to get the project under control before it gets out of control," Brown said. CSC officials would not estimate how many people will work on the contract. As part of forging a close working relationship with the IRS, the company will have a seat on the agency's executive steering committee during the life of the contract. "This is not the typical customer-client relationship," Brown said.While CSC puts its management structure in place for the IRS prime contract, the IRS is scheduled to complete its year 2000 date code fixes. CSC, which began work immediately on the contract, already has identified electronic tax administration as an early project to be tackled in the second six months of the contract, Brown said. This work includes better Internet access to the IRS for electronic filing and making payments, he said. "This is a performance-based contract, so we need to look for ways to invest and [quickly] get a return on that investment," he said. Managing this contract will be a challenge, but top management at IRS has considerable systems integration experience, said William Loomis, an analyst with Legg Mason Inc. of Baltimore. In addition to Rossotti, the IRS' chief information officer, Paul Cosgrave, is a former partner at Andersen Consulting and was president and chief executive of Claremont Technology Group.Rossotti and Cosgrave have an understanding of what is a reasonable requirement, and they understand that both the IRS and CSC have to win, Loomis said. "That mentality will be very helpful going forward."The agency is "really stepping out into uncharted waters," said Robert Dornan, senior vice president of the market research firm Federal Sources Inc. of McLean, Va. "This will take a real good-faith effort from both IRS and the contractor."The win is a definite lift for CSC, which has struggled to win large contracts, analysts said."They haven't won such a large contract is two years," Katri said. "This re-establishes them as a global vendor. ... The worry wasn't that CSC wasn't capturing contracts, but they weren't capturing the larger contracts."CSC also beat one of its primary competitors, Electronic Data Systems Corp. of Plano, Texas, a major player on Lockheed Martin's team, Katri said. That victory probably has been balanced out by EDS' win over CSC for a large IT outsourcing project with the state of Connecticut. (See story, page 1.)CSC had been lagging behind both EDS and IBM in major contract wins, Loomis said. "CSC needed a big win," he said.That Lockheed Martin lost was not a complete surprise to analysts following the company."I never expected them to win, because it was so important to CSC to win," said Peter Aseritis, an analyst with Credit Suisse First Boston in New York. "IT really is a secondary focus for Lockheed Martin."