CSC Marks $2 Billion Win With Silence

For Computer Sciences Corp., winning the National Security Agency's huge Groundbreaker outsourcing contract has been like catching a tiger by the tail.On Aug. 1, the day after the NSA announced it was awarding the $2 billion-plus contract to CSC, the company's stock dropped 7.1 percent to $33.54 per share. Investors had been expecting the contract to be worth $5 billion.In an apparent effort to reassure Wall Street, CSC that day issued a press release in which Van Honeycutt, the chairman and chief executive officer, said he anticipated the scope of work would grow to the expected $5 billion.Honeycutt's statement, while helping the stock rebound later, triggered confusion over the contract's real value and size. The NSA, already skittish about outsourcing key technology functions to private industry, reaffirmed the contract scope will remain in the $2 billion range, saying if the work is expanded, it will be put out for competitive bid.Following NSA's emphatic statement, CSC Aug. 2 abruptly canceled planned media interviews regarding Groundbreaker with Tom Robinson, president of the company's defense group, saying he needed to spend the day at NSA headquarters at Fort Meade, Md. Company spokesman James Sullivan informed Aug. 6 that the terms of the contract now preclude CSC from discussing Groundbreaker, and he referred all future inquiries to NSA.While neither CSC nor NSA are saying a gag order has been put in place, many industry observers believe that, following the brief dust-up over the contract's size, CSC of El Segundo, Calif., is bending over backward to demonstrate it will play by the agency's rules on the prestigious project."This is a customer who plays ... under a different set of market conditions than the typical government agency ? understandably so ? and they're going to be very sensitive to what is said in public about this procurement," said Jim Kane, president of Federal Sources Inc., a market research firm based in McLean, Va. "I suspect there are all kinds of restrictions on what CSC can and can't say."Under Groundbreaker, the NSA will outsource much of its nonmission-related information technology support in four areas: networks, telephony, enterprise management and distributed computing. As many as 750 NSA employees may wind up transferring to CSC or members of its contracting team, called Eagle Alliance, as the agency turns over IT responsibilities to the companies. The Eagle Alliance includes firms such as Logicon Inc., General Dynamics Corp., Keane Federal Systems, TRW Inc. and Compaq Computer Corp. To encourage NSA employees to transfer to the CSC-led team, they will be offered incentives, such as comparable or improved pay, benefits and career opportunities."This outsourcing partnership ... supports our transformation efforts," said Air Force Lt. Gen. Michael Hayden, NSA director. "It allows us to refocus assets on the agency's core missions of providing foreign signals intelligence and protecting U.S. national security-related information systems by turning over several [IT infrastructure] services for industry's purview."An NSA spokesperson said the recruiting effort is under way now, in advance of Groundbreaker becoming fully operational Nov. 1.Before this program, NSA tested the outsourcing waters with Project Breakthrough, a five-year, $20 million contract awarded in April 1998 to CSC, which took over daily operations and maintenance of the agency's computer systems, among other services. About 35 NSA employees joined CSC under this contract. CSC is recognized as one of the top outsourcing companies. Government contracts include the Army Wholesale Logistics Modernization project, worth $680 million. About 200 government employees transferred to CSC under this contract. Another 250 individual contractors also became CSC employees.The company also has a seven-year, $644 million contract with San Diego County to provide a full range of IT outsourcing services, including data centers, networks and desktop computers.While outsourcing is taking place throughout the federal government, Groundbreaker is significant for its size, second only to the $6.9 billion Navy-Marine Corps Intranet project. It also represents a real sea change for one of the government's most secretive agencies, tasked with tracking the communications of friends and foes alike worldwide. Both responsibilities lend themselves to the agency's institutional caution.At the same time, the climate on Capitol Hill toward the whole concept of outsourcing may be adding to NSA's caution. Just two days after the agency awarded Groundbreaker to CSC, the House Armed Services Committee directed in an authorization bill that the Marine Corps should be released from the NMCI contract, the program that could affect as many as 360,000 seats. The committee cited program delays and questioned the Navy's funding and budget strategies.The Defense Department has been moving slowly on so-called A-76 studies, which are public-private competitions to determine which services at military bases can be outsourced, with parties on both sides of the divide frequently filing protests over outcomes.And federal labor unions have their champions on Capitol Hill, where Rep. Albert Wynn, D-Md., has introduced the Truthfulness, Responsibility and Accountability in Contracting Act, legislation aimed at stopping outsourcing until the government can document both the costs and the savings associated with such programs.In such an environment, the seeming confusion over the worth of the Groundbreaker contract, combined with CSC's less-than-stellar quarterly financial results, rattled investors.While the company's revenue was up for the first quarter of fiscal 2002 ? $2.7 billion, compared to $2.46 billion in the same quarter a year ago ? net income was down significantly, to $47.7 million compared to $96 million last year. The company attributed much of the change to corporate restructuring costs on the commercial side, the need for high capital outlays on major contracts and currency fluctuations.Winning Groundbreaker didn't help the company's stock, because "CSC was seen as the odds-on favorite to win," said Robert St. Jean, a research analyst with J.P. Morgan in New York, who tracks the company. "The world was looking at the $5 billion number [and] was a little shocked at the $2 billion."The stock has since recovered its lost ground, closing Aug. 6 at $36.61.Many of those outside the agency are sanguine that Groundbreaker will be just as sweeping as initially estimated."My sense is that this thing is going to get a lot bigger before it all ends," said Tom Meagher, vice president of equity research with BB&T Capital Markets, Richmond, Va. "I see it more like NMCI, [growing to] $7 billion to $10 billion."