Three contractors on the hot seat

For three top-tier government contractors ? the Boeing Co., Computer Sciences Corp. and Electronic Data Systems Corp. ? the new year provides a chance for correction following an unpleasant end to 2003.All three are ranked in the top 10 of the Washington Technology 2003 Top 100 federal prime contractors, but each found itself grappling with major problems on high-profile contracts that brought unwanted publicity and criticism.CSC was criticized for its handling of major contracts with the IRS and FBI. EDS continues to struggle with the financial consequences of winning the Navy-Marine Corps Intranet contract three years ago. And Boeing found itself under scrutiny for ethical lapses that cost it a $1 billion contract.That's not to say 2003 was all doom and gloom for these firms. CSC, for instance, bought DynCorp, itself a major government contractor, for $950 million. The company won a spot on the $3 billion Veterans Affairs IT support contract and was chosen for a $300 million defense integration and engineering support contract, to name just two wins.EDS won several state-level Medicaid contracts, some of them recompetes in which the company was the incumbent. The company also became a subcontractor on a major Education Department student loan project, worth $180 million over the next five years.On Dec. 29, Boeing announced it won a multiyear contract valued at $8.6 billion to produce an additional 210 F/A-18 Super Hornet jets, and a $1 billion contract for system design and development of the EA-18G airborne electronic attack aircraft. The company also snagged a desirable pilot project for the Port Authority of New York/New Jersey to test ways to protect ports, ships and cargo from terrorist attacks.Nevertheless, industry officials and analysts said each of these companies must tackle a unique set of problems that soured the last months of 2003. Hungry competitors are waiting in the wings if they fail. BEATING BAD PRESSDespite a pretty good year that included major contract wins and the DynCorp acquisition, El Segundo, Calif.-based CSC found itself the public whipping boy on two important government contracts.In November, the General Services Administration announced that CSC would miss a December deadline on Trilogy, the FBI's long-awaited agencywide IT upgrade program. A GSA spokeswoman said the agency issued the announcement -- a move it rarely makes -- because of "the serious nature of the work at issue." The cost to complete the program also is increasing, according to media reports, from $380 million to $626 million.Without discounting CSC's responsibilities to the program, some industry observers said they think the GSA announcement was designed to deflect criticism of the FBI's performance on the contract.A senior industry executive familiar with the Trilogy project said the FBI awarded the contract to DynCorp in May 2001, then threw out the original plan in the aftermath of the Sept. 11 terrorist attacks and never restructured the program to take into account the new demands. GSA and the FBI had plenty of warning that the program was in trouble, he said, but no one was willing to carry the news up the management chain.Bob Woods, former commissioner of GSA's Federal Technology Service, the agency that issued the press release about Trilogy, said he could not remember any other instance in which GSA called attention to a contractor missing a deadline."That's usually not stuff you do that way," said Woods, now a consultant to government contractors. "That's not been [GSA's] style. If they've got a problem, they call and let you know it. [The announcement] would imply to me there was something more to it; it could very well be a push from the client agency to do it.""In high-profile contracts, it's important to recognize the degree of difficulty associated with the task," said Jamie Sullivan, a CSC spokesman. "That certainly doesn't excuse cost overruns or missed deadlines, but seldom are these problems solely related to lapses on the part of the contractor. I think it's important that we recognize that all parties associated with these programs share some responsibility for their progress."Shortly after GSA's Trilogy announcement, the IRS Oversight Board issued a report critical of the agency's IT modernization program. The IRS has struggled for years with the modernization effort, and eight of the board's nine recommendations were aimed at problems with the agency's performance, not that of CSC. But it was a lengthy story in the New York Times about CSC's work on the IRS project and whether the company's contract would be canceled that garnered all the attention. Cindy Shaw, an analyst with SoundView Technology Group of Greenwich, Conn., was not alarmed by the negative stories about CSC."With any of these large contractors, you're going to find some contract that didn't work out," Shaw said. "This is [the IRS'] third pass at it. You have to think each time the system gets more antiquated, and CSC gets more of the benefit of the doubt." ETHICS CHALLENGESBoeing's troubles began in May when reports surfaced that two employees of the Chicago-based company had obtained thousands of pages of proprietary Lockheed Martin Corp. documents during a 1998 rocket contract competition between the two companies. Two months later, the Air Force stripped Boeing of about $1 billion in contracts after confirming that the documents had been obtained improperly.The next major blow came when an Air Force contract worth up to $21 billion began to unravel. The plan to lease 100 new aircraft tankers to the service was felled by ethical questions raised when Pentagon officials learned that Darleen Druyun, the Air Force's senior civilian acquisition officer, negotiated with Boeing for a job while she was working on the leasing deal in 2002.In November, the company fired Druyun and Michael Sears, Boeing's chief financial officer who hired her. Phil Condit, the company's chairman and chief executive officer, resigned Dec. 1.The leasing deal was scaled back and now is on hold, while the Pentagon investigates the circumstances of the lease contract negotiations and possible ethics violations in Druyun's hiring. The company's revenue through the first three quarters of 2003 was $37.3 billion, down 8 percent from the same nine months of 2002.All of this will loom over the company in 2004 as it scrambles to demonstrate its commitment to ethical conduct.Paul Nisbet, principal at JSA Research, an aerospace market research firm in Newport, R.I., said Boeing's problems are more perception than real. The leasing contract that was finalized with congressional approval in the fall bore no resemblance to the initial draft proposed, nor was it handled by Druyun and Sears, Nisbet said.But it won't be smooth sailing. The Pentagon is conducting an investigation into the contract award, and many congressional supporters may be leery of backing the program with so much negative publicity attached. Boeing is responding to the ethics concerns. The company created an office of internal governance that reports to the president and CEO. It also requested outside reviews by two separate teams, both which concluded the company did not suffer "systemic problems," said spokesman Dan Beck.The external reviews made recommendations for improving the company's ethics policies and procedures, such as strengthened employee training, updating the company's guidelines and taking steps to safeguard employees who use the company's ethics hotline."We're in the process of addressing those recommendations quickly and comprehensively," Beck said. "There are things we could be doing better to restore the confidence of our customers and the general public."CONSEQUENCES OF NMCIThe challenge facing EDS is managing cash flow until the $8.8 billion NMCI project becomes profitable. The single biggest problem with NMCI, which the company won in October 2000, was that neither EDS nor the Navy knew the full scope of the challenge. The discovery of thousands of legacy applications on obsolete computers vastly complicated the project.So far, EDS of Plano, Texas, has had to invest about $2 billion of its own capital to get NMCI off the ground, said Bill Loomis, managing director of the technology research group at Legg Mason Wood Walker Inc. Because the contract is performance-based, the company has yet to recoup any of that investment."NMCI is an incredibly large contract [and] it continues to tie up cash flow," Loomis said. He and other analysts predicted that the company would not make a profit on NMCI for at least another year.One industry executive familiar with EDS said the cash-flow crunch also has limited the company's ability to participate in acquisitions, which further limits its ability to compete.EDS has suffered other blows as well. In December, the company lost the recompete of a contract for outsourced IT services to the U.K.'s Inland Revenue, a project on which EDS had been the incumbent since 1994. Also in December, Tennessee began withholding daily payments to EDS after the company missed a Dec. 1 deadline on a new TennCare computer system. And in Australia, the company lost a recompete for business continuity services to the Commonwealth Bank of Australia.EDS spokesman Kevin Clarke dismissed any concern about the direction of the company. "I don't think anything is going on," he said. "The government business is highly competitive. I don't think you can say there's a trend."The company's revenue for the first three quarters of 2003 is barely down compared to the same time a year ago -- less than 2 percent. The figures also reflect the ongoing softness in EDS' commercial markets.None of the analysts said they could foresee any drastic actions that EDS needs to take. The company should stay the course and keep programs out of trouble, they said. As for the capital crunch, Jones noted in December that EDS has changed its payment terms to suppliers from 30 days to 60 days to provide a one-time lift to cash flow.Legg Mason's Loomis said the company is "very much in turnaround mode." EDS will probably lose market share in 2004, and it will "probably be about a year from now before they turn around," he said.Staff Writer Patience Wait can be reached at pwait@postnewsweektech.com.