AT&T unit averts a midlife crisis

Failure to win a spot on a major governmentcontract doesn't oftenbecome an opportunity for corporategrowth and a boon to the company's laterfortunes. But that's how some AT&T Corp.executives view missing out on FTS 2001,the governmentwide telecommunicationscontract that is being replaced by the newmultimillion-dollar Networx contracts."We did not win a spot on [FTS 2001],"said Don Herring, senior vice president atAT&T Government Solutions. "So what didwe do? We went out and purchased anothercompany."To expand its footprint in the federal governmentmarket, AT&T acquired GRCInternational Inc. in March 2000 for$220 million. It was one of the company'sfirst forays into the professional servicesbusiness "and one of the best things we everdid," Herring said. "It helped diversify ourcompany a little more and helped buoy ourbusiness for a period of time.""We were fortunate enough to have thehindsight ? or foresight at the time ? tobuy GRCI," he said, noting the company hadthe expertise to combine AT&T productsand services into solutions.Herring said acquiring GRCI was a wisemove also because of the rapid and increasingcomplex improvements in informationtechnology. AT&T believed governmentagencies would be hard pressed to keep upwith the advances on their own, he said.The rapid changes in technology mirroredthose at AT&T, which grew throughmergers with SBC, BellSouth and CingularWireless. The reconstituted AT&T hasannual revenue of $125 billion and employs300,000 people, about 4,000 of whom areassigned to the federal sector.Herring declined to disclose AT&TGovernment Solutions' revenue figuresbecause the company does not break downits numbers by division or percentages. "Butwe're certainly in the billions of dollars."The company ranks No. 38 onWashington Technology's Top 100 list ofthe largest government contractors withmore than $500 million in prime contractingrevenue.Last year, AT&T gained spots on theGeneral Services Administration's $48 billion,10-year Networx Universal and$20 billion, 10-year Networx Enterprisecontracts. Herring said the dual win wassweet vindication for the loss of FTS 2001,and he attributes it mainly to acquiringGRCI."Clearly we intend to be a growth business,"Herring said. "Compared to a coupleyears ago, we feel we're in a very good spot."AT&T has made a major commitment tointegrate its existing business with the systemsintegration business it acquired withGRCI, said Warren Suss, president of SussConsulting Inc. of Jenkintown, Pa."They have some very significant opportunitiesto build the services side of theirbusiness" because federal budget constraintswill erode the government's abilityto operate as its own integrator and provideits own professional services, Susssaid. "These pressures will push them inthe direction of purchasing managed services."It's fundamental for companies such asAT&T to transition to a services providermodel even though federal IT spending haswaned, said Rishi Sood, research vice presidentat Gartner Inc. "We have the federalIT market slowing to about 3 percent total 37IT growth for the next yearand a half."Nevertheless, "networkmodernization represents amajor growth opportunity forvendors, and AT&T is well-positionedto take advantageof that opportunity," Sood said."You're seeing this shift overto the services arena," said JeffMohan, executive director ofAT&T's Networx ProgramOffice. He said procurementofficials "aren't buying 'stuff,'they're buying services."There is no such thing anymore as plugand play in selling telecommunications tothe government, Herring said. "You can'tgo in and just say, 'Let me show you whatI've got.' You really have to sit down in-depthwith multiple people so you understandwhat they need."AT&T is seeing a lot of Networx activitynow because agencies are looking for fullyintegrated solutions and for someone tooperate them, Mohan said. "We had moreRFP activity here in the past month thanI've ever seen."AT&T's biggest Networx award so far is a$270 million task order from the TreasuryDepartment to build a secure, next-generationenterprise network known as TreasuryNetwork, or TNet. The award is potentiallyworth $1 billion.AT&T and its team will build a widearea,virtual private network of voice, dataand managed Internet services that willintegrate 12 Treasury agencies, includingthe Bureau of Engraving and Printing, U.S.Mint and Internal Revenue Service.By mid-2008, AT&T GovernmentSolutions had secured $600 million in taskorders, including a 10-year, $292 millionaward for the Homeland SecurityDepartment's OneNet project that will consolidateseven wide-area networks into onesecure IP network infrastructure.Several factors are spurring the federalemphasis on solutions: FTS 2001 expires in2010, and GSA has set aside $150 million tohelp agencies shop for the best telecomdeals, select inventory and plan for the transitionto Networx.Also, a directive issued by the Office ofManagement and Budget in Augustinstructed agencies to use Networx contractsfor the IT services they now receivethrough FTS 2001. The memo, from KarenEvans, OMB's administrator for e-governmentand IT, also requires agencies to providea cost/benefit analysis to justify anyfuture decisions not to use Networx for newrequirements."AT&T is very well-positioned to takeadvantage of this opportunity," Suss said.But he added also that the company is notthe only provider of integrated professionalservices. Federal agencies have tended toopt for the large integrators and specializedcompanies when they buy professionalservices, he said."Agencies don't usually change patternswithout some resistance," Suss said. "Soeven though conditions favor growth forAT&T in this area, it's not going to happenwithout a lot of work."Sood agreed. He said that althoughNetworx opens the federal marketplace alittle more, government users still rely onthe systems integrator community, whichhas been dominated by the traditional largerintegrators."The long-distance companies still havea way to go in matching someof the relationships and someof the thought leadership positionsthat the systems integratorshave in the marketplace,"he said.Telecoms must segue out ofsimply being viewed as long-distanceor network companiesand move into the moretangible areas of network integration,he said."It's still going to be a fairlycompetitive environment forthem going forward," he said."Out of the bunch, though, AT&T has probablymade the greatest strides toward repositioningthemselves as a network integrator,and has been able to overcome some ofthose initial obstacles that are still plaguingthe other long-distance companies."Another challenge AT&T GovernmentServices faces is assessing precisely whatthe agency chief information officers wantin terms of new communications services,said Mike Heath, vice president of federalsales.With so many applications availabletoday, "CIOs are really worried about deliveringthose mission-critical applications totheir constituents," he said. "They want apartner that can run the infrastructure andbring all those pieces together."Other telecom challenges include mergingmultiple data networks on one IP backbone,providing multiple services to anincreasingly mobile workforce and ever-increasingsecurity requirements. "Thecommon things we're hearing from themarketplace first and foremost is security,"Heath said.So the growing demand for convergenceof wireless and wire lines must includesecurity and reliability. "The pace at which[convergence] is happening," he said, "is sotorrid that it is the next big thing."