How Virginia and Northrop saved a $2.4 billion contract

Northrop Grumman Corp. has made two moves to strengthen its ties with Virginia. First, it picked the state for its new corporate headquarters, and then last month it agreed with Gov. Bob McDonnell’s administration on modifications to the troubled 10-year, $2.36 billion statewide outsourcing contract it won in 2005.

The state and the huge defense contractor were in a stand-off when the new administration came into office in January, Virginia Secretary of Technology Jim Duffey told Washington Technology. “We were dealing with issues that were fairly old from a chronological point of view that needed to be addressed in order to get things moving.”

“The contractor was doing what it believed were the essential services required and not much more," he added. "And the commonwealth suffered with regard to the level of service and responsiveness. There was a lot under discussion.”

Duffey described what was in place as a quasi-process that both parties could choose to ignore, allowing problems to remain unresolved for several years.

Duffey, who spent 24 years at EDS Corp. before becoming president and chief executive officer of Duff Consulting, said Virginia wanted a final resolution of all outstanding issues with Northrop Grumman.

"We wanted this negotiation to be final," Duffey said. “This isn’t just the first phase of additional payments or claims or processes. This has got to be a global resolution to all of our problems, including performance problems.”

The state also wanted any additional payments to Northrop Grumman to be made after the original contract’s 10-year time frame.

On April 5, McDonnell announced a successful conclusion to the contract modification talks between the company and the Virginia Information Technologies Agency (VITA) that began during the administration of his predecessor, Tim Kaine.

The contract was extended for an additional three years and annual costs will be kept to the $236 million cap agreed on in the original contract, the governor said in a statement. McDonnell also placed VITA under the oversight of Duffey’s Office of Technology.

The contract modifications provide for responsiveness and accountability, resolve all pricing issues, and create a rapid response team to address customer service issues, Duffey said.

When completed, the contract will also have established a common communications network for state agencies.

The revised contract includes new hardware and services that Virginia will pay Northrop Grumman an estimated additional fee of $105 million during the three-year extension.

“It provides a series of operational improvements and a series of increased penalties or financial incentives to execute the improvements,” Duffey said.

Under the terms of the renegotiated contract, Virginia will manage its IT usage and pay only for what it uses, he added.

“You get a cost per unit of service, and you get your bill and you see how many units you’re using,” he said. “And you can ask your directors or managers, ‘Why are you using so many [units]? Why are you using this type of unit instead of a less expensive type of unit?’ You can actually control your destiny with regard to usage.”

The agreement also includes new desktop or laptop computers for workers at all state agencies, Duffey said.

“Yes, we had some bumps in the road. Yes, it’s not 100 percent complete yet,” he said. “But we’re well on the way of having all of the commonwealth agencies being serviced by one large data center that has a large, first-class disaster recovery site. So from an efficiency point of view and from a safety and security point of view, it really benefits the commonwealth.”

A spokeswoman for Northrop Grumman called the agreement an important step forward.

The current work centers on building infrastructure, Duffey said. “The next step is going to be how do you approach enterprise applications and cloud computing?”

At that point, “probably the first area that we will focus on will be in the health IT area,” Duffey said, adding that plans for applications are now being developed.

That will require new contracts, he said. “It probably won’t be a one-contractor environment. For large pieces of work, there are some robust, industrial-strength kinds of applications that we will look at.”

The state will also examine applications to handle medium and small workloads.

“The important part is to make sure that in all three of those baskets the commonwealth is able to extract and consolidate the data so it can make management decisions at a higher level with accurate and complete data,” Duffey said.

Asked when such a contracting process will begin, he said, “My objective would be certainly to start developing an enterprise approach to applications during this administration.”

Duffey stopped short of saying that Virginia’s one-term gubernatorial limit hampered the contract talks. He said the Northrop Grumman agreement ensures some measure of continuity because of the presence of a large public company.

“From an operational, execution point of view, I do think there’s the reality that really the first two and a half years is the window of time where you can be the most effective,” he said. “And then after two and a half years, for the last year and a half, the effectiveness of that administration’s management and operation of the relationship decreases with time. It’s a little bit of a lame duck aspect.”

Duffey also refuted suggestions in the press that the terms of the contract extension helped sway Northrop Grumman — already one of the largest employers in the state — into choosing Northern Virginia for its new headquarters.

“In fact, the governor and [Northrop Grumman chief executive officer and president] Wes Bush were pretty conscientious about making sure that there were two separate teams working on those two issues,” he said. “And they were fairly well firewalled. Movement on one side had nothing to do with movement on the other.”

Northrop Grumman, of Los Angeles, ranks No. 2 on Washington Technology’s 2010 Top 100 list of the largest federal government prime contractors.