Breathing New Life Into Contracts

It's an all too familiar story: By the time the procurement process coughs up the contract, the technology it offers is already out of date -- a 286-caliber technology in a Pentium world. According to Doyle Dodge, center director for IT Coordination at the General Services Administration's Office of Emerging Technology, "One failure is an inability to bring new items onto existing contracts." As a result, "high on my list [of priorities] is [getting new] technologies as soon as they are available to the public.... If we have to wait until [a new product] is on a new contract, it's outdated."

Techniques for performing tech refresh vary from contract to contract, according to Bob Dornan, vice president of market research firm Federal Sources in McLean, Va. But one thing is sure: With few formal rules, contractors can use tech refresh to serve the needs of customers. It's no wonder, then, that tech refresh has become a critical business strategy for many companies.

Government Technology Services Inc. of Chantilly, Va., has become something of a master of the practice. On June 19, reseller GTSI announced that the U.S. Army had approved a major system substitution on its Army Portable-I contract. GTSI substituted the Compaq Contura 420C for the same price as the unit it replaced on the two-year IDIQ, indefinite delivery, indefinite quantity, contract.

An IDIQ contract provides a contractor with a license to market a particular configuration of technology to particular government agencies, but it provides no guarantee that agencies must make purchases. So tech refresh is one way to sweeten the attraction of an IDIQ contract.

On June 27, the U.S. Air Force approved major system substitutions on the Desktop IV contract, which include Energy Star compliant 486 microcomputers manufactured by IBM for GTSI under a private label -- the GTSI DeskTop. According to GTSI, these machines have performed in tests up to 50 percent faster than previous Desktop IV configurations. The Desktop IV contract is a controversial three-year, $700 million IDIQ contract that generated numerous protests from disgruntled contractors who lost to GTSI.

Also on the same contract, GTSI, the leading computer reseller to the federal government, is now teaming with the world's leading printer manufacturer. On July 17, Hewlett-Packard of Palo Alto, Calif., announced the addition of its HP LaserJet 4 Plus printer to the Desktop IV contract. The LaserJet 4 replaces the Lexmark 4019 laser printer on the contract, and gives HP access to one of the largest laser printer contracts available with the federal government.

Still, there are skeptics. Analysts of the government information technology market have mixed views of tech refresh. Lynn Bateman of Taurus Information Systems thinks that sometimes tech refresh is competitive, but in some cases, vendors use it as an anti-competitive practice. Each contract usually has language that provides the contractor with options to use tech refresh at any time. Bateman points out that tech refresh is considered an evaluated option that does not have to go through the competitive bidding process, which a regular procurement must have. In an unevaluated option, on the other hand, the contracting agent must justify use of a single source. "[Tech refresh] could be non-competitive to block competitors from existing contracts.... The vendor could put as many options as possible in the contract and get the government to exercise them [in the vendor's favor]."

Bateman also asserts that vendors commonly bid top quality products in the initial delivery on a multiyear contract, using the products of manufacturers such as Hewlett-Packard, Texas Instruments or Zenith Data Systems. Since the margins are low in the initial delivery, Bateman reasons, the contractors try to deliver the best product available. During tech refresh deliveries, however, the contractor may substitute second-rate or inferior products in order to gain more profit margin, which is possible in a fixed-price contract. It's the classic bait and switch. Even though the government agency knows the contractor is delivering inferior product in the tech refresh, many will not terminate the contract due to the practical difficulties in defaulting or ending a contract, says Bateman.

Not everyone gains from tech refresh. Federal Sources' Dornan points out that resellers face shrinking profit margins due to the competition that multiple awards -- having a number of contract winners compete again for the final business -- and tech refresh bring on commodity products. Since more contractors can deliver commodity products, the competition can intensify, and profit margins drop. "The Federal Acquisition Streamlining Act strongly encourages multiple awards.... It gives [the resellers] no relief. Profit margins are razor-thin at best." While some, such as Taurus' Bateman, think that contractors can earn more profit margins through tech refresh, Dornan disagrees. "Tech refresh does not allow for changes [in the contracts] that would increase profit margins." As a result, "some [resellers] are thinking about getting out of the low end" commodities market. Dornan asserts that the Air Force Desktop IV contract's multiple awards led to fierce competition between the contractors and vendors in terms of marketing, pricing and technology. Then again, that competition has meant a better deal for the government customer -- and the American taxpayer.

Tech refresh also presents resellers and vendors with difficult choices. "Should I wait until Pentium prices come down to the same level as 486 [microprocessor] prices" before introducing them, asks Dornan. He points to Manassas' Government Micro Resources as a reseller that has successfully abandoned the lower-end reseller market and migrated to higher-end, higher-margin contracts. Meanwhile, vendors have relentless marketing campaigns directed to resellers and government users to convince them to employ tech refresh with their technology.