WorldCom's troubles jeopardize contracts

Sidgmore reassures federal customers

Departments and agencies served by WorldCom

WorldCom Inc. of Clinton, Miss., pulled in $462.5 million from the federal government in fiscal 2001, according to the General Services Administration. Customers include:

  • Broadcasting Board of Governors

  • Department of Commerce

  • Department of Defense

  • Department of Energy

  • Department of Health and Human Services

  • Department of Housing and Urban Development

  • Department of the Interior

  • Department of Justice

  • Department of Labor

  • Department of State

  • Department of Transportation

  • Department of Treasury

  • Department of Veterans Affairs

  • Corporation for National and Community Service

  • Executive Office of the President

  • Federal Energy Regulatory Commission

  • General Services Administration

  • NASA

  • Nuclear Regulatory Commission

  • Social Security Administration

Source: GSA

John Sidgemore, WorldCom CEO

(Washington Technology photo by Olivier Douliery)

WorldCom Inc.'s legal and financial woes are rippling through the government marketplace, sparking a review of the company's federal contracts and raising concerns about its ability to continue providing services.

Although WorldCom officials are desperately working to keep the company afloat, nervous agencies are eyeing alternatives if the telecom giant slides further into trouble.

The most visible sign of the government's concern is the General Services Administration's review of federal contracts held by WorldCom. GSA conducted similar reviews of Enron Corp. and Arthur Andersen before suspending the two firms from new government contracts.

At that time, GSA said the two companies were not "responsible contractors" and could not win new government business.

John Sidgmore, WorldCom's chief executive officer, said July 2 the company has talked with various federal agencies, including the Office of Homeland Security, to reassure them it is going to stay in service.

"The chances of us having a major blip in our service provisions are low," he said.

The trouble began in late June when the company restated financial results for 2001 and the first quarter of 2002, announcing it had improperly accounted for $3.9 billion in expenses. Since then, WorldCom has said it is reviewing figures for 1999 and 2000. The announcement sent shock waves through Wall Street and Washington, and sent its stock price diving to well below $1 per share.

The Securities and Exchange Commission has filed civil fraud charges against WorldCom, and the Nasdaq Stock Market plans to delist the company's shares.

WorldCom is the single largest provider of telecommunications services to the federal government, earning more than $462.5 million from its government contracts in fiscal 2001, according to the GSA. It performed work for 20 different departments and agencies, including the departments of Commerce, Defense and Justice, NASA and the Securities and Exchange Commission.

The Clinton, Miss., company holds one of two spots on the GSA's FTS2001 contract for long-distance services. WorldCom's contract has a ceiling of almost $1.7 billion and expires in January 2003, though it has four one-year options.

A spokesman for Sprint Communications Corp. of Westwood, Kan., the other holder of the FTS2001 contract, said some federal agencies have already made inquiries about Sprint's services if WorldCom should falter.

"Customers always monitor industry activity, and it would be natural for them to think about contingencies," he said.

WorldCom also is the incumbent contract holder and one of three bidders on the Federal Aviation Administration's Telecommunications Infrastructure (FTI) contract. The award of the 10-year, $2 billion contract was expected by the end of June, but a source close to the process told Washington Technology the award has been delayed at least two weeks because of WorldCom's troubles.

The company in April won the Defense Information Systems Agency's $450 million Defense Research and Engineering Network contract for telecommunications services to more than 6,000 scientists and engineers at Defense Department laboratories, test centers, universities and industrial sites.

But both Sprint and Global Crossing Ltd. have filed protests with the General Accounting Office over WorldCom being granted the DREN contract.

Global Crossing of Bermuda was awarded the DREN contract in July 2001, but DISA withdrew the award after the other bidders protested. Global Crossing filed for bankruptcy, and the agency awarded the contract to WorldCom. Global Crossing filed a protest of the WorldCom award, but the protest was denied.

In its new protest, filed July 5, Global Crossing is arguing its protest should be reconsidered because it is successfully completing most of its restructuring activities, a company spokeswoman said.

In its protest, filed July 3, Sprint is alleging that the award to WorldCom "is now known to be improper," said Dan Gordon, associate general counsel with the GAO.

GAO has until the middle of October to rule on the protests, but Gordon said it is unlikely to take that long.

DISA officials also said the agency is conducting its own review of the award to WorldCom. The agency had no inkling of WorldCom's financial problems until media reports broke the news in late June, a DISA spokeswoman said.

WorldCom's woes also show some signs of being contagious. Electronic Data Systems Corp. of Plano, Texas, spent the first week of July defending its battered stock as markets worried over the company's commercial contracts with WorldCom.

On the government front, WorldCom provides much of the Internet backbone, through its UUNet subsidiary, at the heart of the $6.9 billion Navy Marine Corps Intranet project being carried out by EDS.

Navy Capt. Chris Christopher, deputy director for plans, programs and oversight for the NMCI office, said the Navy is not concerned about WorldCom's woes because the service "has no contract with WorldCom with respect to NMCI. We have a contract to purchase seat services from [EDS], and EDS can obtain the WAN service they need ... from anyone they want."

EDS spokesman Chris Grey, said the company is monitoring the situation and will obtain alternate providers if necessary. "I have to say, however, that EDS has been very pleased with WorldCom service received on NMCI so far," he said.

The ripples of WorldCom's troubles also are spreading into state and local government markets. Georgia may be forced to delay its 10-year, $1.87 billion outsourcing communications project if WorldCom cannot sustain its bid, because there is only one other team in the running.

Gov. Roy Barnes believes if WorldCom drops out of the running, the state should re-bid the project rather than proceed with the remaining bidder, said Jocelyn Baker, the governor's spokeswoman.

Meanwhile, New Jersey fired WorldCom July 2 as the contractor for its E-Zpass toll collection system. State officials are reviewing WorldCom's performance on the contract and will decide once the review is complete whether to keep a portion of a $200 million performance bond the company assumed when it purchased the contract from MFS Technologies in 1998, said Micah Rasmussen, a New Jersey Department of Transportation spokesman.

Despite WorldCom's problems, federal agencies likely will not move too quickly to fire the company from existing work, said Warren Suss, president of Suss Consulting Inc., Jenkintown, Pa., a firm specializing in market research and consulting in the federal marketplace.

"In the near term, there [will not be] major changes," Suss said. "There certainly may be concerns on the part of some agencies regarding long-term issues, but I just can't see an agency going through the incredible cost of disruption ... given that WorldCom is still delivering services and providing basic network operation, maintenance and support functions."

The government business is important to the long-term future of WorldCom, Suss said. "I'm sure [the company] will put it as their highest priority in terms of allocating resources," even if the company declares bankruptcy and reorganizes, he said.

Political realities may also affect WorldCom's fate in the government market, Suss said. "The current administration ... wants to be tough on fraud in the broader commercial marketplace, so it's possible they could make decisions that could affect near-term federal stuff," but the more likely impact will be on future contracts, Suss said.

Rex Mitchell, a telecommunications analyst with BB&T Capital Markets in Richmond, Va., is less sanguine about the company's prospects with its federal contracts.

"The government would be crazy not to diversify that network into other companies," Mitchell said. "Telephone services are something you don't want to buy all from one player ... Even before [this], WorldCom's network has gone down for hours at a time."

Mitchell said it takes time to have a substitute provider in place and ready to go. "It's not easy at all [to switch] unless you've lined it up in advance. If you haven't got anybody else's [services] entering your facilities, it'll take months" to get ready, and cost money upfront, he said.

WorldCom laid off 17,000 employees June 28, about 20 percent of the company's work force. Some were in the company's government unit, but those cuts were not as deep, a company spokeswoman said.

"The reduction in force certainly takes the customer commitment into account," said WorldCom representative Debbie Lewis. "[For] government customers specifically, to whom we offer the most sophisticated solutions, we will continue to provide the highest service."

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