Static on the line
The turbulent telecom sector has systems integrators rethinking their teaming strategies on major networking and communications contracts. It's also helping them make the case that integrators ? not telecom companies ? should be priming the big deals.<@VM>Should the government bail out WorldCom?<@VM>Troubled telecoms<@VM>Telecom companies look for opportunities in troubling times
- By Patience Wait
- Aug 09, 2002
"Striking up a new contract relationship with a carrier that might have [problems within six months]? We wouldn't do that. "? David Bittenbender of Computer Sciences Corp.
(Washington Technology photo by Laurie DeWitt)
"I think anybody ... in the high-reliability business that understands companies and technologies understands that you have to have multiple providers." ? Marv Langston of Science Applications International Corp.
(Washington Technology photo by Olivier Douliery)
John O'Sullivan spent more than four years chasing a single government contract.
As program manager for Harris Corp.'s Federal Aviation Administration Telecommunications Infrastructure contract proposal, O'Sullivan built the team that pursued the multibillion-dollar FAA program to restructure the agency's nationwide telecommunications system and networks.
But rather than rely on just one major telecom provider as a partner, O'Sullivan put together a diversified team of local and long-distance providers, including Sprint Communications Inc., and regional Bell operating companies BellSouth Corp., Qwest Communications International Inc., SBC Communications Inc. and Verizon Communications Inc. Raytheon Technical Services Co. was selected for onsite technical services and support.
Despite its long history of working successfully with the FAA, Harris, based in Melbourne, Fla., was seen as the underdog in the competition. The favorites were Lockheed Martin Corp., with AT&T Corp. as its telecom partner, and WorldCom Inc., the incumbent on the largest existing contract being folded into the new FTI program.
But July 15, the FAA selected Harris for the 15-year, $3.5 billion project, and much of the credit, according to O'Sullivan, goes to the company's diversified approach.
Its strategy appeared especially prescient after financial turbulence hit a host of telecom companies, particularly WorldCom, which many industry observers had considered a lock for the contract.
"We assembled this world-class team nearly three years ago, so from the standpoint of predicting the state of today's commercial telecom market, Harris did not have a magic formula or crystal ball," O'Sullivan said. "In retrospect, however, this approach now appears to provide an added balance and stability for the customer, considering the challenges now facing many companies that serve the commercial telecom market."
Many industry analysts and executives believe Harris' win signifies dramatic changes in the government telecommunications market. Although not everyone is convinced that Harris' approach can or should be duplicated on other contracts, the unraveling of the telecom industry is forcing government agencies and systems integrators to assess their strategies for meeting communications requirements in the federal sector, both in existing contracts and upcoming opportunities.
The list of telecom companies in financial straits is lengthy. Winstar Communications Inc. of New York was one of the first federal telecom contractors to hit bankruptcy, filing in April 2001. Bermuda-based Global Crossing Ltd. sought protection in January. XO Communications Inc., Reston, Va., filed for bankruptcy in June after months of cash flow problems. WorldCom of Clinton, Miss. filed for the largest bankruptcy in U.S. history in July.
At the same time, WorldCom, Global Crossing and Denver-based Qwest now find themselves facing investigations by the Securities and Exchange Commission, the Justice Department and Congress after allegations of fraudulent accounting.
The changed fortunes of telecom carriers are leading to revised business strategies by systems integrators trying to land government contracts.
"Systems integrators are going to be thinking about contingency plans," said Ray Bjorklund, vice president of research with Federal Sources Inc., a market research and consulting firm in McLean, Va. "They'll be second-sourcing ? when approaching major team members, they will have someone in their back pockets to make sure they're covered."
One of the largest integrators in the federal space, El Segundo, Calif.-based Computer Sciences Corp., confirms that approach.
David Bittenbender, CSC's federal-sector vice president for network services, said it became apparent to his company a couple of years ago that telecommunications services were becoming commodities, so it no longer made sense to lock into long-term contracts with providers. And while CSC makes use of several vendors, the company has refresh clauses in its contracts, allowing it to review and renegotiate the terms once a year for both cost and performance.
Most important, CSC is steering clear of providers showing any signs of trouble.
"Striking up a new contract relationship with a carrier that might have [problems within six months]? We wouldn't do that," Bittenbender said.Integrator strategies
Some companies, such as Harris, believe the regional Bell operating companies, called RBOCs, are going to come into their own, vying to become reliable partners that can take spots on federal contracts once reserved for national providers, such as WorldCom and Sprint. The RBOCs are financially sound, well-entrenched in their own geographic regions and lobbying vigorously for permission to expand their markets.
Michael Powell, chairman of the Federal Communications Commission, has signaled that the RBOCs may get that opportunity. He has been talking up the prospect of industry consolidation and has encouraged companies to bring prospective deals to the agency for what would appear to be a friendly review.
FSI's Bjorklund sees some drawbacks to that approach. WorldCom, AT&T and Sprint, for example, all cover the entire continent as well as exert an international presence, he said, while the RBOCs are geographically limited. It would take time for the RBOCs to expand their presence, which could leave some federal agencies unable to meet their missions.
"What does it mean for these agencies that have global requirements? Sounds like it's kind of messy," Bjorklund said.
Executives with several industry-leading systems integrators also suggested the turmoil is creating the opportunity to bring to an end the sometimes rigid division between telecom services and IT services.
Systems integrators have been trying with varying degrees of success to convince agencies that network enterprises ? pulling together a variety of voice, video and data systems and serving users dispersed geographically ? should be viewed as integration projects. Current troubles among telecom providers, they said, could help persuade federal agencies that integrators, rather than telecom providers, should have prime contracting responsibility for such projects.
Marv Langston, senior vice president of Science Applications International Corp., San Diego, said government agencies should look clearly at opportunities being created by new technologies such as voice-over-Internet protocol.
"When people are thinking about upgrading, they can take advantage of the technologies and minimize [being dominated by one provider]," he said.
For example, SAIC recommended a structure for GovNet, the proposed private network for government agencies, similar to what the company now has in place for a commercial customer, the Automotive Network Exchange, Langston said.
"We provision every leg of a network infrastructure with multiple providers that have met service-level specificity for that particular activity," Langston said. "I think anybody ... in the high-reliability business that understands companies and technologies understands that you have to have multiple providers."
Lockheed Martin Corp. appears to be pursuing yet another approach, selecting a small number of vendors specifically targeted at particular contract opportunities. Most recently it was AT&T, said David Kelley, vice president for information operations and the WIN-T program: "They have the same stock problems, but ... we always look to the bottom line [from a] performance standpoint."
On WIN-T, the Warfighter Information Network-Tactical, which is the Army's mobile battle command program, worth up to $5 billion, Lockheed Martin is not looking to traditional carriers, Kelley said. Instead, the company's large partners are Cisco and Harris, and they are primarily handling the communications piece of the network.The government's response
The government is sending mixed signals about its views of recent telecom troubles. On the one hand, the industry is part of the nation's critical infrastructure, and officials such as the FCC's Powell are reassuring Congress and the public that agencies are acting to make sure no one loses service.
On the other hand, the General Services Administration's Office of the General Counsel is beginning a review of "present responsibility" for WorldCom and Qwest to determine whether they have the financial and manpower wherewithal to meet their contractual obligations, and whether they should be suspended or debarred for their conduct.
Sandra Bates, commissioner of the GSA's Federal Technology Service, continues to support WorldCom, one of the two providers on FTS2001, the agency's primary long-distance contract that serves most of the federal government.
Though she does not see any signs of disruption to WorldCom's federal clients, Bates said planning has begun on a next-generation strategy for FTS2001's successor contract. The base contract for FTS2001 expires in December, while several other telecom contracts ? some of the local-service Metropolitan Area Acquisition contracts and niche contracts ? begin to expire over the next several years, she said.
While she would not provide details, saying the new strategy "is not ready for prime time," Bates said she considers it timely that FTS is considering the question now because of the state of the telecommunications sector. She also said the turmoil is validating certain assumptions, specifically that agency customers expect a lot of flexibility in the vehicles available to them.
Bates said she foresees that in the future, telecommunications solutions will be packaged to acknowledge the fact that more engineering and more integration are needed, and that per-minute prices will be less important.
"What we've been hearing [from our customers] is that while price is very important, service and reliability are going to be factors that people are going to be willing to pay for," Bates said.At a press conference in June, John Sidgmore, WorldCom Inc.'s newly named chief executive officer, told reporters that the company is too big for the government to let it fail.
Sandra Bates, commissioner of the General Services Administration's Federal Technology Service, has a similar view.
"I think it is certainly [so large that] it's in everybody's best interests that it not fail," Bates said. "I certainly think the government doesn't want it to go down."
But some competitors question what kind of message it sends for the government to consider protecting a company accused of defrauding investors by cooking its books. "So it doesn't matter if they committed a felony?" one executive grumbled.
WorldCom is ranked 12th on Washington Technology's 2002 Top 100 prime contractors to the federal government, and it provides the backbone for some 50 percent of the Internet through its subsidiary, UUNet.
Bob Woods of Dallas-based Affiliated Computer Services Inc. said he worries that WorldCom's bankruptcy filing could force the sale of UUNet. Woods spent 30 years in the government ranks, finishing with a stint as commissioner of FTS, before becoming president of ACS' government unit.
"If this were US Steel, we'd bail them out ... I don't want to appear parochial, but it seems to me the backbone of the Internet is at least as important as a company making cars," Woods said, referring to the federal bailout of Chrysler. "Nationalization is a scary thought, but that's the kind of thing you're facing with critical infrastructure."
AT&T Corp. is moving to allay fears that the Internet is in danger due to WorldCom's problems.
"It's a myth that Internet traffic is at risk because it depends on any one provider," said Hossein Eslambolchi, president and chief technology officer of AT&T Labs. "Many of the concerns expressed in recent weeks are overstated, since we believe the level of traffic being carried on WorldCom's network is not as high as has been reported by some sources."
Eslambolchi said AT&T's backbone network could accommodate customers looking to migrate their business if WorldCom's network shut down.WorldCom
On June 25, WorldCom announced it would restate its financial statements for 2001 and the first quarter of 2002, because it incorrectly reported $3.9 billion in expenses. On July 21, the company filed for bankruptcy, citing $30 billion of debt. On July 28, Nasdaq delisted WorldCom's stock. It had been trading for less than $1.
Major contracts include a share of FTS2001, a major role on the Navy-Marine Corps Intranet, Defense Information Systems Network-Pacific and the Postal Service managed network.Global Crossing
On Jan. 28, the company filed for bankruptcy amid allegations it had incorrectly reported revenue and earnings. In July 2001, the company won the $400 million Defense Research and Engineering Network contract, only to have it withdrawn after the losing bidders complained. The contract was recompeted and the company was set to win again when its bid was derailed by its financial troubles. Currently, the company is going through an auction process for its assets.
The company holds contracts with the departments of State and Defense and the Army Corps of Engineers.Qwest Communications
On March 8, the Securities and Exchange Commission launched an inquiry into Qwest's accounting practices. On July 9, the Justice Department notified the company that a criminal investigation had begun. On July 28, the company announced it would restate revenue from 1999, 2000 and 2001, because accounting policies were incorrectly applied. Over the past year, the company's stock has dropped from $27.74 to around $1.50.
Major contracts include Metropolitan Area Acquisition contracts in four cities. It also won "crossover" rights to use one of its MAA contracts to pursue other telecom business. The Treasury Department selected Qwest in July to provide Web-hosting services.Winstar Communications
One of the first to falter. In March 2001, Lucent backed out of the financing of a $1 billion equipment deal, which plunged Winstar into bankruptcy. On Dec. 20, IDT Corp. paid $30 million in cash and $12.5 million in stock at a bankruptcy auction. IDT officials compared their deal to the Dutch buying Manhattan for $24. The value of Winstar's assets, according to IDT, is $5 billion.
Government contracts include MAA local telecommunications services contracts in 13 cities, the Navy Voice, Video and Data contract and contracts with the Federal Aviation Administration.XO Communications
Never a major player in the government space, XO tried to pursue MAA contracts. The attempt, however, was derailed by financial woes. In November 2001, the company began restructuring after receiving additional funds from outside investors, Forstmann Little & Co. and Telefonos de Mexico, S.A. de C.V.; but closing the deal ran into problems. On June 17, XO filed for bankruptcy protection to continue its restructuring.
The company had several state and local government contracts, but no major ones among federal agencies.
Sources: Input, Federal Sources, Washington Technology, company documents, published reportsThe present state of the telecom industry would have been hard to imagine a year or so ago.
"We would have denied it could have been true," said Jim Payne, senior vice president of Qwest Communications International Inc.'s federal unit.
Payne's own company has fallen on hard times. Denver-based Qwest is facing scrutiny by the Securities and Exchange Commission and Congress and a criminal inquiry by the Justice Department over its accounting practices and some "swapping" transactions with Global Crossing Ltd., another down-in-the-dumps telecom company. The General Services Administration also is assessing whether Qwest is financially capable of performing on its contracts.
Still, Payne is bullish on Qwest's future in the federal market. The company is seeking to aggressively add services to its "crossover" contract, which allows it to sell more services under one of its Metropolitan Area Acquisition contracts for local telecommunications. The crossover status allows Qwest to compete directly with the FTS2001 long-distance contract held by WorldCom Inc. and Sprint Communications Inc.
Qwest and other vendors also are looking to fill the void created if WorldCom fails to survive bankruptcy protection. Qwest and AT&T Corp., for example, are hiring for their federal units, positioning themselves to be able to serve government customers concerned over WorldCom's ability to meet their needs.
Don Teague, AT&T's head of federal-sector sales, said, "We are not going to promote ourselves predicated on anybody else's weaknesses." But he said the company is being engaged to help some agencies conduct contingency planning and is putting in redundant or backup service.
AT&T also is moving to reassure customers over the perceived vulnerability of the Internet to WorldCom's travails. The company said it can take on WorldCom customers looking to change Internet providers, and it has announced accelerated plans to expand its global network. Like Qwest, AT&T is modifying its crossover contract to add new managed services.
"There are a whole series of contract enhancements we and GSA are negotiating," Teague said.
The third major federal player, Sprint, is not moving very aggressively in this area, according to industry sources, but the company has fielded requests from federal agencies asking for contingency plans, said Tony D'Agata, vice president and general manager of Sprint's federal business.
"At any point in time, Sprint is working on something like 50 to 100 programs, requests for proposals," D'Agata said. "We're in a space, though, where things don't happen overnight, necessarily."
Warren Suss, president of Suss Consulting in Jenkintown, Pa., downplays the short-term likelihood of federal agencies moving from WorldCom to any of the other approved federal providers.
"Transitions are a headache. They cost money, they take time, they're a pain in the neck," Suss said. "My bet is that agencies in the near term are going to stand pat. I don't think that's a terrible strategy."