Leasing Arrangements Draw Fire

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Leasing Arrangements Draw Fire

By Dennis McCafferty
Staff Writer

Arrangements to lease technology to government customers might be the next big innovation in federal contracting. But industry is crying foul over contract arrangements that allow agency buyers to cancel the leases with little notice.

"Even in a one-year vehicle ... the government can say good-bye at any time,'' said Michael Aisenberg, director of federal government market strategy and policy for Maynard, Mass.-based Digital Equipment Corp. "Obviously, the information technology industry would prefer that it not be part of the arrangement.''

Industry officials say the termination of leases is contrary to commercial practices. In addition, they say, the termination clauses are keeping good vendors away from the arrangements. But federal officials say that's far from the case.

Although sales statistics aren't available yet, the General Services Administration is reporting widespread interest in leasing opportunities among information technology industry members.

So far, seven companies have signed on to provide leased products through the GSA schedule sales program: Sunnyvale, Calif.-based Amdahl Corp.; Fairfax, Va.-based BTG Inc.; Plano, Texas-based Electronic Data Systems Corp.; Basking Ridge, N.J.-based AT&T; Rosemont, Ill.-based Comdisco Inc.; Alexandria, Va.-based L.A. Systems Inc.; and Lanham, Md.-based Severn Companies Inc.

In addition, GSA officials say at least 10 other technology companies are pursuing lease arrangements on the schedule program. All of this activity has developed in little more than a month, they say.

"We're making awards and we have at least 10 offers,'' said Bill Gormley, the GSA assistant commissioner overseeing acquisitions.

"That's an indication to the government that the risk of the terms and the conditions of leasing are acceptable. We're a customer and these are the terms and conditions we want to have in order to have a relationship with an individual company. While they may not emulate commercial practices 100 percent, there is no all-out commercial standard in any government procurement,'' Gormley said.

But the Arlington, Va.-based Information Technology Association of America has raised objections to federal officials in recent weeks over government's ability to terminate leased information technology agreements. ITAA Senior Vice President Olga Grkavac, writing on behalf of the association's 250 corporate members and 11,000 affiliate members nationwide, objected to the Office of Management and Budget over the right of federal customers to terminate a lease prior to completion of its term.

While the reasons a government customer can cite in terminating a lease agreement are similar to those on purchase contracts, the burden on lease arrangement vendors are greater, industry officials say. For example, if an agreement to lease 100 PCs for 12 months is terminated after 60 days, then the vendor must find a way to move a large amount of inventory for the remainder of the unfulfilled arrangement. In the case of a purchase agreement that's canceled in mid-contract, the vendor at least has the satisfaction of selling a portion of his inventory for good.

"The existence of this condition in the federal arena is either limiting access to financial institutions or causing lease rates to be significantly higher than they would be in the commercial marketplace,'' Grkavac wrote.

For much of the decade, industry leaders sought to allow the leasing of technology to government customers. The Defense Authorization Act of 1995 initially encouraged these arrangements within the Department of Defense. The Clinger-Cohen Act of 1996 went even further by encouraging agency buyers to embrace greater innovations in government spending.

"Leasing allows for more rapid technology [replacement],'' Aisenberg said. "It allows for lower life cycle costs and a lower cost of information technology overall.''

But with annual budget pressures affected by shifting political tides, government customers have much flexibility to terminate lease arrangements in the same manner with which they terminate purchasing contracts.

While conceding that federal budget constraints are far greater than those in the commercial marketplace, industry leaders complain that terminations for convenience purposes in purchasing contracts should not be allowed in lease agreements. Essentially, that clause allows a government customer to terminate a lease for practically any reason, industry critics say.

"We would be very happy if the government agreed with the ITAA position and eliminated termination for convenience,'' said Karen Zucker, senior counsel for Amdahl Corp.

Grkavac, who wrote the letter June 12 to OMB Office of Federal Procurement Policy Administrator Steven Kelman, said she hasn't gotten a response yet. The ITAA will consider appealing to members of the U.S. Congress if the matter is not resolved on an administrative level, she said.

Through an office spokesman, Kelman declined to comment, except to say that he has received the letter, is reviewing it and will respond at an undisclosed date.

"I think we caught him cold,'' Grkavac said. "It's not something he's heard of before. But with the increase in leasing, it's a concern with our members. We're definitely going to pursue it. Once we get his response, we'll see if we need to pursue it legislatively.''

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