Telecom Firms Vie for Fed Outsourcing Market

Telecom Firms Vie for Fed Outsourcing Market<@VM>Top Federal Network & Telecommunications Service Vendors, 1998<@VM>Federal Network and Telecommunication Services, 1999

Tony D'Agata

By Jennifer Freer, Staff Writer

Federal agencies are expected to increase spending on outsourcing telecommunications services as they attempt to offset a scarcity of skilled personnel that is forcing them to do more with less, industry officials said.

The demand for outsourcing by federal agencies is expected to increase from $2.1 billion in 1999 to about $2.9 billion in 2004, a 6 percent annual growth rate, according to Input, a market research firm in Vienna, Va.

And Tony D'Agata, vice president and general manager of Sprint Corp.'s Government Systems Division, said outsourcing could climb to 13 percent to 14 percent a year because of work force limitations and budget cutbacks.

"The government market is still a huge market, and it's still growing," said Randy Lucas, vice president of sales and marketing for Bell Atlantic Federal, a division of Bell Atlantic Corp., New York.

Outsourcing, which in the telecommunications world includes designing, implementing, testing and managing telecommunications networks, is a more cost-effective way of meeting telecom needs than can be provided internally by federal agencies, according to Mary Freeman, manager of market research at Bell Atlantic Federal. It is also harder for federal agencies to hire and retain information technology professionals, she said.

The move to outsource telecom needs is a boost to the major telecommunications companies serving the government. These include AT&T Corp. of Basking Ridge, N.J., with 24 percent of the federal telecom market share; Sprint Corp. of Westwood, Kan., with 14 percent; and MCI WorldCom of Clinton, Miss., with 7 percent.

Overall, federal spending on telecommunications is expected to grow from $7.1 billion in 1999 to $8.9 billion by 2004, according to an Input study, "Federal Network/Telecommunications Market View." Telecommunications spending represents 27 percent of federal IT spending, the study found.

"All military agencies are investing heavily in telecommunications infrastructure modernization," said Dan Allen, vice president and general manager of network solutions at General Dynamics Worldwide Telecommunications Systems, the company that bought GTE's Government Systems division in September 1999 for $1 billion.

But Allen said there are indications that a decline in telecommunications funding for the military budget will take place in 2002-2003.

"Agencies feel that investing in the infrastructure now is enough to meet the needs of the future, but they are finding it's not," he said.

Meanwhile, many telecom companies are focusing on other contracts, including the sizable Navy/Marine Corps Intranet contract. That is a $10 billion deal to provide secure voice, video and data networking, desktop computers, hardware, software, services and training for more than 400,000 seats, or computer users, at Navy and Marine Corps facilities in the continental United States and Hawaii. That contract is expected to be awarded May 24.

Competing for the contract are teams led by Computer Sciences Corp. of El Segundo, Calif.; Electronic Data Systems Corp. of Plano, Texas; General Dynamics Corp. of Falls Church, Va.; and IBM Corp. of Armonk, N.Y.

Another contract in the spotlight is the Federal Aviation Administration's Telecommunications Infrastructure contract, a $2 billion contract over 10 years to manage the FAA's telecommunications networks. The contract is to be awarded by the end of the year. Harris Corp. of Melbourne, Fla., Lockheed Martin Corp. of Bethesda, Md., and MCI WorldCom are leading teams that are vying for the contract.

Sprint and MCI WorldCom also are very focused on FTS2001, the General Services Administration's $5 billion long-distance telecommunications contract to provide government agencies with long-distance, data and video services.

While the three telecom giants battle for the lucrative outsourcing contracts in the government arena, not all are happy with a proposed merger of MCI WorldCom and Sprint, which has yet to attain final government approval.

"Agencies are concerned with only two main carriers, WorldCom, [the name of the merged companies] and AT&T," said Jim Payne, senior vice president of Qwest's Government Systems Division in Arlington, Va., a subsidiary of Qwest Communications International Inc., Denver.

But AT&T may have some difficulty boosting its share of government funding in the future, at least according to Input. Although the company has 24 percent of the existing federal telecommunications market share, most of its federal business comes from its FTS2000 contract, and "it will be a challenge for AT&T to maintain its market share without the FTS2001 contract," Input said.

AT&T has won several Metropolitan Area Acquisitions deals, and it expects to see continued growth in revenue through outsourcing efforts, according to company officials.

The MAAs are a GSA program for providing circuit-switched voice and data services as well as dedicated transmission to federal agencies in cities throughout the United States.

The MAA awards are estimated to be worth $150 million to $200 million per city, but that number varies according to the market size.

With the demand for Y2K services receding, other projects that were put on the back burner by federal agencies now are surfacing, such as information assurance, network security, broadband services, wireless services, data communications and network management, said Mary Jane McKeever, president for AT&T Government Markets.

VendorEstimated Market Share
(by percentage)
MCI WorldCom7
US West3
Lockheed Martin3
Bell Atlantic2
Net Federal2

Source: Input

AgencyEstimated SpendingPercent of Total
Defense$2.68 billion38
Navy$561 million8
Air Force$3856

Note: Total for Defense does not include separate spending by military services.

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