IT industry takes Washington

While not quite ready to claim victory, industry officials make progress in moving their agenda with lawmakers, White House PROTECTING OUTSOURCING EXPANDING COMPETITION JOUSTING WITH SECTION 803 STILL PENDING Government IT outlook remains strong despite EDS bombshell

If lobbying were sport, the information technology industry had a good season.

In the win column, IT representatives persuaded Congress to defeat several anti-outsourcing bills. They turned back an administration proposal that would have eliminated time-and-materials contracts on certain IT projects. And they saw the administration heed industry concerns about conducting public-private competitions for government work that allow consideration of factors other than lowest cost.

But IT executives are reluctant to claim victory or crow about lobbying successes. Unlike baseball or football, there's no World Series or Super Bowl -- just next season. The fight over these issues, as well as new ones, will continue when a newly elected Congress convenes next year.

Still, as the 107th Congress comes to a close, IT executives said they've witnessed increased attention to their issues on Capitol Hill and in the Bush administration during the last two years. Perhaps most indicative of the changed atmosphere is the high visibility of Mark Forman, associate director for IT and e-government in the Office of Management and Budget, and the strong role his office is taking in shaping the IT budgets and plans of federal agencies.

"[Forman's] office has made it clear they see IT and e-government as the key enabler to achieving many of their goals. There is a realization of what an important role IT plays," said Jim Serafin, vice president of marketing and government relations for the Government Electronics & Information Technology Association in Arlington, Va. The group's members include systems integrators, hardware manufacturers and software providers.

 

Defeat of the Truthfulness, Responsibility and Accountability in Contracting Act -- which Serafin called a "shut-down-the-government bill" -- was a key win in the 107th Congress, industry executives said.

The bill would have temporarily suspended all outsourcing, and thereafter would have required any outsourcing to be based on a public-private competition. Introduced last year by Rep. Albert Wynn, D-Md., the TRAC Act would require an equal percentage of federal employee and private contractor positions to be put up for competition each year. Federal employee unions support the bill.

"The most important action Congress could take would be to implement the TRAC Act," said Colleen Kelly, president of the National Treasury Employees Union, at a Sept. 27 hearing before the House Government Reform subcommittee on technology and procurement policy. Kelly said the act would give taxpayers better accounting of how government funds are spent and government work is carried out.

Industry officials contend the cost-benefit analysis of IT outsourcing projects required by the act could add up to 18 months to the procurement process. The delays would not only hurt contractors, but also would hamper federal workers in carrying out their jobs, said Joseph Kampf, president and chief executive officer of IT contractor Anteon International Corp. of Fairfax, Va.

"It isn't in the jargon of the business world to have your revenue shut off for an indefinite period of time," Kampf said.

The legislation was defeated as a standalone bill, as were TRAC-like amendments proposed for other bills.

"The amendment process is a very dangerous area we continually have to be on the lookout for. There can be this stealth attack where someone introduces a bill in subcommittee or on the floor, where you really have to coalesce quickly to defeat it," Serafin said.

Wynn will likely reintroduce the bill in the 108th Congress, and will look into attaching it to other legislation as an amendment, said his press secretary, Amaya Smith.

Defeat of the act shows how effective education and discussions can be with members of Congress, said Stan Soloway, president of the Professional Services Council, an Arlington, Va., trade group representing providers of professional and technical services to government.

But, he added, "We don't call it a victory, because it's still there, and the other side isn't going to give up."

 

As industry representatives were fighting attempts to limit outsourcing, they also sought to influence the process for public-private competition of government work.

Much of this effort focused on the administration's review of competition in contracting, including its implementation of the Commercial Activities Panel report. The report, issued in April, was the result of a yearlong review of the OMB Circular A-76 process for public-private competition. Panel members represented the Bush administration, federal employees and industry.

The group reached consensus on 10 sourcing principles, including recognition that federal workers should perform inherently governmental functions. But panel members did not agree on the entire report.

A two-thirds majority -- absent federal employee unions -- agreed that the existing A-76 process should be replaced by a system based on the Federal Acquisition Regulation, which provides equal rights to all bidders and allows agency buyers to consider factors other than lowest cost in deciding who wins the work.

Now industry and government await the administration's revised Circular A-76, which will establish a new procedure for public-private competitions based on the panel recommendations.

Angela Styles, administrator of the OMB Office of Federal Procurement Policy, said the new process probably will be used first with workers providing IT services. She said she hopes the new process will be published this month, and expects it to be open for comment for 45 days.

Industry hopes the circular will overhaul the public-private competition process, Soloway said. The A-76 process has been widely criticized within government and industry as too costly, too time consuming and unfair to both sides.

"I hope it's not limited, and I hope it's not a pilot program," Soloway said. "[OMB] should phase it in and make some midcourse corrections, but the application needs to be broad and they need to move quickly. If not, the private sector will find it unsupportable."

Styles said the breadth of implementation will depend on agency decision makers. "I don't consider it a pilot," she said.

White House officials also are pushing to increase the number of commercial jobs agencies put up for competition or outsourcing, an effort supported by industry.

The administration wants agencies in 2002 to compete or directly convert 5 percent of their jobs deemed commercial in nature, and in 2003 to compete or convert an additional 10 percent of their commercial jobs. Some 850,000 federal jobs are commercial in nature but have never been subject to competition, according to the administration.

But the administration's plan is being challenged by legislators who want an amendment to the 2003 Treasury-Postal appropriations bill that would prevent the administration from setting numerical goals for public-private competitions.

Proponents of the ban say the goals are arbitrary and demoralizing to federal workers. But White House officials say prohibiting numerical goals interferes with their ability to manage the federal work force.

Industry representatives, who fear the ban could curtail public-private competitions, aren't sure whether they can persuade lawmakers to alter or remove the amendment, or if the Bush administration will make good on its threat of a veto if the provision is included in the final bill.

If the amendment passes, administration officials said they will work to continue the president's competitive sourcing agenda absent numerical goals. Styles said an alternative would be to set a policy that says all jobs that are not inherently governmental have to be competed.

But "how agencies get there over time would be a lot more difficult," if the administration couldn't set numerical goals, she said.

 

Industry also had significant success in altering Section 803 of the 2002 Defense authorization act, as well as a federal acquisition rule implementing the provision. The final rule has not yet been published.

Soloway called the original version of Section 803 in the authorization bill "horrendously devastating."

Originally, Section 803 required that the Defense Department give all companies named to governmentwide acquisition contracts or GSA schedules the opportunity to compete for task orders under those contracts. But because contracting officers would have been overwhelmed with bids, Section 803 was revised to require that Defense Department contracting officers get at least three bids for each acquisition job worth more than $100,000 that is made under a multiple-award contract.

Debate about Section 803 heated up again last summer when the Office of Federal Procurement Policy proposed that the acquisition rule implementing Section 803 limit streamlined acquisition buys off the GSA Schedules to firm, fixed-price contracts.

Industry officials strongly opposed the change. They said it would have severely hindered the Defense Department's ability to contract for services quickly, and argued that time-and-materials and labor-hour contracts are essential for complex IT solutions where the buyer cannot know in advance everything that will be needed.

After IT industry groups mobilized, conducting letter-writing campaigns and visiting government officials, Styles decided against the new provision, which had not been included in the bill as it passed Congress.

"We decided it was best not to resolve some time-and-material [contract] issues in that rule, but to resolve them in another rule," Styles said.

The administration's decision is a temporary victory, Serafin said. "We are probably going to have to fight that battle in the future," he said.

Industry officials also are monitoring closely the legislation establishing a new Department of Homeland Security. Of key concern is a provision that would provide additional, federally funded insurance coverage, called indemnification, to companies providing homeland security products and services to the government.

Indemnification is crucial for companies offering anti-terrorism products and services to the government, industry representatives said. Companies are afraid they could be liable for billions of dollars in damages if an IT system they built or operate fails during a catastrophic terrorist attack similar to the Sept. 11 attacks, even if it's not their fault, executives said.

"If we are managing Transportation Security Administration converged communications, and someone's battery goes, and they can't contact someone and a terrorist attack occurs, is EDS responsible for this?" asked Booth Jameson, director of global government affairs for the federal unit of Electronic Data Systems Corp. of Plano, Texas.

Jameson said companies would still be required to buy as much insurance as they can on the open market, but their ability to buy terrorism-related insurance would be limited.

"We're a $22 billion company -- $4 billion of insurance isn't going to take you very far," Jameson said. With indemnification, "we would have the federal government as a backstop so we would not lose the whole company" in the event of lawsuits following a terrorist attack, he said.

Executives hope the bill will include an amendment that will allow indemnification on a case-by-case basis in the event of a terrorist attack.

"There is a growing understanding that this is not a bailout," Soloway said. "The question is how to achieve it in a way that gives coverage companies need, coupled with some comfort to the government that it just doesn't open the vault." *

Staff Writer Gail Repsher Emery can be reached at gemery@postnewsweektech.com.

As we near the end of the third quarter, it appears there will be more good news from federal information technology services firms and not-so-good news from commercial IT service firms.

A very negative preannouncement from Electronic Data Systems Corp. and disappointing earnings from Oracle Corp. seem to signal that no turn is in sight for commercial IT spending. With the Dow below 8,000 again, and NASDAQ hitting levels last seen in 1996, it is a difficult time for most industries, not just IT services.

I believe the catalyst for higher IT spending will be business expansion and increased business investment, as opposed to a new technology cycle, regulatory requirements or unusual events such as Y2K. Early indicators for a turn in commercial IT spending are improving corporate revenue and earnings performance and better outlooks at larger companies, with the view that this will lead to increasing capital expenditures, including IT.

However, as the performance of the stock market suggests, we are not yet seeing such expansion and probably will not for at least a few quarters.

The EDS miss was a big surprise to investors, given the magnitude, the amount of long-term contracts the company holds and the fact that EDS reported results and backed guidance just two months ago. The shortfall was a result of one-time events, such as losses from USAirways, which filed for bankruptcy; weakness in Europe, which Oracle also cited as one of the reasons for its disappointing earnings; weakness in EDS software business; and a general reduction in follow-on business from outsourcing clients.

One bright spot: EDS' Navy-Marine Corps Intranet contract is running at a greater pace than anticipated, helping revenue but not profits.

At the annual Legg Mason IT Services conference in September, commercial systems integrators said their clients continue to delay decisions because of economic uncertainty. The systems integrators are managing their businesses to preserve cash and managing their costs with expectations of flat-to-down revenue.

Even the outsourcing companies are citing lengthening sales cycles because of client uncertainly over the economy's direction.

One area that continues to surprise me is the state and local market, in which IT service firms continue to win new business despite staggering budget deficits. While some areas in the state and local IT market are being cut, projects that help governments perform their essential missions or that have alternative funding sources (federal, fee-based or sources other than taxes) are continuing to be awarded.

In an effort to reduce costs, commercial and state clients increasingly are shifting software development and outsourcing offshore, primarily to India.

The federal IT service firms at the conference maintained their upbeat outlook, despite budget delays.

Direct or indirect spending for homeland security is driving the growth of many of the companies' businesses. As for defense spending, most of the participants thought defense spending will continue to grow over the next several years, though a potential war with Iraq could cause some near-term disruption to programs not directly supporting the effort. Investors clearly have recognized the differences in market outlook between federal and commercial companies, with the former trading at their highest valuations in over a decade, and the latter trading at their lowest valuations in a decade.

Bill Loomis is managing director of the Technology Research Group at Legg Mason Wood Walker Inc. He can be reached at wrloomis@leggmason.com. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. For additional information and current disclosures for the companies discussed herein, please write to: Legg Mason Wood Walker, Inc., 100 Light St., P.O. Box 1476, Baltimore, Md., 21203, Attn: Research Department.

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