Ga. outsourcing suffers big blow

IBM's withdrawal shows problems with service-level agreements

Convergent Communications Outsourcing Project outline

October 2001

Request for proposal issued.

Four companies and one team are qualified by Georgia to compete: Motorola Inc., Science Applications International Corp., TRW Inc., WorldCom Inc. and

Electronic Data Systems Corp.'s team

of Lockheed Martin Corp., AT&T Corp. and BellSouth Telecommunications Inc.


June 2002

Teams led by EDS and WorldCom

submit bids.


July

State cancels bids by EDS and

WorldCom.


August

State issues revised RFP.

November

New bids submitted by IBM and

EDS teams.


January 2003

IBM withdraws its bid on project

April

Project award scheduled.

IBM Corp.'s withdrawal from the competition for the Georgia Convergent Communications Outsourcing Project has pushed the $1.8 billion project to the brink of cancellation, according to analysts and industry experts.

The IBM-led "EnvisionGeorgia" team withdrew its bid Jan. 3, leaving only the "ConnectGeorgia" team, led by Electronic Data Systems Corp., in the running for the project.

Under the 10-year contract, the winner would provide telephone services, computers and support, local area networks and high-speed online Internet access to state and local government agencies.

IBM's decision to cancel its bid, submitted in mid-November, is the latest setback for the groundbreaking project. Last July, the state canceled bids by EDS of Plano, Texas, and WorldCom Inc. of Clinton, Miss., when it discovered WorldCom had submitted invalid financial information.

At press time, the Georgia Technology Authority was consulting with new Gov. Sonny Perdue to decide how to proceed with the project, said Michael Clark, a GTA spokesman. The state either will award the contract to the EDS team or cancel it and outsource parts of the project, he said.

The reason for IBM's withdrawal is the subject of dispute. In a Jan. 3 letter notifying the state of its intention to cancel its bid, IBM merely stated that external factors, such as the state's political landscape, the telecommunications industry and the economy, were prompting its withdrawal.

But one company official was more specific. John Nyland, IBM's vice president of public sector Americas, said that the changing nature of the solicitation itself led the company to withdraw its bid.

Industry sources close to the project said that Big Blue was caught off guard by the state's attempt to establish "uncapped" service-level agreements during the negotiations process after bids were submitted. The state reportedly established service-level agreements with no limit on the amount of resources the prime contractor would have to expend to meet these agreements.

But Larry Singer, who shaped the project and helped craft the request for proposals, said he is unaware of any last-minute changes to the project's requirements.

"There have been no fundamental changes to the RFP," said Singer, former executive director of the Georgia Technology Authority and state chief information officer under former Gov. Roy Barnes. Singer resigned from his position in December and said he is serving as an adviser to GTA on a pro bono basis.

If the project were canceled, it would be the second major setback in recent years for a statewide information technology or telecom outsourcing contract. In 1999, Connecticut's governor canceled a project to outsource its IT services and support when it was on the verge of signing a contract with EDS. The company, which was unhappy with the state's terms, backed out of the deal.

Analysts and industry experts said the problem in Georgia mirrors industry's earlier experience in Connecticut. In both cases, the government customer sought to establish service-level agreements during negotiations that drove away the contractors, they said. Rather than letting the contractors establish the service-level agreements themselves and choosing the better offer, the state sought to dictate the liability associated with the agreements.

"What's throwing a monkey wrench into [the Georgia project] is that the requirements are coming up in the last five minutes of the game," said Tom Davies, senior vice president of Current Analysis Inc., Sterling, Va.

The project was conceived as a best-value contract, embodying innovative approaches that would dramatically improve its communications infrastructure, a goal that is incompatible with a low-cost approach, according to state and industry officials. To achieve its stated goals and objectives, Georgia would need to establish performance standards.

EDS' partners on the ConnectGeorgia team are AT&T Corp., Bell South Telecommunications Inc.,Cingular Wireless, Information Systems Management Inc. and Science Applications International Corp.

IBM's partners on the EnvisionGeorgia team were Sprint Inc., Resource Network International Inc. and Enterasys Networks Inc. In the earlier competition, IBM was a participant on the GeorgiaAdvantage team led by WorldCom.

Perdue has stated publicly that he supports the project as a way to increase telecommuting in the Atlanta metropolitan area and to extend Internet access to remote corners of the state. Perdue's office did not return phone calls for this article.

Because the contract was to be awarded through a competitive process, there are no legal obstacles keeping Georgia from awarding the work to the EDS-led team, state and industry officials said.

If the state decides to contract out parts of the job, EDS would consider bidding, said Dana Bolden, an EDS spokesman. But Bolden said the state would get a better price by outsourcing the entire deal.

"Buying under CCOP would drive the cost down, whereas a piecemeal approach would increase the cost significantly. We don't think that is the best value for the state," he said.

 

SOURCES OF FRICTION

IBM and Georgia disagreed on two main issues, according to an industry source. One source of friction was an attempt by the state to establish uncapped service-level agreements. IBM officials were reluctant to commit unlimited resources to meet some of these, the source said.

Another cause of friction was a request by the state for full access to cost and pricing information. While IBM provides such information for federal solicitations, it does not provide it for the commercial side of its business, which was responsible for the project, the source said.

In a competitive procurement such as the Georgia project, "the market forces of the two companies competing against each other ought to be enough to convince the customer that it is getting a good price," the source said.

The EDS team did not encounter the same problems during the bid clarification phase that began after the two teams submitted their bids in November, Bolden said.

"The interchange between the state and the team was quite positive for Connect-Georgia," he said.

Singer strongly disagreed with IBM's interpretation of events. He said the EnvisionGeorgia team withdrew because it was poorly positioned to compete against the ConnectGeorgia team. Although the bid process had not been completed, extensive discussions had taken place between the state and the two competing teams.

Rather than the state deciding that IBM and EnvisionGeorgia had not won the contract, "they decided themselves that they hadn't won," Singer said. "ConnectGeorgia was the last one standing."

 

TOO MUCH RISK

Georgia officials, like those in Connecticut, appear to have left certain requirements "open-ended" at the outset, which had a major affect on the bids they received, Davies said. While any government customer has the right to seek service-level agreements that are to its satisfaction, it shouldn't do so at the last minute, he said.

He said the states are establishing requirements that are catching contractors by surprise and changing the economics and risk involved, which forces bidders to recalibrate the risks and rewards of the project.

"If the companies know this early on, they can make a decision whether they want to play by these rules," Davies said.

Even when service-level agreements are capped, the contractor assumes considerable risk if the requirements are difficult to meet. Computer Sciences Corp. discovered this after its $644 million outsourcing contract with San Diego County was nearly terminated in April 2002, because the company was having trouble meeting the contract's rigid service-level goals.

CSC and San Diego County resolved the dispute following top-level meetings between officials in June 2002.

John Kost, vice president of global public-sector research at the market firm Gartner Inc., Stamford, Conn., said state officials lack experience negotiating best-value deals that call for service-level agreements. Consequently, they believe that "unless they have clear metrics and carry a very big stick, they are going to be taken advantage of," he said.

Bob Welch, a partner with Acquisition Solutions Inc. of Chantilly, Va., said that neither federal nor state governments have done a good job of establishing service level agreements in best-value contracts.

"Government has had a hard time letting go and not dictating the solution to industry in the form of a statement of work," he said. "It needs to allow industry to propose their unique solutions and metrics for how they would measure success."

Rather than dictating service-level agreements themselves, government customers should let each bid team propose them in response to the solicitation, he said. Once the bids are submitted, the government can compare one contracting team's service-level agreements against another's to get the most advantageous terms.

To remedy the problem that appears to be plaguing state government outsourcing deals, Welch said government should get feedback from industry in one-on-one market research meetings held before contract negotiations are in full swing. Once the negotiations begin, it's too late, he said.

Staff writer William Welsh can be reached at wwelsh@postnewsweektech.com.

About the Author

William Welsh is a freelance writer covering IT and defense technology.

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