What a difference six months could make

Fluctuating industry could complicate Networx award process

Although the General Services Administration won't award the Networx telecommunications contracts for a few more months, the industry landscape is already shifting to adjust to the contract that will govern federal telecom procurement for the next decade.

Many bidders are in the process of being acquired, are acquiring smaller companies or are doing both at the same time. When GSA is ready to award the contracts next summer, the companies getting spots on the vehicles may not look much like the ones that submitted bids.

Among the major companies, SBC is in the process of acquiring AT&T while Verizon is buying MCI. At the other end of the scale, some companies are continuing to acquire smaller companies to bring niche capabilities in-house and strengthen their value as potential Networx contract holders.

GSA officials declined to say much about how the possible mergers affect the bid evaluation process. "Companies submit their proposals, and we evaluate what has been submitted," said GSA spokeswoman Mary Alice Johnson.

Legally, there are two major concerns, said John Chierichella, head of the government contracts practice at Sheppard, Mullin, Richter and Hampton in Washington, D.C.

First, the federal Assignment of Claims Act forbids a company to win a contract and assign it to another vendor without the government's consent.

"The statute doesn't apply technically to bids, but courts and the Government Accountability Office have historically applied the same principles that are embodied in the statute to the assignment of bids," Chierichella said. "If the entity that now has responsibility for the bid is a different entity [than the original bidder], there is something of a concern."

However, he said, "if it's not just a naked transfer of the bid, if it's incident to a bona fide transfer of control of the company, a merger or acquisition, then the contracting officer has the right to recognize the successor. It's not mandatory, it's discretionary. But most of the time, contracting officers are pragmatists."

Second, the internal structure of new companies often changes during mergers and possibly even afterward.

"When companies merge or when they undergo reorganizations, functions and units can be merged, eliminated or simply aligned differently within the overall organization," he said.

As a result, the internal factors that affect the prices that the company charges to customers are often in flux during mergers, which "can sometimes make the evaluation of an offer somewhat speculative," he said.

Agency officials should press the merging company to provide as much detail about the merger's impact as possible. If a company doesn't address the issue or declines to predict the merger's impact on prices, contract awards could become vulnerable to protests, Chierichella said.

Warren Suss, president of Suss Consulting, said Networx was designed to accommodate mergers and acquisitions.

"The government this time decided not to limit the number of awards upfront like they have in the past," Suss said. "Partly that was in order to encourage more offerors and to encourage more awards, so that in the event of consolidation, there would still be sufficient competition among the remaining players."

However, that dynamic largely applies to the post-award environment.

Broadly put, MCI's strategy is to change with the times, said Jonathan Crane, the company's executive vice president of strategy and corporate development. Although telecom companies once had to offer only reliable local and long-distance voice services, newer contracts call for comprehensive voice, video, data, network management and IP services, among other offerings.

The telecom "industry is really quickly transforming from being simply a connectivity provider to bringing more value," Crane said. "There are lots of competitors. The pricing for pure connectivity has gone down over the years. Long-distance transport has gone down, and we're also in the midst of a technology change. All of us have to find a different value proposition to provide to our government base. We have to redefine ourselves in terms of what services we bring to the client base."

MCI recently completed the acquisition of Totality, a privately held firm that provides remote managed services. The move is one in a series of strategic acquisitions MCI has made in an effort to meet new demands. Its earlier purchase of NetSec added managed security services to its arsenal. In 2003 MCI acquired Digex to add application-hosting capabilities.

"You have to think about hosting," Crane said. "You have to think about storage. You have to think about computing. We really could redefine each one of the kind of services that have been bought in the past by the government."

To keep up with customers' evolving preferences, MCI is aiming to resemble a utility provider that offers services as needed. "The world's changed, so we should always anticipate that we're going to have new challenges," Crane said. "This is an enormous task to ask of any provider."

Sprint's most important merger was with wireless provider Nextel. The two companies completed the deal in August.

"The corporation felt that the marriage of our capabilities could better enable us to compete with the other large wireless providers and also provide choice to our customers," said Tony D'Agata, vice president and general manager of Sprint's Government Systems Division.

Most of the company's competitors in wired services have sufficient capabilities and infrastructure, he said. Sprint chose to expand wireless services through the Nextel merger and through acquisitions of smaller, regional wireless companies.

"We've spent a couple billion dollars at least to acquire wireless companies," he said. "It extends our ownership. One has additional control over how to manage in certain areas or territories of the country."

D'Agata said Sprint, especially with the Nextel addition, is in good shape for the Networx competition.

"Most of what has been requested on Networx is fairly consistent with our competencies and capabilities," he said.

FTS 2000, the granddaddy of telecom contracts, was mostly centered on voice services, D'Agata said. "By the time we got to FTS 2001, the dominant service was data communications as opposed to voice. Now as we get to Networx, we're seeing a couple of things. One is the advent of wireless, which was almost nonexistent under FTS 2001, and [the other is] managed services."

AT&T takes its own approach

Partnerships and alliances are the relationships of choice at AT&T. The last major acquisition AT&T made was in 2000, when the company bought GRC International, which has become the professional services arm of AT&T Government Solutions, said Hank Beebe, chief engineer and leader of AT&T's Networx capture team.

Since then, however, AT&T has pursued partnerships rather than acquisitions. One key reason is to ensure that the partner companies retain their strengths, said Jeff Mohan, director of business development at AT&T Government Solutions.

When a company buys a smaller firm, "The first thing that happens is they're not a small business anymore," he said. "There's a tremendous push for integrating them into your business. In my experience, that dilutes the entrepreneurial and innovative spirit that made them attractive in the first place."

Such partnerships bring capabilities to AT&T, such as government-specific training or asset recovery services, which are not needed in the company's commercial business, Mohan said.

In preparing to bid on Networx, Mohan and Bill Polizos, director of the company's small- business program, examined existing partner companies and potential new ones for inclusion, Mohan said. The company also held small-business conferences to seek out new partners for Networx.

"As we go through the implementation phase of Networx, we're certainly going to add small businesses as we need to do the work," he said.

AT&T forms partnerships with large companies, too, and the Networx team includes integrators SRA International and EDS. But small businesses bring a variety of advantages, including credit for meeting socio-economic goals, he said.

-- Michael Hardy

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