Networx: Lower guaranteed revenues

A new contract that will govern federal telecommunications procurement into the next decade is nearing final form, and it includes relatively small minimum revenue guarantees for vendors.

The final period for public comment on the Networx contract ends in December. Officials at the General Services Administration's Federal Technology Service plan to issue two final requests for proposals next April.

Networx will be split into two vehicles: Networx Universal for worldwide services and Networx Enterprise for smaller, more limited offerings.

Contractors who win a place on the Universal contract will share a minimum of $525 million, while Enterprise contractors have a guaranteed minimum of $25 million, shared among them.

The guarantees are small compared with the $750 million each that Sprint and MCI were guaranteed as the first companies to be awarded FTS 2001, the contract Networx will replace.

FTS officials believe the total value of the 10-year contract could be $20 billion, although that is not a set ceiling, an agency spokeswoman said.

FTS officials had long promised that the guarantees for Networx would be smaller than for FTS 2001, but the numbers were only revealed earlier this month during a public meeting in Fairfax, Va.

Now some industry insiders are worried that the guarantees are not big enough to inspire companies to bid on the contracts.

Others disagree. Companies had to spend significant amounts of money to meet the demands of FTS 2001, said Warren Suss, president of Suss Consulting.

Those guarantees "were justified in the earlier incarnations of the program to provide incentive to industry to belly up to the bar for those kinds of costs, as well as an incentive to drive prices down," he said. "If management knew they were guaranteed $750 million, they would presumably be more aggressive in their bidding."

The telecom contract, he said, "is very well-established as an enormous program that's going to predictably generate revenues," so larger guarantees aren't needed.

Robert Collet, vice president of engineering at AT&T Government Solutions, said that whether the smaller guarantees are justified depends on unanswered questions about when companies must provide the services that the contracts, particularly Universal, demand.

The contract calls for advanced tools, including a range of Synchronous Optical Network services that don't exist now, at least not commercially, he said.

A draft RFP issued in October doesn't indicate whether the more advanced offerings would be required when the contracts are awarded in 2006 or if they can be added later.

"If the actual RFP comes out with a reasonable expectation of what's required on Day One, the [minimum revenue guarantee] is reasonable," Collet said.

If, on the other hand, officials want the advanced services on Day One, then the minimum revenue guarantee is inadequate. "All of us in the industry would have to accelerate our development activities for what may not be a ready market," he said.

Tony D'Agata, vice president and general manager of Sprint's Government Systems Division, echoed Collet's concern about systems development and said his team is assessing Sprint's position.

Another concern D'Agata expressed is that Networx Universal requires companies to provide some products that likely will become obsolete long before the contract expires, such as frame relay and Asynchronous Transfer Mode networks.

If companies have to support such technologies for several years longer than they normally would, the burden could be onerous, he said.

FTS officials could still raise the minimums, the agency spokeswoman said.

"We maintain an open mind for suggestions that add value to the Networx program and have a process in place for gathering, evaluating and incorporating that information into the final RFP," she said. "All suggestions that add value, including those pertaining to [minimum revenue guarantees], will be analyzed as we move forward with the final RFP."

The real Networx

With expectations that the Networx telecommunications contract will prove lucrative for the winning vendors, General Services Administration officials are holding the line on promising vendors minimum guaranteed revenues comparable to those offered under past telecom contracts.

The most recently published guaranteed minimums for Networx are:

* Networx Universal — $525 million shared among the winning vendors.

* Networx Enterprise — $25 million shared among the winning vendors.

— Michael Hardy

The Fed 100

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