Will FTS 2001 unravel?

When the General Services Administration created the FTS 2001 contract in

1996, it did more than launch a simple contract for federal agencies — it

ushered in a new era of how the government buys telecommunications.

Under the contracts signed with Sprint in December 1998 and MCI WorldCom

a month later, the government offered agency telecom managers an unprecedented

package of features, flexibility and value. For starters, agencies got rock-bottom

prices — about 60 percent off rates offered under the predecessor FTS 2000

contract.

Over the eight years of the deal, long-distance service would start

at 5 cents a minute and then drop to 1 cent a minute, a rate some say could

save taxpayers more than $4 billion over eight years. "The government has

gotten a good price," said Barbara Connor, president of Bell Atlantic Federal.

"I don't know of anyone, anywhere, who is getting their long distance for

1 cent a minute."

To keep the contract flexible in a time of quick marketplace innovation,

the government also said the companies could offer new technologies even

if they were not specifically provided for under the contract. And in a

move that could come back to haunt the architects of the contract, FTS 2001

was made optional; agencies could tap the contract or not, depending on

their requirements and management resources.

But agency buyers weren't the only winners at the FTS 2001 table: MCI

and Sprint were offered big sweeteners. Terms called for the two companies

to be guaranteed revenues of at least $750 million each over the life of

the contract.

Finally, even big losers were thrown a bone: AT&T — an FTS 2000 contract-holder

that was iced out of the FTS 2001 contract — was told that GSA might consider

allowing it and others to offer long-distance services to federal agencies

via so-called Metropolitan Area Acquisition (MAA) contracts, separate pacts

that cover local telecom services. AT&T has three lucrative MAAs — Chicago,

San Francisco and New York — that, if changed into portals for long-distance

service, could reap big rewards for the company. AT&T also shares three other

MAAs: Indianapolis with Winstar Communications Inc. and Bell Atlantic; Cleveland

with Ameritech Corp.; and Buffalo, N.Y., with Bell Atlantic.

But have FTS 2001 contract administrators gone too far in trying to

be all things to all parties? Sandra Bates, commissioner of GSA's Federal

Technology Service, doesn't think so. She declared the contract "already

a success, in that government has access through this program to the latest,

greatest networking technology and services, and prices none better."

Maybe so, but nearly a year and a half after contracts were signed and

only months from the government's deadline for cutting over to FTS 2001,

two-thirds of all federal agencies have yet to move to the new contract.

A thicket of problems stands in the way, including the contract's economics,

rollover snags, AT&T's hardball contracting tactics and a pending marriage

between MCI and Sprint.

"We did not see the kinds of numbers we expected in 1999," said Diana

Gowen, vice president of MCI WorldCom Government Markets, which stands to

reap substantial rewards from its new FTS status. "We had only transitioned

about 2 percent of the agencies [in 1999] and are at about 30 percent right

now."

Some telecom experts chalk up the obstacles to inertia. "All transitions

are made with some angst, so when an agency has a choice, they prefer not

to transition," said Tony D'Agata, vice president of Sprint's Government

Services Division. "A number of customers have decided that it is just as

well not to transfer."

A Too-Visible Transition Process

Part of the anxiety lies in the complicated art of network cut-over,

industry experts say. After an agency picks a vendor, selects services and

designs new networks, agencies have to switch physical networks from one

company to another. This can be done with new cable, but most companies

prefer to use existing connections. To make that happen, the new contractor,

the incumbent and the local-service provider must all be present. If not,

the agency might wait another month or more for services to be transferred.

The lack of good equipment records has also made it difficult to transition

quickly, say FTS 2001 vendors. "You never know what you will find when you

get in there," said Richard Slifer, director of FTS 2001 for MCI. "We have

opened up [circuit] boxes and found scrap pieces of paper with writing on

it stuffed behind the wires. This is what we have to use to know how the

circuitry is laid out."

The transition process was supposed to be invisible, in much the same

way any resident can change phone carriers without having to do anything

more than say yes, according to one transition expert, who spoke on condition

of anonymity.

However, "no one can be totally prepared for the scope of this transition — even MCI — and they thought they did everything to get ready to help the

agencies transition," the source said.

Where's the Beef?

But while such practicalities are factors in the FTS 2001 transition,

most officials understand that the root causes have to do with the value

of new services agencies can expect under the contract. To some, there simply

is not much additional value offered under the next-generation contract.

"With FTS 2000, there was an immediate cost savings when agencies switched

and FTS 2000 changed agencies' telephone services from analog to digital,"

said Mike Corrigan, the former GSA commissioner for telecommunications,

who worked on FTS 2000. "This time there is not an immediate price incentive

to switch, and there is not much service difference. They are switching

[from] digital to digital."

Problems with the physical transition and the perception that new FTS

2001 services may not be worth fighting for have left AT&T ample incentive

to coax agencies to ride the old contracts as long as possible, experts

said. The company has matched prices offered under FTS 2001 and dragged

its feet in trouble- shooting transition problems, they said.

AT&T has slowed the transition process by requiring a 25-day waiting

period to terminate service, meaning that Sprint or MCI must wait almost

another month for AT&T to transition services. "We all stand in line while

[AT&T] gets revenue for 25 more days," said Jerry Edgerton, president of

MCI WorldCom Government Markets.

But John Doherty, vice president of government markets for AT&T, said

the company has done nothing to impede agencies' moves to FTS 2001. The

25-day notice to disconnect is standard in the industry, said an ATT spokeswoman.

Still, Dennis Fischer, who left his post as commissioner of FTS 2001

for a job with Visa in April, called the slow transition one of his disappointments

with the program. "It's very complex," he said. "Some people are resistant

to change, but my sense as I left is that the pace was picking up."

More Bumps Ahead

With the FTS 2000 contract ending Dec. 7, agencies are running out of

time to find another contract vehicle and are feeling pressure to make a

transition.

But now, even if agencies wanted to make the cut-over, vendors will

not be able to make the deadline. "We anticipate having all the voice lines

transferred by the deadline, but will be unable to have all the data lines

transitioned by [December]," Gowen said. "Many agencies are taking this

opportunity to upgrade their networks, and that takes additional time."

Fear that agencies will not have completed transitions by the deadline

has led to discussions of extending the FTS 2000 contract once again, an

option that MCI says may lead them to sue. Sprint was a contract-holder

on FTS 2000 and would not be affected by the extension other than hurting

the company's ability to meet the minimum revenue guarantees.

"If [FTS 2000] is extended, we will have to explore all our options,

but legal action is something we would have to look at," Gowen said.

While MCI is threatening on the front end of the contract, AT&T is putting

pressure on GSA to open the contract's back door by allowing the company

to offer long-distance services through the local-service MAA contracts.

"They said we were going to have open competition across the board," Doherty

said. AT&T plans to offer long-distance services under FTS 2001 "as soon

as we get GSA permission."

AT&T, however, may get no relief from GSA. A recent study of the FTS

2001 contract by the General Accounting Office warned that increased competition

in the long-distance market could prevent GSA from meeting the minimum revenue

guarantees it promised MCI and Sprint. This in turn may discourage GSA from

allowing companies holding local-service contracts to provide long- distance

services.

"GSA is a victim of its own success," said Kevin Conway, who wrote the

GAO report. "They offered guarantees to get lower prices, but because the

prices are so low, barring any significant growth, it will be a challenge

to meet the guaranteed revenues."

Others believe GSA may have been a victim of its own naivete in expecting

AT&T to walk away from FTS 2000. GSA "failed to anticipate the problems and

the difficulties of transitioning from a strong incumbent" such as AT&T,

said Warren Suss, president of Warren H. Suss Associates Inc., a market

consulting firm.

"They failed to put into place a strong enough mechanism to ensure they

would achieve cooperation at the time the program came in," Suss said.

Ultimately, the program could be undone by one of its major selling

points — offering agency telecom managers a choice of contracts. The proposed

merger of Sprint and MCI, which the companies announced last year, would

leave the government with "a lemon of a contract," said one agency telecom

manager, who spoke on condition of anonymity.

"If the two vendors on the FTS 2001 contract are allowed to merge, it

will not only eliminate competition on the contract but any incentive to

offer new technology or lower prices to match market values," he said. "We

will be back to where we started — paying more for long-distance service

than the commercial market and using an old, antiquated system."

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