HP/EDS merger could simplify contracting

The merger of Hewlett-Packard and EDS could offer federal contracting officials an easier transition into performance-based acquisitions as government agencies struggle to define a performance-based acquisitions strategy.

Some procurement experts say Hewlett-Packard’s planned purchase of Electronic Data Systems for $13.5 billion will likely help the hardware giant better position itself to win performance-based services contracts.

The companies have signed an agreement outlining the deal, and both  boards of directors have approved it. The companies expect the sale to close in the second half of the calendar year.

EDS is a services provider, and HP is one of the largest suppliers of PCs, servers and other hardware. Both companies have major customers in the federal government.

Procurement expert Alan Chvotkin said the merger of HP and EDS would put HP among a select few companies with General Services Administration schedule contracts — along with Lockheed Martin, Dell and Cisco Systems — that are in a position to win performance-based contracts.

“The merger would signal to me that [HP] sees an opportunity to expand GSA schedules,” Chvotkin said, executive vice president and counsel at the Professional Services Council, which represents professional and technical services providers in the government market.

Agencies still struggle with performance-based contracting, even though the concept has been around a long time. Historically, contracting officers have generated lists of components and services to buy. Under performance-based contracting, agencies instead communicate the outcome they want and let the chosen contractor team figure out the best way to achieve it. Service-level agreements, under which the contractor commits to delivering minimum levels of service or suffer penalties, aid in managing such contracts.

About 38 percent of services contracts were performance based in fiscal year 2007, according to figures from the Office of Management and Budget. That amount was 7 percent short of OMB’s target of 45 percent. Paul Denett, administrator of OMB’s Office Federal Procurement Policy, said this year OFPP expects 50 percent of agencies’ services contracts to be performance based.

Reasons for the shortfall are varied, officials say. In a April report, the Treasury Inspector General for Tax Administration cited a lack of education, guidance and training as primary reasons for the slow adoption of performance-based contracting at the Internal Revenue Service.

David Drabkin, acting chief acquisition officer at GSA, said the reasons for agencies’ reluctance to embrace performance-based acquisition are deeply rooted. “It’s really a cultural change [and] intellectually more difficult,” Drabkin said. “A lot of people feel uncomfortable not knowing what’s inside the box.”

The complexity of major federal projects is another factor. “It’s an extremely challenging job to manage contracts through service-level agreements, probably because in many cases the bottom line [is] not controlled by a single vendor,” said Warren Suss, president of Suss Consulting.

However, with HP joining the ranks as a hardware and solutions provider, the management issues could become less complicated, Suss said. HP “certainly has the potential — keyboard-to-keyboard — to cover comprehensive solutions. They have the ability to dive very deep when it comes to both the hardware of the business as well as the services side of the business.”

HP’s acquisition of EDS would also mean that it would gain a number of contracts in the service provider’s portfolio, including:

Navy Marine Corps Intranet: EDS’ biggest government contract is also one of the biggest in the Defense world. The company won a seven-year, $6.9 billion contract for the Navy and Marine Corps closed network in 2000. In 2007, the Navy extended the contract by three years and $3 billion, even as the military prepares to migrate to a new consolidated network in 2010. EDS will attempt to win a recompetition for the contract.

Defense Manpower Data Center: In early March, the Defense Department awarded EDS a one-year contract to manage its central archive of identity management, personnel and financial data. The one-year contract with four one-year options is potentially worth $179 million.

Centers for Medicare and Medicaid Services’ Enterprise Data Center: EDS won several contracts related to services’ central data center. In 2007, the services awarded EDS a task order worth $93 million to modernize the center.


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