Telecom troubles

As telecom providers struggle financially, nervous feds seek alternatives, backups

As a result of the latest financial woes in the telecommunications industry, information technology managers running the government's telecom systems are nervous about the industry's ability to deliver inexpensive and quality service that agencies depend on to support everything from the Navy's huge intranet to the U.S. Postal Service's communications with thousands of post offices.

At the center of the storm is WorldCom Inc., which filed the biggest corporate bankruptcy in U.S. history last month. WorldCom provides only 8 percent of the network and telecom services to the government, according to the federal marketing and consulting firm Input, but WorldCom's bankruptcy is not alone in contributing to the uncertainty over telecom services. The industry is at best shaky, and other companies are also facing tough times.

"I think it's fair to say the government is experiencing the same market dislocation that the private sector is experiencing, but maybe on a more concentrated sphere," said David Nadler, a government contracts lawyer and telecom expert. "Eventually, it will shake out, but I couldn't begin to guess how."

The problem is debt, according to telecom experts. Many telecom firms overextended themselves in the late 1990s, planning for a dot-com explosion that turned into a bust. Companies were left holding bandwidth and network expansions that were no longer in demand. Now, telecom companies are trying to hang on financially and figure out how to improve business, experts say.

"Everybody has the same problem — a monster amount of debt," said Jerry Edgerton, senior vice president of WorldCom's government markets division.

Edgerton has been meeting daily with government customers, assuring them that service will continue the same as, if not better than, before and that the company will emerge stronger from its Chapter 11 bankruptcy filing, which allows the company to hold off on paying its creditors while it reorganizes.

"We have seen an overwhelming support from our customers in the last three or four weeks," he said. "We're going from customers being apprehensive to customers being supportive. They are in the same boat."

Nervous Feds Seek Backup

The government has plenty riding on WorldCom's financial health. The company provides about $1 billion a year of the federal government's telecom services, and the company is deeply embedded in government systems.

WorldCom is the major telecom provider for the Navy Marine Corps Intranet being built by EDS. It provides services for the Federal Aviation Administration's Leased Interfacility National Airspace System Communications System, the network that supports all U.S. airspace for civilian and military air traffic control, and holds the contract for USPS' Managed Network Services, which provides telecommunications to the nation's 34,000 post offices, among its many government contracts.

WorldCom officials say they are receiving new orders for services, but the company has not been awarded any new contracts from the federal sector. The real test of whether WorldCom can persuade federal agencies that it is a stable partner will be new contracts, according to Edgerton.

But winning future government work may be difficult. "What will hurt them is when somebody decides to buy a new service," said Bob Woods, former Federal Technology Service commissioner at the General Services Administration and now president of education services for Affiliated Computer Services Inc. "If I were buying a service tomorrow, the question would be, 'Should I stay with WorldCom or should I stay with someone more solid?' That's when WorldCom will really have to work for new service."

Other telecom companies already report that agencies are sending out feelers about other services and backup plans.

"The concerns have obviously heightened of late, and it's easy to understand why," said Tony D'Agata, vice president and general manager of the government systems division at Sprint. "We are receiving a lot of inquiries. The agencies read the papers as well. In one respect, it's an opportunity for us. Where we can help our customers create contingency plans or actually migrate their business, we stand ready to do it."

Agencies doing business with integrators that use WorldCom as a subcontractor are also looking for alternatives, according to Don Teague, AT&T's vice president of sales for civilian agencies. "We are being contacted by agencies that are now doing what the commercial sector is doing," he said. "They are looking at contingency plans and asking, 'What do I have for backup?'"

Warren Suss, president of Suss Consulting Inc., a technology advisory firm, said agencies are worried about service. "There are a lot of nervous people in the government now. GSA has been trying to assure the agencies that everything will be fine. However, there are a number of agency folks who feel they need a backup plan in case of the worst."

Although many federal executives who deal with telecom services declined to speak on the record, they did say that they are looking for backup systems in case WorldCom is unable to deliver its services.

Ronald Miller, chief information officer at the Federal Emergency Management Agency, said his agency just made the transition to WorldCom under the FTS 2001 government contract for long-distance service. "We're working on contingency plans, but it's highly unlikely we'll have to execute them," he said. "It's difficult for us to envision a scenario where they go out of business."

Unlike past emergency actions where the government stepped in to bail out carmakers, airlines and the banking industry, the federal government will have to step out of the way and let market forces do their work, according to one telecom executive.

"There's such a glut in the telecom industry that a bailout of one company is not going to do much good," said the executive, who declined to be identified.

GSA's Watchful Eye

WorldCom competes with Sprint on GSA's FTS 2001 contract to offer low-cost telecom services to government agencies. "We are all reliant on the infrastructure," said Sandra Bates, commissioner of FTS. "It's not one piece because all the pieces are interconnected."

Bates said that she has pledged to stand by WorldCom and that the federal government is closely watching to see that the quality of the company's services does not falter.

But change could come. GSA is reviewing all of its contracts with WorldCom in light of the company's disclosure of accounting practices that resulted in nearly $4 billion being falsely reported as revenue during the past year. WorldCom announced Aug. 8 that it improperly accounted for an additional $3.8 billion. If GSA decides to bar the company from future federal contracts, it could have a devastating impact on the company and force federal agencies to scramble for new services.

WorldCom's FTS 2001 base contract expires January 2003. The FTS 2001 contract was a five-year contract with five one-year options to renew. That could mean competition for the FTS award, a move that could dampen the company's optimistic view of the future.

Edgerton said he does not believe that GSA will bar WorldCom from future government contracts because such a move would have widespread impact — not just on WorldCom but on the economy as well.

"The federal government would have to take into consideration the economic consequences of doing that," he said. "We'd have to put another 80,000 to 100,000 people out of work. That's a pretty serious decision. The customers know that it's critical they stick with us."

WorldCom is not alone. Other telecom firms in the federal market are facing scrutiny, too. GSA is reviewing government contracts with Qwest Communications International Inc., which is being investigated by the Securities and Exchange Commission for how it accounted for $1.1 billion in revenue during the past few years. GSA is also reviewing contracts with Global Crossing, which operates a worldwide fiber-optic network. Global Crossing filed for bankruptcy in January and is also being investigated for its accounting practices.

Qwest reported a $1.1 billion second-quarter loss Aug. 8 and lowered its forecast for the year. But Jim Payne, senior vice president of Qwest's Government Systems Division, said it has been a banner year for the company in the federal market.

"It's always easier to go to one department store and buy everything, but there's also an issue for diversity," he said. "Some agencies have tried MCI and Sprint, and now they are working with us. What I'm trying to do is provide alternatives, technical as well as staff. We have a solid product, good program support. I don't tend to lose my agencies once I get them."

Protecting Telecom Customers

WorldCom still has battles to fight. The FBI is continuing its investigation of WorldCom. The company and other corporate giants engulfed in scandal, such as Enron and Arthur Andersen LLP, have become representations of corporate greed.

Meanwhile, Congress will likely step in before the end of this year to make it harder for telecom companies to discontinue their services — a move that will protect consumers and government customers.

Although the Communications Act of 1934 requires carriers to provide 31 days' notice before terminating a service, it is unclear whether that notice period covers Internet and cable providers and other services not imagined when the law was written decades ago.

"If there are service disruptions, this is going to radiate enormous damage to the American economy," said Sen. Ron Wyden (D-Ore.), a member of the Senate's Commerce, Science and Transportation Committee.

The initial shock of WorldCom's bankruptcy may have worn off, but customers, vendors and employees wonder whether more revelations are coming, and how that would affect WorldCom's services.

Other telecom experts are confident that things will work out. Despite the chaos, signs indicate that the telecom sector in government remains strong and will only get stronger in the next five years.

A recent study by Input found that telecom has become a critical area of technology investment for the federal government in response to the homeland security crisis.

The Sept. 11 terrorist attacks revealed many inadequacies in the government's communications structure in terms of interoperability, bandwidth and disaster recovery, the study says.

And the company forecasts that telecom spending will increase in the next five years from $10.8 billion in fiscal 2002 to more than $16.1 billion in fiscal 2007.

"The federal government is much more stable than the commercial market," said Payton Smith, author of the study. "There's a particular opportunity in the federal government right now with communications requirements relating to homeland security."

The most important strategy for any federal agency is to have a backup plan, according to industry analyst Frank Dzubeck, president of Communications Network Architects Inc.

"Nothing is going to collapse," he said. "What has to be done is watch it and make alternatives. That's why any large customer has multiple suppliers.... No one that I know of in the consulting world or the analyst world ever would recommend putting all of one's eggs in one basket."

NEXT STORY: GSA stands by WorldCom

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