DOD rethinks its IT procurement strategy

The Defense Department once relied on its own extensive contracting expertise for information technology procurements, but that changed when the General Services Administration’s schedule contracts became a favored source throughout government for IT hardware and services.

Now, contracting practices are changing again. Budget pressures, mismanagement of some GSA acquisitions and a stronger focus on mission effectiveness all lead back to what many observers see as a renewed commitment by DOD to its own contracts for systems and services that it used to buy through GSA.

“We are definitely seeing a shift,” said Megan Gamse, manager of Defense opportunities for market watcher Input. “I think we’ll see a lot of contract follow-ons shifting to these large inside contracts.”

The favored status of GSA schedules within DOD has held for about a decade, observers point out. But shifting back to internal contracting would not be as radical a break from the past as some GSA supporters imply.

Such a shift, however, would make DOD contracting activities less visible, compared with the relative openness of GSA contracting, Gamse said. Contractors who want to do business with DOD need to learn quickly about its contract vehicles so they stay abreast of developments and market opportunities.

“I think it is clear that the Defense Department has been moving pretty dramatically away from the GSA and toward using its own contracts,” said Warren Suss, president of Suss Consulting. “I think the DOD vehicles are seen by users as covering much of the same territory as the GSA contracts.”

Even if DOD came out with a specific policy to authorize use of GSA schedules and to clear up any confusion, “at some point it’s going to be difficult to turn the clock back,” Suss said.

A major reason for a shift in DOD contracting was the revelation of GSA contract misuses several years ago. Those included the use of an IT contract for hiring interrogators at Iraq’s Abu Ghraib prison. In another instance, Federal Technology Service employees in Washington state used an IT fund to pay for building construction.

Those contracting misuses led to a combined DOD and GSA campaign in 2004 called “Get It Right,” which was intended to prevent further abuses. It was followed in October 2004 by a DOD directive requiring Defense agencies to establish procedures for reviewing and approving the use of any non-DOD contract.

Deidre Lee, then-director of Defense procurement and acquisition policy, said the directive was not intended to encourage or discourage the use of non-DOD contracts. But others said it led many DOD officials to infer that department executives were against using GSA contracts and to act accordingly.

Attitudes hardened after DOD’s inspector general issued a report in July 2005 criticizing GSA for contract mismanagement. The IG wrote that $1 billion to $2 billion in military funds for military support operations were wasted in a five-year period because GSA contracting officers and DOD managers mismanaged the money or otherwise didn’t handle acquisitions properly.

Recent internal GSA financial figures obtained by Federal Computer Week show that GSA’s IT Fund revenue in the first quarter of fiscal 2006 was 26.7 percent below predicted levels. GSA attributed much of the shortfall to a loss of military business.

Added to that shortfall are growing demands on available funds. “With the wars in Iraq and Afghanistan and the overall pressure on budgets, every command and agency in the DOD is under the gun to find efficiencies,” said Bernard Skoch, executive vice president at Suss Consulting and former principal director for network services at the Defense Information Systems Agency. “That leads to the DOD wanting to leverage more dollars out of its contracting.”

Skoch said all DOD services are skeptical about the return they get on the fees and overhead they pay to use GSA contracts. Those fees are 3 percent to 7 percent of the total order, he said.

“Around a year ago, there were reports of the DOD spending some $100 million a year in fees to use external vehicles,” said Bob Guerra, a partner at Guerra Kiviat. “They’ve spent a lot of money with the GSA, and with all of the recent problems the GSA has been having, they’ve just figured that the advantage [in using GSA schedules] isn’t there anymore.”

Guerra said he expects more DOD work will be shifted to contracts such as the Army’s recently awarded $20 billion IT Enterprise Solutions 2

(ITES-2) contract, which provides IT services, program and project management; systems operation and maintenance; and network support. That contract also offers information systems security and information assurance business process re-engineering, and education and training.

ITES-2 is expected to be the source of the Army’s IT procurement for the next decade. Other military services and DOD and federal agencies can order from the contract, too.

The previous ITES-1 contract reached its ceiling in about 18 months, Guerra said. Although ITES-2 has a nominal contract term of 10 years, some industry analysts said that DOD might hit the spending ceiling in only five years. Guerra said he thinks the contract could top out in a couple of years.

DOD’s shift away from GSA contracts is a definite trend, but it will not be an abrupt change, others say. Because DOD relied on GSA for IT products and services, it cut back on its own contracting resources. It will need to build those up again.

“Around the DOD, they all but shut down their contracting offices,” said Austin Yerks, president of Computer Sciences Corp.’s Defense Integrated Solutions and Services organization. “The office at the Hanscom Air Force Base was cut from around 200 people to just 20, for example, and similar things happened in the Army and Navy and at other places around the DOD.”

Yerks said it might take as many as three years for DOD to bring those contracting offices back to the level they need to be.

And it’s not just a matter of getting the numbers back up. As DOD focuses more on its own contracting vehicles, it also wants to shift to performance-based contracting. Writing statements of objectives for fixed-cost, performance-based contracts requires different skills from those needed to create statements of work for requirements-based cost-plus contracts.

Getting experienced employees knowledgeable in performance-based contracting is difficult enough for the contracting companies themselves, said Joan Hyde, director of contracts and pricing at Booz Allen Hamilton. It will likely be even more of a challenge for DOD, she said. “They’ll be in a training mode for a long time.”

Guerra agreed, adding that it took the contracting community nearly seven years to understand what procurement reform was about. Understanding performance-based contracting and what it requires will probably take at least three years, he said. It also requires a change of mind-set, because agencies have to relinquish control that they are accustomed to having through requirements-based contracts.

Not everyone sees the shift in contracting preferences as a certainty. Robert Nabors, vice president and director of EDS’ Department of Defense and Army business, said he thinks the trend is overblown. DOD still uses GSA extensively, even though it is expanding its use of internal contracts, he said.

“I don’t think this is an issue of DOD contracts replacing GSA,” Nabors said. “I think the GSA still has a role to fill, and I think they’ll be around [in DOD business] for a long time.”

Some people say the fees DOD pays to use GSA contracts are too high, but the alternative is expensive, too, Hyde said. People have built up expertise in dealing with the GSA schedules, so it’s likely that DOD will continue using a mix of GSA’s and its own vehicles, she said. “GSA schedules have been easy to use, and I don’t see them going away completely.”