GAO-01-855R FTS 2001 Implementation

United States General Accounting Office

Washington, DC 20548

July 2, 2001

The Honorable Tom Davis

Chairman

Subcommittee on Technology and Procurement Policy

Committee on Government Reform

House of Representatives

Subject: FTS2001 Implementation Issues

Dear Mr. Chairman:

As you know, GSA awarded FTS2001 contracts to Sprint and MCI WorldCom to

provide long distance telecommunications services to federal agencies. The federal

government began the sizable and complex effort of transitioning from the existing

FTS 2000 contracts to FTS2001 in June 1999. This transition is presently nearing

completion. In your letter of May 3, 2001, you asked that we respond to several

follow-up questions pertaining to your Subcommittee’s April 26, 2001, oversight

hearing regarding the FTS2001 contracts. My responses to your questions follow

below.

Question 1: How feasible would it be to build into future contracts an

accountability mechanism that may include penalties that the General Services

Administration (GSA) could apply against the contractors’ guaranteed minimum

revenue over the life of the contract? What is the feasibility of renegotiating the

current contracts?

Answer: It is feasible to include an accountability mechanism in future contracts that

include such civil penalties as provisions for credits or liquidated damages. It is also

feasible to modify the current FTS2001 contracts to include such an accountability

mechanism, because federal acquisition law does permit such modification of

contracts (although such action would require negotiations with, and the agreement

of, the contractors). We should make it clear, however, that the existing FTS2001

contracts already include accountability mechanisms, in both specific and general

terms.

As we stated in our report of last March,1

 the existing FTS2001 contracts establish

specific performance requirements,2

 including timeliness of service delivery,

 1

FTS2001: Transition Challenges Jeopardize Program Goals (GAO-01-289, March 30, 2001). 2

 These terms are stated at paragraph H.13 of the FTS2001 contracts.
Page 2 GAO-01-855R FTS 2001 Implementation

availability of services, quality or grade of service, and restoration of failed or

degraded service. However, the contracts provide that these basic performance

requirements not take effect until the FTS2001 transition is complete, thereby

restricting the government’s ability to hold the contractors accountable for

performance shortcomings during the transition period.3 Thus, the FTS2001 transition

delays that have occurred to date not only had a financial effect but have also delayed

the effective date of these specific contract terms and conditions.

Beyond these specific requirements, the FTS2001 contracts contain additional terms

and conditions establishing accountability for failure to provide service or meet

contract requirements. For example, the contracts include a default termination

clause that permits termination of the contracts in whole or in part. Rather than

terminating the contracts, the government can instead ask for consideration from the

contractor. This consideration could take any mutually agreed upon form, including

price reductions or a reduction in a contractor’s minimum revenue guarantee (MRG).

We recommended in our report that GSA take action to obtain consideration for

failure to meet management information and billing requirements within the time

frames established in the FTS2001 contracts. GSA concurred with this

recommendation. According to GSA, it is still examining the record of FTS2001

contractors’ performance to date to determine what specific action may be

appropriate.

Question 2: How can GSA prevent future billing problems? Is this a problem

caused by lack of database software used to collect and organize the information

or a personnel management issue?

Answer: As we reported to you in March, one factor inhibiting transition progress was

the lack of accurate, up-to-date billing information and the improper billing of

services. This problem is not unique to FTS2001—it is common among users of

telecommunications services. This problem is not attributable to personnel

management or to a lack of database software. Rather, billing problems often arise

from changes in contracts and services such as those that took place during the

FTS2001 transition. According to GSA, these issues also arise because of differences

between the contractors’ commercial billing practices and the practices that

government agencies are accustomed to, which are reflected in contract

requirements. In that regard, there has been a “learning curve” for both the

contractors and the government on billing matters during transition. In the case of

FTS2001, GSA also waived the test and acceptance of one contractor’s billing system

for an indefinite period because of the desire to move forward with contract

implementation, and did not promptly resolve billing problems that arose with both

contractors.

 3

 Specifically, the contract states that these requirements “...will not apply to services being

transitioned from the FTS2000 network to the FTS2001 network; services being migrated to FTS2001

from networks other than FTS2000 during the FTS2001 initial transition; or new service starts on the

FTS2001 that may take place during the initial transition and startup of FTS2001.”
Page 3 GAO-01-855R FTS 2001 Implementation

The best way to reduce the effect of billing problems is for GSA to hold the

contractor responsible for resolving such problems promptly when they arise. The

billing problems we identified adversely affected FTS2001 transition progress

because their resolution was not prompt.

GSA is taking steps to resolve current billing problems. It is tracking issues as they

arise, and it is currently trying to resolve 12 issues still outstanding with Sprint and

MCI WorldCom, including the problem of commercial billing that we reported. In

addition, GSA’s Office of Inspector General has recently begun a review of the

FTS2001 billing area, which might also identify ways to prevent future billing

problems.

Question 3: Was the legitimacy of the databases that supported the transition

process from FTS2000 to FTS2001 inaccurate? Do you think this is the sole

reason for transition delays?

Answer: The lack of information needed to accurately and appropriately manage and

measure transition progress was one of the factors that contributed to FTS2001

transition delays. This issue was one of lack of access to information, however, rather

than of its accuracy. Specifically, while GSA developed an automated system to help

track transition data and develop reports, the FTS2001 contractors did not furnish

GSA with the data it needed to populate that management system’s database.

According to GSA, it also had difficulty obtaining information from one of the

FTS2000 contractors during the initial transition planning. As a result, GSA and

agency transition managers did not receive the timely and up-to-date information they

needed to effectively plan and manage transition activities.

This was not the sole reason for transition delays. Additional factors contributing to

transition delays included the inability to rapidly add transition-critical services to

contracts, the slow pace at which agencies ordered services, contractor customer

support problems, and the inability of local telecommunications providers to deliver

services and facilities as scheduled.

Question 4: The MRGs have been slowed significantly due to delays in the

transition to FTS2001. Is it true that MCI and Sprint will not meet their MRGs

until 2004 and 2006 respectively? Further, doesn’t this point to limited

competitive opportunities for another three to five years for other companies

that are ready and able to offer the government low prices and advanced

technological services/products?

Answer: We estimate that MCI WorldCom and Sprint may meet their MRGs in fiscal

years 2003 and 2004, respectively (contract years five and six). Our estimate is based

on FTS2001 revenues accumulated through April 2001, and assume no significant

change in the demand for services from either contractor. An analysis recently

prepared by GSA staff reached a similar result.
Page 4 GAO-01-855R FTS 2001 Implementation

Even if MCI and Sprint do not meet their MRGs in fiscal years 2003 and 2004,

however, that result may not point to continued limited competitive opportunities for

the FTS2001 program. GSA’s position has been that it would not wait until the MRGs

were completely satisfied before allowing additional competitors to cross over into

FTS2001; rather, it would make that determination when it was reasonably assured

that the MRGs would be satisfied within the potential 8-year contract period. At the

April 26, 2001, hearing on FTS2001 implementation, the FTS Commissioner, Ms.

Sandra Bates, testified that GSA would begin accepting proposals this summer from

qualified contractors who wish to offer FTS2001 long distance services, that is, those

providing local telecommunications services under the GSA’s Metropolitan Area

Acquisition program. Therefore, if GSA follows through on those statements,

competitive opportunities under the FTS2001 program would no longer be limited.

Question 5: Do the deviations from the FTS2001 requirements identified by

GAO represent the only deviations from contract requirements permitted by

GSA? If not, what others are there?

Answer: The only permitted deviation from the FTS2001 requirements that we

identified in our report was GSA’s decision to waive ordering and billing system test

and acceptance requirements for MCI WorldCom in order to allow it to more quickly

receive and process service orders. To the extent that other contract requirements

were not met when required—such as other billing problems encountered with both

contractors, and the failure to provide management information when required—we

recommended in our report that GSA obtain consideration from the contractors in

accordance with the FTS2001 contracts’ terms and conditions.

Question 6: What is the impact on the FTS2001 procurement, and competition

in general, of GSA's relaxation of FTS2001 contract requirements?

Answer: As we mention in our response to question 5, we identified in our report only

one deviation from contract requirements that GSA permitted. Specifically, that one

deviation was GSA’s decision to waive the requirement that MCI WorldCom’s billing

and ordering system be tested and accepted before order processing could begin. As

we reported to you in March, several factors contributed to FTS2001 implementation

delays. We reported that GSA’s decision to waive the acceptance testing of MCI

WorldCom’s billing system contributed to billing problems and thus was one of the

factors contributing to FTS2001 implementation delays.

In addition, those instances where other contract requirements were not met do not

represent out of scope contract modifications on GSA’s part, and therefore do not

cast doubt on the original contract competition. This issue was addressed in a protest

filed with GAO by AT&T on May 25, 2001, alleging that GSA had relaxed or waived

FTS2001 requirements and specifications in a manner that materially altered the

fundamental nature and purpose of the FTS2001 contracts.
Page 5 GAO-01-855R FTS 2001 Implementation

The decision of GAO on June 14, 2001, dismissed the protest as a “contract

administration” matter beyond our protest jurisdiction, and untimely in any event. 4

We concluded that AT&T had not shown that the modifications to the FTS2001

contracts were beyond the scope of the original contracts: “The objectives and scope

of the FTS2001 contracts remain unchanged despite the alleged poor performance of

the contractors: the same services are being provided notwithstanding the alleged

relaxation or waiver of those requirements.”

Question 7: During this period of transition, how much revenue that would

have been included under the FTS2001 Program was not as a result of

transition delays?

Answer: According to GSA revenue reports, approximately $159.8 million was billed

to the government under the FTS2000 contracts from December 2000 through April

2001. In comparison, about $236.4 million was billed under the FTS2001 contracts

during the same period. Not all of that FTS2000 revenue would have been included

under the FTS2001 program had transition not been delayed, because the lower

prices offered under the FTS2001 contracts would reduce that amount. According to

GSA, about $46 million in revenue will not be included under the FTS2001 program

because the transition extended beyond December 2000.

In addition to the questions set forth in your May 3, 2001, letter, you also asked during

the hearing that we examine GSA’s estimate of savings lost to the government due to

transition delays. GSA FTS Commissioner Bates testified at the hearing that about

$74 million in savings was lost due to delays in completing the FTS2001 transition. As

I indicated to you at the hearing, we have reviewed and evaluated GSA’s derivation of

that estimate and the supporting documentation. On the basis of this analysis, we

found the $74 million estimate to be reasonable.

In providing oral comments on a draft of this letter, the GSA FTS Assistant

Commissioners for Acquisition and for Service Delivery generally agreed with the

information presented. We have incorporated GSA’s comments where appropriate.

- - - - -

During the course of our work to address the questions posed in your May 3 letter, we

reviewed the documentation we prepared in support of our earlier report to you. We

also met with the GSA FTS Assistant Commissioner for Acquisition and with other

FTS2001 program management staff to obtain documentation of revenues accrued to

date, estimated time lines for satisfying contract minimum revenue guarantees, and

actions being taken to resolve billing issues. We also obtained documentation from

GSA supporting its estimate of lost FTS2001 savings and discussed the logic used and

steps followed to derive that estimate with the staff from Mitretek Systems, who

prepared that estimate for GSA. We independently estimated time lines for satisfying

contract minimum revenue guarantees based on FTS2001 revenue documentation

 4

AT&T Corporation, B-287931, June 14, 2001.
Page 6 GAO-01-855R FTS 2001 Implementation

obtained from GSA. We conducted this work from May 2001 through June 2001 in

Washington, D.C., and Fairfax, Virginia, in accordance with generally accepted

government auditing standards.

- - - - -

We are sending copies of this correspondence to the Ranking Minority Member,

Subcommittee on Technology and Procurement Policy, and interested congressional

committees. We are also sending copies to the Administrator of General Services, and

to the Director, Office of Management and Budget. Copies will be made available to

others upon request. The correspondence will also be available on GAO’s Web site at

http://www.gao.gov.

If you have any questions regarding this correspondence, please contact me or Kevin

Conway, Assistant Director, at (202) 512-6240 or by e-mail at koontzl@gao.gov or

conwayk@gao.gov, respectively.

Sincerely yours,

Linda D. Koontz

Director, Information Management Issues

(310322)