Telecommunications: GSA's Estimates of FTS2001 Revenues Are Reasonable
(Letter Report, 04/07/2000, GAO/AIMD-00-123).

Pursuant to a congressional request, GAO reviewed the General Services
Administration's (GSA) estimates of the Federal Technology Service (FTS)
2001 revenues and the implications of allowing other service providers
to compete in the FTS 2001 market, focusing on: (1) the percentage of
FTS 2001 contracts that are minimum revenue guarantees (MRG); (2) when
MRGs are likely to be satisfied; (3) the factors that could
significantly alter the estimates of total program revenue and
corresponding timeframes for satisfying MRGs; and (4) how competition
could affect the estimates.

GAO noted that: (1) GAO found that GSA's revenue estimation process,
which relies on historical and known agency requirements for FTS
2001-offered services, produced a reasonable estimate of program
revenues; (2) GAO's independent, high-level estimate, which used the
most currently available traffic forecasts and pricing information,
produced essentially the same estimate--$2.3 billion in revenue over the
life of the FTS 2001 program, assuming all 4 of the contracts' option
years are exercised; (3) during GAO's review, GAO identified a number of
technical issues with regard to GSA's revenue estimation process that
did not affect the integrity of its revenue estimates; (4) the MRGs--a
total of $1.5 billion--represent about two-thirds of current estimated
program revenues over 8 years; (5) according to the results of both
GSA's and GAO's analysis, the FTS 2001 MRGs are expected to be satisfied
for both contractors during fiscal year 2004; (6) three primary factors
could significantly alter estimates of total program revenue and
corresponding timeframes for satisfying the MRGs: (a) pricing; (b)
agency demand for FTS 2001 services; and (c) transition progress; (7)
additional competition could yield price reductions, cause further
transition delays, and reduce demand for services from the two existing
FTS 2001 contractors; (8) in turn, these factors would decrease program
revenues and lengthen the time needed to satisfy the MRGs; (9) in regard
to the potential benefits of reduced prices and transition costs, it is
difficult to quantify the effect on estimates without knowing an added
competitor's prices or the specifics of related transition costs; (10)
however, two factors would have to be considered in such an analysis;
(11) savings in transition costs would occur only if the new competitor
was an incumbent FTS 2000 provider and only to the extent that
transition costs have not yet been incurred; (12) reductions in revenues
to current FTS 2001 contractors would increase the timeframe for
satisfying the MRGs; and (13) if MRGs are not satisfied during the
contracts' term, GSA may be liable for additional payments to the
contractors.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-00-123
     TITLE:  Telecommunications: GSA's Estimates of FTS2001 Revenues
	     Are Reasonable
      DATE:  04/07/2000
   SUBJECT:  Telecommunication industry
	     Future budget projections
	     Federal procurement
	     Prices and pricing
	     Contract administration
	     Cost control
	     Competitive procurement
IDENTIFIER:  FTS Federal Acquisition Services for Technology Program
	     GSA Metropolitan Area Acquisition Program
	     FTS 2000
	     FTS 2001

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GAO/AIMD-00-123

Accounting and Information
Management Division

B-284758

April 14, 2000

The Honorable Dan Burton
Chairman
Committee on Government Reform
House of Representatives

Dear Mr. Chairman:

The General Services Administration's (GSA) Federal Technology Service (FTS)
provides its customers with a broad range of end-to-end telecommunications
services, including global voice, data, and video services, supporting both
local and long-distance government telecommunications users. Its FTS2000
long-distance services reached more than 1.7 million users through two
multibillion dollar 10-year contracts that were awarded to AT&T and Sprint
in December 1988. Two contracts have since been awarded for the successor
FTS2001 program-one to Sprint in December 1998 and one to MCI WorldCom in
January 1999. The federal government is now in the process of transitioning
from the FTS2000 to the FTS2001 long-distance telecommunications program.

On March 1, 2000, we briefed your office on the results of our review of the
GSA's revenue estimation process for FTS2001 and provided answers to four
questions you asked regarding the FTS2001 contracts' minimum revenue
guarantees (MRGs) and the implications of allowing other service providers
to compete in the FTS2001 market.

To answer these questions, we analyzed the process and assumptions GSA used
to develop program revenue estimates and time frames for meeting the MRGs.
We also contracted with Technology Futures, Inc.-experts in
telecommunications forecasting--to assist in our review of the revenue
estimation process and to develop an independent high-level estimate of
potential FTS2001 program revenues. We conducted our review from January
2000 through March 2000 in accordance with generally accepted government
auditing standards, and on March 22, 2000, we received comments on this
report from the GSA FTS Assistant Commissioner for Service Development, the
Assistant Commissioner for Service Delivery, and the Deputy Assistant
Commissioner for Acquisition. Additional details on our objective, scope,
and methodology are contained in appendix I. This report provides a summary
of our briefing. Our detailed briefing slides are presented in appendix II.

GSA awarded two contracts for the FTS 2001 program-one to Sprint in December
1998 and one to MCI WorldCom in January 1999. Each contract is for 4 base
years from the date of award with four 1-year options, and each contractor
is guaranteed minimum revenues of $750 million over the life of the
contracts. Major federal agencies committed themselves to transition their
requirements expeditiously from FTS2000 contracts to FTS2001 upon award of
those contracts and to use the FTS2001 contracts to meet their core
requirements. However, unlike the FTS2000 program, agencies are not required
to use FTS2001 for their telecommunications requirements. Agencies that opt
to use the program will have access to a wide range of services including
long-distance, toll-free, and 900 voice services; international services;
internet and intranet-based services; and low-speed and high-speed data
communications services.

The FTS2001 program also provides for further competition beyond the two
contractors already selected. Service providers who are awarded contracts
under GSA's Metropolitan Area Acquisition (MAA) program-which provides local
telecommunications services in selected geographic areas-may be permitted to
compete for the FTS2001 business (1) if allowed by law and regulation, (2)
after the FTS2001 contracts have been awarded for a year, and (3) if GSA
determines that it is in the government's best interests to allow such
additional competition.

We found that GSA's revenue estimation process, which relies on historical
and known agency requirements for FTS2001-offered services, produced a
reasonable estimate of program revenues. Our independent, high-level
estimate, which used the most currently available traffic forecasts and
pricing information, produced essentially the same estimate-about
$2.3 billion in revenue over the life of the FTS2001 program, assuming all 4
of the contracts' option years are exercised. During our review, we also
identified a number of technical issues with regard to GSA's revenue
estimation process that did not affect the integrity of its revenue
estimates. We have included these issues in our presentation enclosed in
appendix II to this report, and we will discuss these issues, along with our
specific recommendations, in a separate letter to the Administrator of the
General Services Administration. The following summarizes the answers to
each of the specific questions you asked.

Question 1: What percentage are the MRGs of the FTS2001 contracts?

Answer: The MRGs-a total of $1.5 billion-represent about two-thirds of
current estimated program revenues over 8 years.

Question 2: When are the MRGs likely to be satisfied?

Answer: According to the results of both GSA's analysis and our own
independent analysis based on current requirements forecasts, the FTS2001
MRGs are expected to be satisfied for both contractors during fiscal year
2004 (contract year 6).

Question 3: What sensitivities are there in each of the estimates provided
in (1) and (2)? What factors could significantly alter these estimates?

Three primary factors could significantly alter estimates of total program
revenue and corresponding time frames for satisfying the MRGs: pricing,
agency demand for FTS2001 services, and transition progress.

ï¿½ Price reductions, resulting from additional competition under the MAA
program or the price management mechanisms in the FTS2001 contracts,1 would
decrease estimated revenues to the two FTS2001 service providers and
increase the time needed to satisfy the MRGs.

ï¿½ Agency demand for FTS2001 services could also alter estimates. For
example, we noted that GSA's projections for growth in agency data
communications services were lower than private sector trends. To test the
sensitivity of this assumption, we developed a sensitivity analysis using a
data communications growth rate more consistent with private sector trends,
as described in appendix I. The results of this sensitivity analysis
demonstrated that using a more aggressive data communications growth rate
significantly increased total estimated revenues. As this additional growth
would primarily occur in the outyears of the program, however, the estimated
MRG time frame is unaffected.

ï¿½ Delays in the current transition schedule could also decrease estimated
revenues and lengthen the time needed to satisfy the MRGs. GSA originally
expected the FTS2001 transition to be complete as of June 2000, but progress
has been slow to date. As of February 17, 2000, GSA managers reported that
only 26 percent of agency site transitions were completed and the remainder
would be completed from now through December 2000.

Question 4: If additional competitors were permitted to compete for the
FTS2001 business, how might that competition affect the estimates provided?
Would reduced prices/transition costs brought about by such competition
offset the impact on estimates?

Answer: Additional competition could yield price reductions, cause further
transition delays, and reduce demand for services from the two existing
FTS2001 contractors. In turn, these factors would decrease program revenues
and lengthen the time needed to satisfy the MRGs. In regard to the potential
benefits of reduced prices and transition costs, it is difficult to quantify
the effect on estimates without knowing an added competitor's prices or the
specifics of related transition costs. However, two factors would have to be
considered in such an analysis. First, savings in transition costs would
occur only if the new competitor was an incumbent FTS2000 provider and only
to the extent that transition costs have not yet been incurred. Second,
reductions in revenues to current FTS2001 contractors would increase the
time frame for satisfying the MRGs. If MRGs are not satisfied during the
contracts' term, GSA may be liable for additional payments to the
contractors.

On March 22, 2000, we met with the GSA FTS Assistant Commissioner for
Service Development, the Assistant Commissioner for Service Delivery, and
the Deputy Assistant Commissioner for Acquisition to obtain oral comments on
a draft of this report. They agreed with the information presented and with
our answers to your questions. They also suggested a few technical changes
that we have incorporated as appropriate.

We are sending copies of this report to Representative Henry Waxman, Ranking
Minority Member, House Committee on Government Reform. We are also sending
copies to the Honorable Jacob J. Lew, Director of the Office of Management
and Budget, and David J. Barram, Administrator of the General Services
Administration. Copies will be made available to others upon request.

If you have any questions regarding this report, please contact me or Kevin
Conway, Assistant Director, at (202) 512-6240 or by e-mail at
[email protected] or [email protected] . Other major contributors to
this work were Cristina Chaplain and William B. Ritt.

Sincerely yours,

Linda D. Koontz
Associate Director
Governmentwide and Defense Information Systems

Objective, Scope, and Methodology

The objective of our review was to evaluate GSA's revenue estimation process
and answer the following questions:

1. What percentage are the MRGs of the FTS2001 contracts?

2. When are the MRGs likely to be satisfied?

3. What sensitivities are there in each of the estimates provided in (1) and
(2)? What factors could significantly alter these estimates?

4. If additional competitors were permitted to compete for the FTS2001
business, how might that competition affect the estimates provided? Would
reduced prices/transition costs brought about by such competition offset the
impact on estimates provided?

To understand the FTS2001 program's services and its contract MRGs, we
reviewed program documentation, initial program revenue projections, and
copies of the contracts for FTS2001 services that were awarded to Sprint and
MCI WorldCom. In examining GSA's options to add FTS2001 service providers,
we also reviewed the solicitations that GSA has issued as part of its MAA
program. We also interviewed GSA FTS2001 program managers and obtained other
summary information on FTS2001 program implementation issues and status at
the February 22, 2000, transition managers meeting in Washington, D.C.,
cosponsored by GSA, the Interagency Management Council, and the FTS2001
contractors.

To fully understand and evaluate the process used by GSA to estimate program
revenues and time frames for satisfying revenue guarantees, we interviewed
GSA FTS2001 program managers and their Mitretek Systems support staff and
analyzed and documented the specific steps followed and assumptions used by
Mitretek Systems to develop those analyses. In addition, we engaged
forecasting and telecommunications experts from Technology Futures, Inc.
(TFI), in Austin, Texas, to assist us in analyzing and evaluating the GSA
revenue estimation process. To determine what factors could significantly
influence those estimates, we also examined the influence of changes in
pricing, expected service volumes, and program schedules.

To evaluate the reliability of GSA's program revenue estimates, we asked TFI
to develop an independent estimate of potential FTS2001 program revenues,
based on stated agency FTS2001 requirements and on pricing information
covering the remainder of the contracts. In examining the level of growth
forecast for agency demand, TFI staff observed that the outyear growth in
agency data communications forecasts lagged behind commercial forecasts for
the same time periods. Therefore, to evaluate the sensitivity of this
factor, TFI also developed an estimate of program revenues that assumed a
level of agency requirements growth more consistent with private sector
trends and that at least half of this additional growth might be satisfied
by the nonmandatory FTS2001 contracts.

To evaluate the forecasting methods used by agencies to estimate their
FTS2001 service requirements, TFI staff joined us in conducting expert
interviews at selected federal agencies. The four agencies we
visited−the Departments of Defense, the Treasury, Justice, and
Energy−represent a broad and sizeable range of telecommunications
requirements and collectively accounted for about 46 percent of revenues
billed for FTS2000 telecommunications services in fiscal year 1999. We
interviewed telecommunications managers at each of the four agencies to
determine how they developed their respective agencywide forecasts,
including the steps they followed and the systems and technology factors
they considered.

We conducted our review from January 2000 through February 2000 in
accordance with generally accepted government auditing standards.

Briefing to the House Committee on Government Reform

(511691)
  

1. The FTS2001 contracts include a requirement for periodic price management
efforts to ensure that FTS2001 prices are competitive with prices paid by
other large users of telecommunications services.
*** End of document. ***