FTS 2001: Contract Transition Delays and Their Impact on Program 
Goals (26-APR-01, GAO-01-544T). 				 
								 
This testimony discusses the status of the FTS 2001 long distance
telecommunication program. The General Services Administration	 
(GSA) planned to complete the transition from FTS 2000 to the FTS
2001 contracts by December 6, 2000, but did not meet this	 
deadline. Several factors contributed to the delays, including	 
staffing shortages and turnover, contractor billing problems, and
contract-related modifications. As of April 11, 2001, the overall
FTS 2001 transition was about 92 percent complete. The transition
of voice services from FTS 2000 and FTS 2001 is almost entirely  
complete and switched data services and dedicated transmission	 
services are about 82 and 88 percent complete, respectively. The 
remaining transition requirements are scheduled for completion by
the end of June 2001. Nevertheless, the collective effect of	 
delays encountered during this complex transition has jeopardized
the timely achievement of FTS 2001's two program goals (1) to	 
ensure best service and price to the government and (2) to	 
maximize competition. GSA has taken steps to position the FTS	 
2001 program for greater success, including developing better	 
telecommunications planning procedures and improving contractor  
billing. This testimony summarized the March report, GAO-01-289. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-544T					        
    ACCNO:   A00908						        
  TITLE:     FTS 2001: Contract Transition Delays and Their Impact on 
             Program Goals                                                    
     DATE:   04/26/2001 
  SUBJECT:   Contract modifications				 
	     Schedule slippages 				 
	     Service contracts					 
	     Telecommunication					 
	     Telecommunication industry 			 
	     Federal Telecommunications System 2000		 
	     Federal Telecommunications System 2001		 

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GAO-01-544T

FTS2001 Contract Transition Delays and Their Impact on Program Goals
Statement of Linda D. Koontz Director, Information Management Issues

United States General Accounting Office

GAO Testimony Before the Subcommittee on Technology and Procurement

Policy, Committee on Government Reform, House of Representatives

For Release on Delivery Expected at 2 p. m. Thursday, April 26, 2001

GAO- 01- 544T

Mr. Chairman and Members of the Subcommittee: Thank you for inviting us to
participate in today?s hearing on the FTS2001 long distance
telecommunications program. As you know, telecommunications services are
increasingly critical in transforming the way the federal government
conducts business, allowing us to streamline our processes, reduce paperwork
and delays, increase efficiency, and improve our interaction with the
public. It is therefore important that a far- reaching program like FTS2001
be successfully implemented in order to maximize benefits to the taxpayers.

Although GSA planned to complete the transition from FTS 2000 to the FTS2001
contracts by December 6, 2000, this date was not met. We discuss in our
report, released today, several factors that contributed to transition
delays. 1 At this point, progress has been made in resolving the problems
described, and most remaining transition requirements are scheduled for
completion by the end of June 2001. Nevertheless, the collective effect of
delays encountered during this complex transition has jeopardized the timely
achievement of FTS2001?s two program goals: ensuring best service and price
to the government and maximizing competition.

My testimony to you this afternoon will address

the status of the transition from FTS 2000 to FTS2001,

reasons for delays and the steps taken to eliminate transition impediments,

the effects of the delays on meeting the FTS2001 program goals, including
the effects on maximizing competition, and

the steps being taken by GSA to address our recommended actions for
positioning the FTS2001 program for greater success.

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

2 Background

Between 1994 and 1997, GSA and the Interagency Management Council (IMC) 2
cooperated to develop a strategy for FTS2001, the successor to FTS 2000.
Unlike its predecessor, FTS2001 is not mandatory. The program is expected to
attract and retain customers by providing good services at low prices.

GSA awarded an FTS2001 long distance service contract to Sprint in December
1998 and another to MCI WorldCom in January 1999. Under the terms of these
contracts, each contractor is guaranteed minimum revenues of $750 million
over the life of the contracts, which run for 4 base years and have four 1-
year options (8 years in all). The federal government began transitioning
from FTS 2000 to FTS2001 in June 1999. This transition has been a sizable
and complex undertaking, involving a variety of voice, data, and video
communications services provided to more than 1.7 million users across the
country.

To avoid any service interruptions during the transition, GSA awarded
extension contracts in December 1998 to the two FTS 2000 contractors- AT& T
and Sprint. These extension contracts had a 12- month base period with two
6- month options. The second options expired on December 6, 2000- the
expected completion date for the FTS2001 transition.

Delays lengthened the FTS2001 transition period beyond that original target,
however. As a result, in December 2000 GSA negotiated contract modifications
with Sprint and AT& T to further extend FTS 2000 services until the
transition to FTS2001 is completed. The Sprint contract modification extends
its FTS 2000 services for an additional 6 months through June 6, 2001, while
the AT& T modification extends that contractor?s FTS 2000 services for an
additional 12 months, expiring on December 6, 2001.

FTS2001 Strategy and Goals In consultation with industry and the Congress,
IMC and GSA set two goals for the FTS2001 program: to ensure the best
service and price for the government and to maximize competition

2 IMC, established in 1992, is made up of a senior information resources
management official from each of the 14 cabinet- level departments, the
Environmental Protection Agency, the National Aeronautics and Space
Administration, the U. S. Postal Service, the Office of Management and
Budget, and the Small Agency Council.

3 for services. Part of this program strategy was to move beyond long
distance

telecommunications services, eventually permitting contractors to offer both
local and long distance services. Consistent with this strategy, the FTS2001
program allows further competition in the long distance market beyond the
first two FTS2001 contractors. Specifically, Metropolitan Area Acquisition
(MAA) contractors, who provide local telecommunications services, may be
permitted to compete for FTS2001 long distance business where allowed by law
and regulation, after the FTS2001 contracts have been awarded for a year,
and if GSA determines that it is in the government?s best interests to allow
such additional competition.

GSA, however, has been unwilling to allow MAA contractors to offer FTS2001
services until it can be sure that the minimum revenue guarantees to the
current FTS2001 contractors are met. The total $1.5 billion minimum revenue
guarantees represent a more substantial portion of FTS2001 program revenues
than was originally estimated. When the FTS2001 contracts were awarded, GSA
believed that they might be worth more than $5 billion over an 8- year
period. However, a subsequent GSA analysis of FTS2001 savings completed on
January 28, 1999, revealed that the contracts? lowest prices could actually
result in total contract revenues of only $2.3 billion over 8 years. Revised
program estimates developed in February 2000 affirmed this $2.3 billion
revenue estimate. 3

FTS2001 Transition Responsibilities Are Spread Among Participants Although
administered by GSA, the FTS2001 long distance contracts involve several
parties sharing responsibility for their transition and implementation.
GSA?s role in this process is generally to act as a facilitator and furnish
assistance, rather than actively managing and directing it, as it had done
with FTS 2000. Although GSA did manage transitions for 20 small agencies,
most agencies chose to manage their own transitions, taking principal
responsibility in conjunction with their service providers. Nevertheless,
GSA does retain important program- level responsibilities including FTS2001
program management, contract administration, centralized customer service,
coordination and procurement of services, and billing support. GSA also
supports agencies with engineering, planning, and performance by reviewing
transition plans and monitoring contractor performance.

3 Telecommunications: GSA?s Estimates of FTS2001 Revenues Are Reasonable
(GAO/ AIMD- 00- 123, April 14, 2000).

4 The IMC also played an important role in managing and overseeing the
FTS2001 transition.

Specifically recognizing that neither GSA nor the FTS2001 customer agencies
could realize the benefits of these new contracts if the transition was
hindered or delayed, in October 1999 the IMC chartered a Transition Task
Force to

share information and ?lessons learned? among agencies,

identify and resolve common transition problems, and

advise GSA regarding transition management and contractual issues. In so
doing, the IMC Transition Task Force held monthly meetings with FTS2001
contractor and agency personnel, highlighted transition obstacles of
importance to the responsible parties, and helped devise actions to mitigate
these obstacles. This Transition Task Force held its final meeting in
February 2001.

The FTS2001 Transition Is Behind Schedule Although the original schedule
called for completing the transition to FTS2001 by December 6, 2000, that
transition continues today. As of April 11, 2001, the overall FTS2001
transition was about 92 percent complete. The transition of voice services
from FTS 2000 to FTS2001 is almost entirely complete, and switched data
services (SDS) and dedicated transmission services (DTS) are about 82 and 88
percent complete, respectively. 4

These final services to be transitioned have become increasingly time-
consuming to complete. That is, the number of days on average required to
complete a service order increased significantly during the later stages of
transition for dedicated transmission and switched data services. For
example, orders for dedicated transmission services took more than twice as
long to complete by January 2001 than they did in August 2000. Although the
increase in time to provision switched data services was less substantial,
completing these orders also took significantly longer: switched data
service orders completed in August 2000 took about 108 days to complete; by
January 2001, the time required to provision those services rose to 158
days.

4 Switched data services are primarily large agency data communications
networks using frame relay or ATM (asynchronous transfer mode) technologies.

5 Schedules developed by the contractors earlier this month indicate that
Sprint now expects to

complete most of its transition requirements by June 30, 2001. Sprint?s
schedule indicates nine Sprint requirements for which completion dates have
not yet been determined, however. WorldCom also expects to substantially
complete its FTS2001 transition service orders during June 2001, with a
switched data services requirement for the Social Security Administration
scheduled for completion in August, and orders for dedicated transmission
service placed by FAA scheduled for completion in October 2001.

Several Factors Contributed to Transition Delays The FTS2001 transition
delays occurred for several reasons, which involve all the key players in
the program, including GSA, federal agencies, FTS2001 contractors, and local
exchange carriers:

First, while GSA developed an automated system to track transition progress,
the FTS2001 contractors did not provide GSA with the necessary management
data so that the system could be used to accurately measure and effectively
manage this complex transition.

Second, the inability of GSA and the long distance contractors to rapidly
add transitioncritical services to the FTS2001 contracts impeded agency
efforts to order FTS2001 services.

Third, FTS2001 customer agencies were slow to place orders for transition
services, due in part to Year 2000 computing concerns and in part to a lack
of staff resources dedicated to managing their transition efforts. In
particular, only about half of the service orders required to transition
switched data services were submitted by last June.

Fourth, problems with staffing shortages and turnover, billing, and
procedures impaired the efforts of FTS2001 contractors to support agencies?
transition activities.

Fifth, some local service providers outside the FTS2001 program did not
provide services and facilities as scheduled that were needed to deliver
FTS2001 services to discrete locations.

Among these factors, three problems require GSA?s continued attention: the
availability of transition information; the timely completion of transition-
related contract modifications; and the resolution of billing problems. I
would like to focus on these three problems.

To maintain the information needed to manage this complex transition, GSA
acquired an automated transition management system, the Transition Status
and Monitoring System, for use by GSA and agency transition managers. This
system was intended to automatically generate

6 transition status reports by agency and location that tracked data
regarding completed and

missed transitions, who was at fault and why, the cost of missed
transitions, and other relevant management information and statistics.

This system could not be used as planned, however, because GSA could not
obtain usable and complete transition management information from the
contractors to populate the system. For example, although Sprint had
completed 37 agency transition plans by January 2000, its transition
database at that time contained information on only two agencies, making it
impossible for GSA to verify transition status information. GSA had similar
problems obtaining a transition database containing usable and complete
information from WorldCom. These shortcomings reduced the effectiveness of
transition management by GSA and affected agencies, and despite workarounds,
they added to the cost of transition.

GSA did receive more complete transition databases from WorldCom and Sprint
in December 2000. Following its review of those deliverables, GSA formally
accepted the WorldCom database in late December 2000, and GSA is currently
working to import these data to its transition management system. GSA has
not yet accepted Sprint?s transition database.

Although most of the transition effort has now been completed, this
management information- required by contract- is still important to managers
at GSA and at the agencies. Complete, up- todate information will provide an
accurate and reliable baseline inventory for use in on- going
telecommunications planning activities and in future acquisition planning
and implementation efforts.

The second area that continues to require GSA?s attention is the timely
completion of contract modifications to add transition- critical services to
the FTS2001 contracts. Because the FTS2001 contracts did not initially
contain all the services required, GSA has had to process numerous FTS2001
contract modifications to add services required by agencies for completing
their transitions.

Beginning last August, at the request of the IMC Transition Task Force, GSA
prioritized the processing of transition- related contract modifications and
by the middle of this month had completed processing almost all such
modifications. GSA and WorldCom have also used workarounds to minimize the
effect of delays: for example, by allowing managed network services on a
trial basis while the associated contract modifications are developed and
processed. GSA has completed all but one transition- related contract
modification with Sprint,

7 and all but three additional transition- related modifications with
WorldCom. GSA expected to

complete all remaining transition- related contract modifications by April
25, 2001. The third ongoing problem area is billing. A lack of accurate,
current billing information and improper billing of services have forced
agencies to take resources available for the FTS2001 transition and redirect
them toward solving these problems. In some instances, FTS2001 contractors
have billed agencies at higher commercial rates; such incorrect bills have
sometimes resulted in collection actions against agencies, and in a few
cases services were erroneously disconnected for nonpayment.

These billing problems occurred in part because GSA did not ensure that the
FTS2001 contractors met all billing requirements at the outset of
transition. For example, WorldCom was required to have a contract- compliant
service ordering and billing system in place before services were ordered,
but that requirement was waived in order to permit WorldCom to accept and
process transition orders. Formal acceptance was completed in April 2001.

Transition Delays Jeopardize Timely Achievement of FTS2001 Goals FTS2001
transition delays have three important effects on the program goals of
ensuring the best service and price for the government and maximizing
competition.

Delays increase the costs of services.

The government cannot ensure that service meets expectations, because
performance requirements are waived until the transition is complete.

Delays slow the accumulation of revenues needed to meet the minimums
guaranteed to the current contractors, so GSA has deferred adding more
contractors and thus promoting further competition.

Transition Delays Caused Telecommunications Costs to Rise Those agencies
that did not complete their transition from FTS 2000 to FTS2001 by December
2000 saw their telecommunications costs increase for several reasons:

8

Sprint temporarily offered discounts under its FTS 2000 extension contract;
after those discounts expired on September 30, 2000, the cost to agencies
for those services increased by about 20 to 25 percent.

Similarly, AT& T offered discounts of 20 to 65 percent under its FTS 2000
extension contract; however, these discounts were discontinued in the
December 2000 contract modification that further extends those FTS 2000
services.

Sprint and AT& T have also reinstated volume- sensitive pricing for select
services, which reduces per- unit service costs as the volume of services
purchased increases. As a result, as the transition approaches completion
and the volume of FTS 2000 services declines, the unit price for these
services increases. 5

The December 2000 extension contract modification also required a one- time
payment to AT& T of $8 million. To cover this payment, GSA temporarily
assessed a 20 percent surcharge against agencies? monthly FTS 2000 bills.
After January 2001, GSA suspended that surcharge, having collected the $8
million. 6

Performance Requirements Are Deferred Until Transition Is Complete Because
some performance requirements are waived until after the FTS2001 transition,
the government cannot hold the FTS2001 contractors fully accountable for
performance shortcomings. These performance requirements include such things
as the timeliness of service delivery, the availability of services, the
quality or grade of service, and the restoration of failed or degraded
service. As a result, transition delays not only increase the price the
government pays for telecommunications services during the protracted
transition period, they also hinder the government?s ability to hold the
FTS2001 contractors accountable for timely and effective service delivery.
Thus, the government will not be able to ensure that it gets the best
service until the transition is complete.

5 For example, once calling volume declines to less than 50 million minutes,
the cost of a telephone call placed with AT& T increases by more than 77
percent, to almost 10 cents per minute. However, this estimate includes only
transport cost, not access cost, because access cost is sensitive to a
particular location. Access costs may range from a low of 5.7 cents per
minute for a volume of 2,000,000 minutes, rising gradually to 17.2 cents per
minute for 6,000 minutes of volume, then rising sharply to more than $1 per
minute for only 1,000 minutes of volume. 6 Although it had planned to assess
the surcharge on FTS 2000 bills through June 6, 2001, FTS 2000

revenues were sufficiently high in December 2000 and in January 2001 that
GSA was able to recoup the $8 million in those 2 months alone.

9 Transition Delays Hamper Efforts to Add Competition

Before opening the FTS2001 program to further competition (and enabling
customer agencies to reap the potential benefits), GSA needs assurance that
it can meet the FTS2001 contracts? minimum revenue guarantees. These
guarantees, totaling $1.5 billion, represent about 65 percent of an
estimated total revenue value of $2.3 billion over 8 years. By slowing the
accumulation of FTS2001 revenues, transition delays add to the challenge of
promptly meeting these revenue guarantees, because some proportion of the
money spent on telecommunications is still going to the old FTS 2000
contracts rather than to the new contracts.

FTS 2000 expenditures are diminishing as the transition continues, but are
still a considerable amount. As recently as February 2001, for example,
agencies spent almost $32.5 million for one month of FTS 2000 services- in
spite of the fact that GSA was reporting the overall FTS2001 transition to
be about 90 percent complete by that time. Of that sum, over $7.5 million
went to Sprint; because those revenues were for FTS 2000 services, however,
they did not count toward Sprint?s FTS2001 revenue guarantee. From the start
of the FTS2001 transition in June 1999 through February 2001, Sprint has
received almost $369 million in revenue from FTS- 60 percent of it for
services billed under its FTS 2000 extension contract. These FTS 2000
extension revenues (over $221 million) do not reduce the government?s
minimum revenue commitments to Sprint under the FTS2001 contract.

The information available on FTS2001 revenues to date paints a mixed picture
of progress in ensuring timely satisfaction of the contracts? minimum
revenue guarantees. GSA?s report on FTS2001 revenues through February 2001
indicates that Sprint has accumulated about $147.1 million in revenues,
while WorldCom has accumulated about $301.9 million against its guarantee,
as shown in table 1.

Table 1: FTS Revenues Through February 2001 Compared to Guaranteed Minimums
FTS2001 revenues (in millions) Contractor To date Guaranteed Difference
Percentage of

guarantee met

Sprint $147.05 $750 $602.95 20% WorldCom $301.88 $750 $448.12 40% Total
$448.93 $1500 $1051. 07 30% Source: GSA.

In managing the minimum revenue guarantees, GSA must cope not only with
transition delay, but also with transition deferral and the loss of program
customers. The FTS2001 revenue estimates

10 of $2.3 billion were based on projections of the number of federal
customers who planned to

transfer their FTS 2000 services to the FTS2001 contracts. However, because
the FTS2001 contracts are not mandatory and in some cases because of
transition difficulties, some agencies changed their transition plans. As of
April 2001, some 16 departments or agencies that had been using FTS2000 for
their services had decided to use alternative suppliers for all or part of
their services rather than transition them to FTS 2001; GSA values these
services at about $77 million annually.

Two factors could mitigate the constraining effect posed by the FTS2001
contracts? minimum revenue guarantees. The first of these is unforeseen
growth in demand for FTS2001 services. For example, a revised revenue
estimate prepared in September 2000 for GSA by Mitretek Systems indicated
that the program was experiencing unforeseen growth in demand for switched
data communications services and higher speed dedicated transmission
services; this demand could potentially add more than $250 million over the
life of the contracts.

A second factor is the potential participation of the FTS2001 contractors in
the MAA program once GSA permits those contractors to cross over to those
contracts. As I indicated earlier, just as MAA contractors might be allowed
to offer FTS2001 long distance services, so too will FTS2001 contractors be
permitted to cross over into the local MAA markets. For instance, in
December 2000, GSA opened the MAA markets in New York, Chicago, and San
Francisco to additional MAA and FTS2001 contractors. Should an FTS2001
contractor pursue and receive permission to cross over, any revenues earned
would accrue against its FTS2001 revenue commitment. According to GSA FTS
officials, WorldCom had expressed interest in pursuing MAA opportunities,
although it has not yet submitted proposals to offer services in those
initial MAA markets.

If the transition can be rapidly completed, if there is no additional loss
of customers from the program, and if there is continued growth in service
demand beyond that originally forecast, FTS2001 will be in a better position
to meet the minimum revenue guarantees, which will give GSA greater latitude
to increase competition by adding contractors.

Next Steps In our report, we make several recommendations to the
Administrator of General Services concerning actions that should be taken to
address the outstanding issues impeding transition, and to better position
the program to fully achieve its basic goals of ensuring the best service
and

11 maximizing competition. GSA managers agreed to implement all these
recommendations, and

have already begun taking these next steps:

To enable more accurate tracking of FTS2001 transition progress and improve
telecommunications planning, GSA has received transition management
information from WorldCom and is also working with Sprint to obtain
acceptable information. Further, GSA is determining how to incorporate
measures into its FTS2001 transition reports that reflect the final step in
the transition process, which is the issuance and completion of disconnect
orders required to turn off FTS 2000 services. This is an important factor
in ensuring the timely and orderly close- out of FTS2000 services.

To ensure the prompt availability of all services needed by agencies to
complete their transitions to FTS2001, GSA expects to complete the remaining
five transition- related contract modifications with Sprint and with
WorldCom by the end of this month.

To promptly identify and resolve remaining billing issues, GSA has completed
its testing and formal acceptance of WorldCom?s service ordering and billing
system, and GSA?s billing issues team has cataloged billing problems and
developed an action plan for resolving outstanding billing issues.

Finally, in light of the contractors? failure to meet management information
and billing requirements within contractual time frames, GSA has plans
underway to obtain consideration as appropriate for failures that have
ensued.

Completing these steps will be important to completing the transition and
realizing the program?s objective of increasing competition. The process of
planning and managing future telecommunications service acquisitions- both
by GSA and by the agencies themselves- will benefit from an accurate and
robust inventory of current telecommunications services. Further, the value
of this critical program to customer agencies will be improved through the
application of lessons learned in streamlining and prioritizing the contract
modification process, in effectively and expeditiously resolving billing
problems, and in holding contractors accountable for meeting agency
requirements in a timely manner.

* * * * * Mr. Chairman, that concludes my statement. At this time I would be
happy to respond to any questions that you or other members of the
Subcommittee may have.
*** End of document ***