THURSDAY, DECEMBER 7, 2000 COMMUNICATIONS DAILY
GSA MANAGEMENT FEES FOR MAA CONTRACTS RAISE QUESTIONS
General Services Administration (GSA) is charging agencies that participate in contracts for local telecom services overhead rates of 25-75%, compared with management fee of 8% for FTS 2001 long distance program, several industry sources said. GSA, in response to Freedom of Information Act request, confirmed that it was charging customers participating in Metropolitan Area Acquisition (MAA) program management fees based on "desired level of support" and gave examples in range of 20-30% that customers are charged directly. Several industry sources said high overhead rates had substantial impact on prices for services offered under MAA program, making bottom lines that customers pay less competitive than those originally bid. Telecom consultant Warren Suss said success of MAA program and steep discounts in previous rates outweighed larger overhead rates, but others questioned why rates were relatively steep compared to FTS. GSA’s Federal Technology Service (FTS) has awarded MAA contracts to Bell companies, Qwest and Winstar in 19 cities so far, including most recent New Orleans agreement to BellSouth in Oct. Program, expected to award contract for Philadelphia shortly, covers standard voice, switched data and dedicated transmission service. Aim of program, started after Telecom Act of 1996, is to provide benefits of local telecom competition to federal agencies similar to those in long distance market, GSA said. All contracts awarded so far carry total value of $3.8 billion. Contract winners include AT&T, BellSouth, Qwest, SBC, Verizon, Winstar. GSA has estimated savings that federal govt. will see as result of contract could exceed $1 billion for all cities compared with current rates that govt. pays for similar services. MAA management fee is used to pay for contract-related costs, including "transition planning and implementation efforts," GSA said in response to FOIA request. MAA program itself is relatively new, with first 3 cities awarded to AT&T in May 1999. First-year costs include transition and related expenses "that will be significantly reduced in future years," GSA said. Management fees vary between city-specific contracts and contract elements. GSA said management fees become part of FTS’s Information Technology Fund. GSA’s FOIA response gave example of N.Y.C. where current rate is $24.57 per line per month, with overhead rate that GSA charges directly of $5.51 per line per month. In another example, it said current rate in San Francisco is $23.51 per line per month, with GSA management fee of $7.52 per line per month. Several sources indicated that agencies didn’t see breakdown on their bills between what GSA charged directly and portion that went to vendor. Pricing under MAA contracts is somewhat complicated, in part because it varies between cities and contract elements. GSA said switched voice services could include features selected by customer such as call forwarding and voice mail. Each billed service contains price elements such as monthly recurring charges and end-user common line charges. Each contract can have more than 8,000 price elements that can vary by contract year and "geographical location within each MAA city," GSA said. Rates and revenue for MAA program "are set on an annual basis and are adjusted down as business volumes increase," it said. Industry source familiar with contracts said that one concern with overhead rates that GSA is charging for MAAs is that if vendor bid 40 cents less for service that was $1, by time management fee is added for agency, price can be raised to close to what they were paying originally. In other cases, price of some line items, including those connected to certain trunk lines on PBXs, are even more expensive under MAA than what agencies were paying previously, source said. While that source and 2 others said range of overhead rates was 25-75% for most contract elements, more typical range was 25-40%, he said. Size of overhead rates is "tough to justify," said another industry source. "It’s an extreme burden for industry to try to bring competition to the local loop with those types of overheads and convince people to go through any transition." GSA said it now handles about 25% of local phone business for govt. agencies, with rest of agencies buying directly from Bell companies or CLECs. Several sources indicated that overhead rates have had some impact on pace of agencies in switching to MAA contracts. Figures on how many agencies have signed on to MAA contracts as new customers couldn’t be obtained. In response to FOIA request as to how much federal govt. users have been billed under MAA since program started in 1999, GSA said AT&T has been billed $280,581 in N.Y., $433,337 in Chicago and $35,936 in San Francisco. Only other vendor that has been billed since start of program, GSA said, is Winstar in Baltimore for $253. Another industry source said that when overhead rates were added to prices that vendors bid for various contract elements, "the savings to the end user are not very significant in my opinion." Source said: "Had I known there were going to be those kinds of rates put on something like this, I don’t know I would have bid on it. You are essentially making yourself noncompetitive." However, several industry consultants said that because transition to local service for new MAA contracts was more complicated than for long distance services of FTS program, higher management fees were not unexpected. "It’s not a cheap program to administer," said telecom consultant Warren Suss, pres. of Suss Consulting of Jenkintown, Pa. Among costs of implementing program are request for proposals, evaluation, specialized requirements for billing, continuing oversight. He didn’t dispute percentages of 25-75% that industry sources cited as being added by GSA to help administer program. But he said that even when those management fees were added, savings still were very significant compared with what federal agencies had been paying for local services. "MAA programs are the first programs in the nation that have succeeded in using the emerging competition for regional services to drive prices down in extremely dramatic ways," Suss said. Prices that are part of contract awards so far in MAA cities "are orders of magnitude below what the government was paying before." Some price reductions are as much as 80%, he said. Overhead rates will decrease as more customers join MAA program. Disparity between MAA and FTS management fees in large part is due to fact that FTS contracts can spread overhead rates among much larger customer bases, he said. While MAA contracts in several ways are more complicated to transition new customers than their long distance counterparts, some sources said level of overhead rates raised questions about GSA’s own staffing levels for program. "The concept of the MAA program from the beginning was to have contracts that were quick and easy to bid on, easy for customer agencies to use and that would allow GSA to reduce the overhead associated with administering those contracts," said John Okay, independent telecom consultant. Okay is former FTS deputy commissioner who was one of architects of MAA program. "I think GSA is struggling with their current business processes and their current staffing levels but they really need to take a fresh look at those and take advantage of some of the features of those contracts that make them easier to administer," he said. Contracts "should make it easier for customers to deal directly with the vendors" instead of depending on GSA for most elements of contract, he said. Similarly, Lisa Crawford, procurement consultant who formerly headed AT&T’s FTS 2000 program, said size of overhead rates in MAA contracts raised questions about GSA’s own infrastructure. As example, she said part of management fees goes to pay GSA’s own sales force. "Contracts require that vendors have sales forces that are out there aggressively selling," she said. "That’s duplicating work that’s not inherently a government function." – Mary Greczyn