'World's largest' telecom deal turns out to be a dud
- 05 November, 2012 11:47
Originally billed as the world's largest telecommunications purchase, the U.S. government's Networx contract is turning out to be chump change for the five carriers involved in the deal. Halfway through its 10-year term, the contract has driven around $2 billion in revenue compared to projections as high as $34 billion for this stage of the program.
Networx is an umbrella program that allows federal agencies to buy voice, data and video services from five carriers: AT&T, Verizon, CenturyLink (formerly Qwest), Sprint and Level 3. Created by the General Services Administration (GSA), Networx has a 10-year ceiling of $68.2 billion in revenue. However, due to delayed purchasing by agency customers, Networx total revenue through September 2012 is at $2.18 billion, GSA concedes. [See chart]
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"There's no question that Networx is not living up to GSA's expectations," says Ray Bjorklund, vice president and chief knowledge officer with Deltek, a Herndon, Va., consultancy. "It's not configured in a flexible way. It's harder to accommodate new services and new ways of buying than it should be. And the transition to Networx is many years behind schedule and still isn't done."
Networx "has not been successful," agrees Bob Woods, a former commissioner of GSA's Federal Telecommunications Service who runs Topside Consulting in Vienna, Va. "The ceiling number was artificially high to start with. It shouldn't have been $68 billion; $30 billion would have been plenty. They made the contract so complicated that the transition became impossible to do in a graceful amount of time. Agencies have taken forever to get there."
Experts say Networx has failed to reach its revenue goals because it is too complicated, causing transition from the predecessor contract to fall several years behind schedule. On Sept. 28, the GSA released a report indicating that U.S. agencies disconnected 99% of their services from the previous telecom services contract, which was called FTS 2001. This milestone should have been reached in 2009, according to original GSA estimates.
"We're years behind schedule," says Edward Morche, senior vice president, general manager of the government markets group at Level 3 Communications. "While the FTS 2001 disconnects are 99% complete, only 70% of the revenue from FTS 2001 has transitioned to Networx. You can read through the tea leaves. If everyone was happy with Networx -- if it was easy and provided value -- agencies would have moved 100% of the revenue over. What we're seeing is other contracting vehicles being used."
Networx offers 48 services from toll-free voice to Web hosting, but these services are not bundled to allow agencies to easily buy end-to-end solutions. Also, Networx doesn't offer cutting-edge cloud and wireless solutions because the contract was written in 2005, before these technologies emerged.
GSA argues that Networx is succeeding in its goal to save agencies time and money when purchasing complex telecom services.
"Last year, the Networx contract saved the federal government more than $660 million on commercial rates," Mary Davie, GSA Federal Acquisition Service acting commissioner, says in a statement. "The contract allows GSA to provide core networking services to almost every federal agency; and those agencies typically save between 30% to 60% on the cost of services. In 2012, Networx saw the highest business volume on the contract to date, leading to additional cost savings.''
As of Oct. 19, 257 of 266 agencies had transitioned off the FTS 2001 contract, and the remaining nine agencies were expected to complete their transition to Networx by December.
Some Networx vendors -- particularly Verizon and AT&T -- are faring better than their rivals. Deltek estimates that Verizon has earned 47% of Networx revenues to date, while AT&T has earned 41% and CenturyLink 12%. Sprint and Level 3 have earned less than 1% of revenues, Deltek estimates.
Verizon was the largest incumbent on the Networx predecessor FTS 2001 contract, so rivals say it isn't surprising that it is earning the most revenue.
"It was very hard for agencies to decide what to do, and the default position was for them to stick with the incumbent," Morche says. "It's the people looking to grow their revenue from the agencies who are going to be the most frustrated. Level 3 might be the most frustrated."
Even carriers like AT&T that have fared relatively well on Networx say the revenue flow has come much later than anticipated.
"Our management is like everyone else's: They wanted a return on the tremendous investment we put into Networx. They were anxious,'' admits Jeff Mohan, executive director of GSA programs for AT&T Government Solutions.
Nonetheless, Mohan is confident that Networx is finally hitting its stride and will be a successful contract for AT&T despite its late start. "I would not characterize Networx as a failure," he adds. "I would characterize it as perhaps a little late in maturing."
The carriers aren't the only ones suffering from the slow transition to Networx, argues Diana Gowen, senior vice president and general manager at CenturyLink. Gowen says agencies have been paying higher telecom bills on the older FTS 2001 contract.
"From a savings-to-the-government perspective, I would have to say this contract has been a failure, but no one on [Capitol] Hill or at [the Office of Management and Budget] has gotten concerned enough to really propel this further," Gowen says. "There are still agencies who have not made decisions, have not transitioned [to Networx] and have not disconnected'' from the more expensive FTS 2001 contract.
Topside Consulting's Woods says that the pricing is good on Networx, but that GSA did not do enough to help agencies transition to the complex contract. So some agencies chose other contracting vehicles because Networx is not mandatory. "People got frustrated with its difficulty and went somewhere else," Woods says.
Another issue that slowed Networx transition was that GSA and the agencies lacked an accurate inventory of network services purchased under the predecessor contract.
"Say we got 10,000 telephone numbers to transition to Networx. We couldn't just do that out of the gate because of the inventory challenges. We had to check that all of the numbers belonged to the agency and weren't a dry cleaner or somebody's home," Mohan says. "Things that sound like they would be easy to transition aren't."
Carriers are urging GSA to change Networx to make it easier for agencies to use when buying complex services to drive up revenues for the second half of the contract.
"For me, it's the next five years that are really going to [show] the success of Networx," says Susan Zeleniak, senior vice president of Verizon Public Sector. "Up until now, mostly what's been done is transition old services to the new contract. ... The big change is going to be from now on how successful we are at doing non-standard services like security, hosting, engineering and design."
Zeleniak would like to see cutting-edge network services such as identity management, cloud-based infrastructure and wireline/wireless integration offered through the mega-deal.
"GSA needs to make it more flexible to add services, not just buying a line or buying minutes. People want to buy infrastructure as a service, security as a service, SAP migration as a service. If we could offer more of those services, this contract could achieve significantly more revenue," Zeleniak says. "We want to bundle communications capabilities in a services model, rather than a line item model."
Industry experts say Networx will probably produce around $10 billion in revenue by the end of 2017. While not the huge sums originally predicted by GSA, the $10 billion mark would at least make the contract profitable for many of the carriers.
"I think Networx has hit its stride," Mohan says. "We are seeing agencies buying advanced technologies at attractive price points. We are seeing agencies using Networx services to move into their next phase of transformations. This is what everyone has anticipated. The only thing that has been a drawback is that it is late."
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