Navy-EDS Deal Hits Troubled Waters

Navy's NMCI project tacking against scope creep, changing rules.

One year into the largest government outsourcing contract ever awarded, the going has been anything but smooth sailing for the $6.9 billion Navy Marine Corps Intranet project.

Not only is political support for the closely watched deal wavering, but also, due to scope creep, outsourcing provider Electronic Data Systems Corp. has so far taken over only a fraction of the 360,000 desktop systems the deal calls for. As a result, the future of the hulking project—and all other huge government outsourcing deals—is in question.

Despite some observers doubts and persistent obstacles in the early stages, officials from the Department of the Navy and EDS said they are pressing ahead with the plan to rebuild the military organizations IT infrastructure. They remain confident that the NMCI will serve as a model for other large government outsourcing deals.

The NMCI deal calls for EDS to pull together the 360,000 desktop systems and 200 networks across Navy and Marine commands into a single intranet starting with the Naval Air Systems Command. According to Secretary of the Navy Richard Danzig, the goal of the project is to save about $1.2 billion a year through increased productivity and the removal of redundant systems.

That may prove a good deal for the Navy, but what about EDS? Some observers say they believe that the NMCI contract is more of a trophy win than a moneymaker for the Plano, Texas, services company.

The project may have taken its biggest hit Sept. 11, when the terrorist attack on the Pentagon destroyed most of the Navys Washington-based IT infrastructure, including parts of the new intranet system. The Navy and the contractors are scrambling to rebuild those systems (see story, Page 28). But the project has been under fire for some time as critics and government administrators point out flaws and change the rules for what was already an unwieldy package of technology services, private partnerships and government bureaucracy.

Among the first signs that all is not well with the NMCI is the apparent eroding of hard-won congressional support for the effort. Although the Navy had delayed awarding the contract to ensure that it had adequate political support, the House Armed Services Committee in its fiscal 2002 authorization bill has recommended the exclusion of the Marine Corps from the project. Excluding tens of thousands of Marine Corps users could reduce the value of the deal and result in layoffs.

The Marine commandant sent a letter to the House committees members making it clear that the Marines need to participate in the NMCI, but no decision has been made. Navy officials said they remain confident the Marines will participate.

And the changing scope of the NMCI is just one of the projects problems. EDS and its Navy counterparts have also had to deal with changing rules. Last spring, the Department of Defense demanded that the projects environment be tested as rigorously as any military weapons system. While the DOD and the Navy hammered out an agreement, work on the project stopped, which forced EDS to temporarily lay off 10 percent of the NMCI Strike Force, or roughly 300 workers. Officials said their overall schedule was set back only slightly and that implementations are nearly back on track.

"Weve broken up what we planned for both commercially run tests and customer-run tests for the contract into what [the DOD] and Congress want to see," said Ron Turner, deputy CIO for infrastructure, systems and technology, with the Navy, in Crystal City, Va.

Many of the problems with projects the size of the NMCI can be attributed to underestimating individual steps when drafting the project as a whole, sources said. In preparing to move applications over to the NMCI early in the project, the Navy discovered it had far more applications to assess than it had anticipated. Those applications had to be certified before they could be moved onto new desktops and then given back to users. "They had to run in Windows 2000 and not violate our security model. That delayed almost everything," said Turner, who blamed the delay on poor planning by the Navy, not EDS.

The list of the applications that had to be assessed was long enough to "wallpaper a hallway 50 feet long," said Ken Gremillion, sales manager at Miramar Systems Inc., in Denver, one of the NMCI Strike Force subcontractors providing the migration utilities for the project.

Individual commands were left with the task of whittling down the total number of applications that would be moved to the NMCI environment.

"Now they are rationalizing from tens of thousands down to thousands of applications," said Rick Rosenburg, EDS program client executive for the NMCI Strike Force, in Herndon, VA.

Beyond such external crosscurrents, the Navy has also faced a challenge selling the ubiquitous NMCI to its people.

Engineers and logisticians who created "fantastic" networks to facilitate communication were essentially being asked to give up their "baby," Turner said. The Navy wanted such individuals to "solve business problems," rather than run networks. "Weve moved them into knowledge management, application and Web development, and some are working on linking applications in wireless devices," Turner said.

For those who wanted to continue with hands-on IT work, the Navy encouraged them to join EDS.

"We had a clause in the contract that EDS offered them a 15 percent pay raise, signing bonus, and some people were able to negotiate transferring their government retirement package to EDS," Turner said. Despite the incentives, only 46 of the 280 people affected opted to go to EDS. Others were moved to different jobs in the Navy. No one has yet been permanently laid off.

EDS to date has taken responsibility for about 42,000 existing seats, a fraction of the total to be handled by the NMCI. The setbacks and glitches have cost EDS real money. The services company had expected to collect $728 million in the first year of the contract but will see $600 million due to delays imposed by the new testing schedule.

"They will be very challenged to make money on that contract," said Chris Ambrose, an analyst at Gartner Inc., in Stamford, Conn. "My personal feeling is they probably had to invest a lot of money in this. They have to perform at every level of the contract." Still, there is a strategic value in having such deals. Wall Street in the past has punished EDS when it did not have such deals in its portfolio, Ambrose said.

Despite the reduced receipts, EDS Rosenburg is unfazed. EDS officials said theyve made good on their promise to move workers to the private sector as well as on the promise to distribute up to 40 percent of the work to small businesses.

"The total contract value has not changed. $128 million was added to the 2003 number. We will be able to make up what didnt get done in 2002 in 2003," Rosenburg said.

That said, members of both the Navy team and the NMCI Strike Force said theyve learned valuable lessons from their progress thus far—lessons that could help others considering outsourcing deals of the NMCIs scope.

"First, get your legacy environment in shape prior to outsourcing or moving into a concept such as this," the Navys Turner said.

Rosenburg said upfront communication is key. "Id have gotten more information out about the contract sooner, so there would be less resistance to the program," he said.

Turner agreed. "We caught too many people off guard—to the point where Congress changed the law," he said. If he could do it differently, Turner said he would have "targeted the House and Senate Armed Services committee, House and Senate Appropriations committee; I would have started earlier with the union president to let him know this is not a job reductions program." Then, "buy a condo on Capitol Hill," he said.

Despite the "amazing amount of political push back" it took to move the NMCI forward, industry observers said they believe other government organizations—military and otherwise—will move toward more outsourcing.

Rishi Sood, a Gartner outsourcing analyst in Mountan View, Calif., said, "There is a mandate to move more responsibility to the private sector in the form of outsourcing." Sood predicted that over the next two years, the industry will see another four or five large outsourcing contracts from the federal government—especially in the military and intelligence communities.

But despite rumors to the contrary, the Air Force will not be among them, according to Col. Neal Fox, director of the commercial IT product area directorate, Maxwell/Gunter Air Force Base, in Alabama.

"We are watching the NMCI to see how it does," Fox said. "My personal view is that I dont think its necessary for the Air Force. Processes we have in place will meet the needs of the Air Force—they will give the Air Force CIO control of IT resources in a way that will make outsourcing unnecessary."

Still, despite the sticker shock that caused Congress to recoil when it saw the price tag for centralizing IT procurement with the NMCI, Turner said he believes the Navy had no other choice.

"We, frankly, could not figure out a good way to come up with the minimum $2.6 billion wed need to upgrade our basic communications infrastructure, let alone the other $1 billion wed need for all-new computers and software," Turner said. "Plus, we have almost 67 percent of our IT work force eligible to retire within about three years, and there is no groundswell of new hires in this field. We needed to find a new way of doing business."

And it could be that the Defense Department, Army, Air Force and Joint Chiefs of Staff are watching the NMCI even more closely than they had been after the events on Sept. 11.

"After Sept. 11, the government learned the need to be able to move quickly and to innovate. Were starting to see a centralized CIO in government, and they see the need to bring in external service providers to bring in a technology refresh," Gartners Sood said.