Computer Rivals Claim U.S. Contract Rules Are ‘Wired’ to Favor IBM
Two years ago the National Institutes of Health, planning to modernize its computer center, announced that it would award a contract worth up to $800 million over the next decade, a large and important piece of business even by federal government standards.
Bidding on such a complex contract can be expensive and time-consuming, so to encourage competition, the agency offered to pay $1 million to any losing bidder.
Not just any computer company could bid on the contract. The company’s size was a factor, as was its reliability and service. And because NIH had already invested heavily in computers made by International Business Machines Corp., any new equipment would have to be compatible with IBM operating standards.
All that narrowed the field to a number of strong contenders, including Amdahl Corp., National Advanced Systems, Electronic Data Systems, Martin Marietta Corp. and Computer Sciences Corp.
In the end, however, there was only one bidder: IBM.
“They structured it like it was a competitive procurement, but basically it was a wired specification,” said Sidney M. Wilson, vice president of PacifiCorp Capital Inc., a Reston, Va., systems integrator that designs complex computer systems and is familiar with NIH’s computer operation. Wired, that is, for IBM.
According to one official at Amdahl, the NIH contract specifications were “just loaded with terms and conditions favorable only to IBM. We said, ‘Who’s kidding who?’ and we all dropped out. With that much money at stake, I don’t think anybody would have walked if we thought there was a chance in hell that we could win it.”
Yen for IBM
It is, increasingly, a loud and common complaint in the world of government-computer contracting.
Some of the complaints may be sour grapes on the part of losing competitors. But circumstantial evidence also supports the claim that government computer managers, like many of their counterparts in private industry, have a yen for IBM. For taxpayers, the result may well be millions of dollars in higher costs and a slowing of technological innovation.
That charge was aired publicly last month when six IBM competitors risked offending the world’s biggest computer buyer and released a letter to former Defense Secretary Frank C. Carlucci in which they alleged that procurement officials routinely favor IBM in Navy contracts. Carlucci has issued no public response, but the Pentagon’s inspector general has launched an investigation.
In their letter, the six companies claimed that Navy technical personnel “consistently manipulate the procurement process to guarantee the desired outcome, an award to IBM,” using a variety of techniques.
Those techniques, they charged, include drawing up computer equipment specifications based on IBM products rather than on the government’s actual requirements; delegating the procurement to a large integrator of computer systems or a minority firm acting as a “front” for IBM; overstating the scope of a requirement by awarding long-term contracts that shut out the competition, and modifying existing contracts to allow purchases of equipment for other requirements.
‘Competitive Environment
IBM refused to comment on the charges or to answer specific questions for this article.
“There are a wide range of complex and complicated rules surrounding the procurement process, and we have no reason to believe that the government does not follow those rules,” said Mark Holcomb, an IBM spokesman. “It is an intensely competitive environment, and there is an exhaustive protest process for people who disagree with contract awards.”
Indeed, in the past few months alone IBM has lost competitions against National Advanced Systems and Amdahl for expensive mainframe computer systems at the Energy Department’s Oak Ridge, Tenn., facility and at an Air Force finance center in Denver, respectively.
But to hear it from others in the industry, including people who have no vested interest in one company or another, the NIH scenario is endlessly repeated at many agencies.
Terry Miller, president of Government Sales Consultants Inc., a consulting firm based in Great Falls, Va., said some of the worst offenders are the Army, the Navy, the Defense Intelligence Agency, the Central Intelligence Agency, the National Aeronautics and Space Administration, the Social Security Administration, the Environmental Protection Agency, and the Agriculture and Justice departments.
For companies that believe they have been shortchanged in the bidding process, there is always the option of lodging a protest with the General Services Administration’s Board of Contract Appeals.
But many companies say they don’t protest, fearing that they will anger agencies and needlessly ring up legal bills and other expenses that usually start at $100,000 per protest.
Even before a contract is awarded, a different office within the mammoth GSA is charged with reviewing contract plans of the various agencies--a process that is increasingly viewed as a “rubber stamp,” said Jack Biddle, president of the Computer & Communications Industry Assn., representing 60 major computer companies.
Francis A. McDonough, deputy commissioner for federal information resources management at the GSA, conceded that during the past few years reviews have been streamlined and eliminated for agencies considered to be doing a good procurement job, an effort to cut paper work and increase efficiency.
But with complaints building, McDonough said his agency will review a sample of large procurements more thoroughly.
“We hear the people,” he said, “and we need to move as times change.”
Huge Sales Force
Because so much of the government buying of mainframe computers is cloaked in national security, it is impossible to tell how many big machines IBM sells to federal agencies each year.
Computer Intelligence, a La Jolla market research firm, estimates that IBM mainframes constitute 37% of the installed value of all of the government’s computers worth more than $1.5 million apiece--a conservative estimate, according to others in the industry.
Still, that is nearly twice the market share of its nearest competitor, Amdahl. But it is significantly less than the 81% market share IBM claims in the commercial mainframe market, where there are no rules requiring competitive, open bidding.
One reason IBM has been so successful in selling to the government is that it has so many people doing it.
In the Washington area alone, where IBM sells the government everything from off-the-shelf equipment to complex mainframe systems, IBM employs 15,000 people, according to Washington Technology, a local high-tech newsletter.
That makes it the third-largest employer not headquartered in the region. In marketing strength alone, IBM outnumbers some rivals such as Amdahl by 30 to 1.
According to PacifiCorp’s Wilson, it is not simply the number of salespeople but the sophistication of sales techniques that set IBM apart. Over time, he said, IBM has cultivated close relationships with clients in the various agencies and is relentless in sowing “fear, uncertainty and doubt” about competitors.
Influence From Top
As Wilson portrays it, IBM salespeople ask customers, “ ‘How can you possibly do business with those people? They won’t deliver. When they do, it won’t work. When it breaks they can’t fix it.’ ”
“If all that stuff was true, would any of these people (Amdahl, Cray, NAS, Unisys) be in business?” Wilson asked.
The tilt toward IBM works from the top down.
A former naval officer handling advanced data processing awards, who spoke on the condition of anonymity, said there was great pressure from his commanding officer to structure the specifications of a contract to favor IBM. The officer said IBM’s computer was not technically superior but was several million dollars more expensive.
“My commanding officer was approached by IBM when they saw that I, as project manager, was not structuring a procurement which openly favored them. They invited the commanding officer to attend a weeklong session . . . at an ongoing forum IBM uses to lay out the IBM gospel,” he said.
Upon his return, the commanding officer told the officer to structure the specifications to favor IBM. The manager refused, and the contract was awarded to Amdahl for $2.5 million less than IBM’s bid.
“When IBM saw that I was not giving them preference, they made the typical sweep of going above me to my commanding officer to give them the feeling that I wasn’t doing well,” said the officer. “I was put on the carpet a couple of times defending my actions.”
For many computer makers, the competitive advantage over IBM has always been price. But lately, as computer system contracts have become more complex and as IBM has sought to minimize its price disadvantage, agencies have begun to consider factors other than cost.
Process Called Fair
“The government has completely switched to including a lot of technical evaluations of a lot of non-cost issues,” said Bob Dornan, vice president of the Federal Sources Inc. consulting firm, issues such as “management support, reputation of the company, availability of software--a lot of things that are a little more nebulous but still are valuable factors that can have some impact.”
It was just such non-cost factors, written into the specifications, that scared off a number of potential bidders from the $800-million contract at the National Institutes of Health.
Joseph Naughton, the computer center director at NIH, said the process was fair to all players and that, upon their recommendation, many requirements were removed from the request for proposals the agency issued. Several companies discussed teaming together, he said.
“The merger fell apart for some reason I couldn’t tell you,” he said.
“IBM . . . is completely integrated and thoroughly supported,” he said. “You can generally depend on it. . . . Many other manufacturers have a habit of not performing.”
There essentially are two types of computer companies that complain of an IBM tilt.
One group, including Amdahl, Cray, NAS and companies that use their equipment to assemble complex systems, makes equipment that operates on IBM’s software standards and can work compatibly alongside an agency’s existing IBM computers.
Agencies Inventive
The other group, which includes Digital Equipment, Honeywell, Unisys, AT&T; and others, uses different operating standards. They often are disqualified even from bidding on government contracts because IBM compatibility is written into the specifications--even when compatibility does not appear to be a relevant issue.
It is the second group that seems particularly disadvantaged in the area of government sales. Industry sources say agencies are infinitely inventive in the ways they come up with to demand IBM operating standards.
When, for example, the Navy sought in 1983 to award a $400-million contract to upgrade a spare parts inventory tracking system based on an original Sperry Univac machine, it got three serious bidders--Sperry, Honeywell and IBM--each of which used a different software standard.
But according to an official of one of the three companies, the Navy began writing software code for the new system on an IBM machine and informed Sperry and Honeywell that, should either be awarded the contract, they would have to include in their price a $5-million item for software conversion.
“By going this subterfuge route, IBM had a $5-million leg up,” the source said. Honeywell and Sperry never made a “best and final” offer, leaving the business to IBM and H. Ross Perot’s Electronic Data Systems Inc., a systems integrator that used IBM hardware.
Sources close to the General Accounting Office say they investigated the contract award and the use of the IBM system in the writing of software code. But protests by Honeywell and Sperry before that agency were rejected for untimeliness, according to an industry source.
There perhaps are good reasons for the government’s tilt toward IBM, none more important than to bring some degree of standardization to the government’s disparate computer operations.
Indeed, in the early 1980s, the White House issued a directive setting compatibility as a top priority in government computer purchases. With the prompting of IBM, a number of agencies interpreted that as a official endorsement for the IBM tilt, according to Jack Biddle of the Computer & Communications Industry Assn.
The day may come before too long when all major computer systems will be compatible, much like stereos and turntables are today, through a process known as “open systems architecture.”
But between now and then, billions of dollars of government computers will be purchased--and the preference for IBM mainframes is likely to persist.
“The agencies are saying . . . ‘I have a problem now and only IBM can fix it,’ ” Biddle said. “Later they are going to say, ‘We can’t go to your new open system because of the investment we have made in the IBM proprietary system of operation.’
“If you have no competition, the taxpayer will ultimately pay the price, and the nation will lose the benefit of the creativity of the Amdahls and Unisyses of the world.”
