GAO criticizes DISA's fee-for-service operations

The Defense Information Systems Agency is not adequately managing mainframe systems at
Defense Department megacenters and other systems services it provides on a fee-for-service
basis, according to a new General Accounting Office report.

DISA provides a wide range of information technology products and services to Defense
agencies and the services.

But GAO auditors found that DISA sets improper prices for IT services.

“These weaknesses impair the business area’s ability to focus management
attention on the full costs of carrying out operations and managing those costs
effectively,” said the report, DOD Information Services: Improved Pricing and
Financial Management Practices Needed for Business Area.

Arthur Money, the senior civilian official in the Office of the Assistant Secretary of
Defense for Command, Control, Communications and Intelligence, disagreed with the report
and questioned its “degree of objectivity.”

Defense information services are divided into two business areas: the Defense
megacenters and the Communications Information Services Activity. CISA provides
telecommunications services through offices located worldwide. DOD performs mainframe data
processing at 16 megacenters around the country on IBM Corp. and Unisys Corp. systems
running Executive Software from Executive Software Inc. of Glendale, Calif. The systems
support almost all DOD data processing, including logistics, payroll, finances and
acquisition.

DISA last year decided to consolidate its 16 data centers at six sites to increase
efficiency and lower its expenses. It will take two years to complete the consolidation
that will likely save $1.5 billion over the next 10 years, DISA officials said.

But the centers’ costs vary considerably from one center to another, GAO said. The
hourly cost at the megacenter in Columbus, Ohio, for example, is about 61 percent higher
than it is at the St. Louis center, the report said.

The Denver megacenter spends about $68 an hour providing Unisys mainframe services,
while its San Antonio counterpart spends about $11 an hour, GAO said.

In addition, the megacenters do not accurately estimate their workloads, auditors
found. According to fiscal 1997 DISA records, the differences between estimated and actual
workloads at the megacenters ranged from 15 percent to 174 percent, the GAO report said.

Seven of the 15 centers that offer IBM mainframe services overestimated their
workloads, GAO said. One center told GAO that its workload for one year was about 74
percent more than what DISA had projected, the report said.

“Accurate workload projections are essential to the business area in developing
prices that enable it to recover operating costs from its customers,” the report
said.

Nor is DISA reimbursed for its services in a timely manner, GAO said. DISA records as
of January show that 31 percent of receivables for information services, or about $173
million, was outstanding for more than 60 days.

GAO recommended that DISA take several corrective actions, including analyzing the cost
differences at the megacenters and identifying improvements needed to properly conduct
business.

It also recommended that DISA compare forecasted workload estimates against actual work
and consider the trends in developing future fees.

Money said DISA had already implemented GAO’s price-setting and financial
management suggestions. He said the report failed to credit DISA for correcting
inefficient operations at the megacenters.

“We are non-concurring with four of the eight report recommendations and
questioning the accuracy of the data, the degree of objectivity, and the balance portrayal
of the facts supporting them,” Money said.

“We are most anxious to resolve the differences, as it appears information
contained in this report is being used in proposed legislation without DOD having had the
opportunity to verify its accuracy,” Money said, referring to a proposal in Congress
that calls for re-evaluation of $222 million in fiscal 1999 DISA funding. 

The General Accounting Office isn’t alone in questioning the Defense Information
Systems Agency’s estimate of workload and pricing at Defense Department megacenters.

More than a dozen vendors and a congressman have raised concerns about DISA’s
award last month of seven contracts worth nearly $40 million to CHE Consulting Inc. of
Earth City, Mo., for hardware maintenance at 15 megacenters.

They question CHE’s ability to perform on-site preventive and remedial hardware
maintenance work at the price it bid. Earlier this month nine vendors, including companies
that manufacture equipment at the megacenters, urged DISA director Lt. Gen. David Kelly to
terminate the CHE contract.

“CHE’s prices demonstrate a lack of understanding of DISA’s maintenance
requirements,” vendors said in a Sept. 4 letter to Kelly. “As manufacturers and
established maintenance providers, our infrastructure and capabilities require higher
prices than CHE has quoted. If CHE tries to enlist our support as subcontractors, we
cannot work at CHE’s prices.”

According to the vendors, CHE’s prices are about 85 percent lower than DISA’s
own estimates and approximately half as much as what other bidders proposed.

Three losing bidders—CCL Service Corp. of Bethesda, Md, PCC Federal Systems Inc.
of Falls Church, Va., and Severn Companies Inc. of Lanham, Md.—have filed lawsuits in
the U.S. Court of Federal Claims contesting the CHE awards.

DISA’s Defense Information Technology Contracting Office at Scott Air Force Base,
Ill., issued an order Sept. 18 stopping work until the court rules on the lawsuits.

“These concerns are unfounded,” CHE president David York said. “We are a
company that is currently and has in times past provided hardware maintenance services on
behalf of DISA and other government agencies. And we have done a fine and exemplary job of
doing that.”

CHE provides a wide array of computer hardware engineering services to government and
industry, including remedial and preventive hardware maintenance services. But Rep.
Herbert H. Bateman (R-Va.) sent a letter late last month to Kelly questioning the
company’s size and ability to do the work.

“I am advised that this company has only 14 employees and, according to a recent
Dun and Bradstreet report, a net worth of $272,167,” Bateman said. “If my
information is correct, there is substantial reason to question the ability of CHE to
perform an undertaking of the size and significance of the contracts.”

DISA, however, stands by the CHE contract. Kelly told Bateman in a response letter that
although CHE is a relatively small company, its bid was reasonable.

“Given the determination by the contracting officer, I have no reason to doubt
that CHE can perform as specified in the contracts,” Kelly said.

—Gregory Slabodkin