Feds mull impact of WorldCom woes

As more details surfaced about potential financial and legal problems for telecommunications giant WorldCom Inc., company officials and industry observers said last week that they anticipate little disruption to the services agencies receive.

The Defense Department and the General Services Administration, however, have begun reviewing WorldCom's future financial viability, opening the door to barring the firm from future contracts.

The reviews were prompted by WorldCom's disclosure of accounting practices that resulted in nearly $4 billion being falsely reported as revenue during the past year. The Securities and Exchange Commission is investigating.

GSA is currently reviewing "all WorldCom government contracts and other related information for purposes of determining present responsibility," according to an agency spokeswoman.

To be considered "responsible" under the Federal Acquisition Regulation, a company must meet several requirements, such as having adequate financial resources, the ability to meet contract schedules, a satisfactory record of integrity and business ethics, and accounting and operational controls.

GSA could potentially find WorldCom not responsible across the board, meaning debarment for the company from all future federal contracts, said Carl Peckinpaugh, a government contracts lawyer and Federal Computer Week columnist.

After Arthur Andersen LLP's indictment in March on charges involving the Enron bankruptcy, the Office of Federal Procurement Policy modified the FAR to extend disbarment to new task orders on existing contracts, Peckinpaugh said. Andersen is WorldCom's former auditor.

However, debarment would not affect services already being provided, so agencies should see no immediate change in service levels, said Warren Suss, president of Suss Consulting Inc.

"No matter how things play out...I'm sure that WorldCom will put the performance [of] their federal contracts high on their priority list," he said.

WorldCom provides long-distance telecom services to many agencies through GSA's FTS 2001 contract. The company also recently won contracts to provide network management services for DOD's Defense Information Systems Network program and high-speed networking services for the defense research community (see box, below).

Since the disclosure, the company has received many calls from customers worried about the future of their services, and officials have done everything they can to "renew their confidence," John Sidgmore, WorldCom's president and chief executive officer since April, said at a press conference July 2.

Many of the calls came from national and homeland security agencies concerned that WorldCom's troubles could affect its UUNet subsidiary, which runs almost 50 percent of the Internet traffic in the United States. "They are very nervous at this point that something will happen," Sidgmore said.

Since Sept. 11, many agencies are much more aware of continuity of operations and redundancy, he said. However, even if WorldCom files for Chapter 11 bankruptcy, "I don't see any significant chance of the UUNet network going dark under any circumstances."

Defense Secretary Donald Rumsfeld also expressed doubt about the impact of WorldCom's problems on DOD in his July 2 press conference.

"To the extent important activities, useful activities are being contracted for, regardless of the corporate shell that fits around those, those activities tend to go on," he said. "I've never seen an instance where some useful service in supplying something to government has been interrupted or disrupted for any period of time, so I am not worried about the risk to the Pentagon from a single company having a change in its corporate situation."

Whether or not WorldCom is able to continue to provide service, the loss of confidence in the company "certainly shakes things up," Suss said.

Sprint, WorldCom's primary competitor on the governmentwide FTS 2001 long-distance telecom contract, has seen a significant increase in inquiries from agencies for backup and contingency planning efforts, said John Polivka, a Sprint spokesman.

"Folks are wondering what's going to happen, and as part of that, they are exploring their options," he said.

Officials at AT&T, which recently joined the FTS 2001 contract, would not comment on the impact of WorldCom's situation on the federal market.

The impact could be significant because WorldCom's presence is widespread. The firm did more than $462 million in business in the federal market in fiscal 2001.

The Commerce Department, which uses WorldCom primarily for long distance and dedicated circuits, will be following GSA's lead, according to a Commerce spokesman.

The Federal Aviation Administration is expected to award its multibillion- dollar next-generation telecom infrastructure contract this month. WorldCom already holds several important FAA networking contracts and is currently considered one of the leading bidders.

Dan Caterinicchia and Christopher J. Dorobek contributed to this story.

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On the defensive

The Defense Department is taking a closer look at its business with WorldCom Inc.

In April, the Defense Information Systems Agency awarded the $1 billion Defense Research and Engineering Network contract to WorldCom. Because the current contract with AT&T stands for another two years, "there would be no immediate mission impact if WorldCom were unable to carry out DREN," a DISA spokeswoman said.

However, "we are currently conducting a detailed legal analysis," she said. DISA's legal review only covers the DREN contract, but DOD is relying on a General Services Administration investigation to look at other contracts WorldCom has with the department, she said.

WorldCom is also a major provider on the Defense Information Systems Network, the basic DOD voice, data and video network. Although DISA will continue to monitor the service level on the network, the agency "has received assurances from WorldCom that it will continue to deliver service to DISA customers," the spokeswoman said.

- Diane Frank and Christopher J. Dorobek