TCOM 541

Session 6

And Now For Something Completely Different …

• Back in the 1970’s, the General Services Administration ran what was essentially a private phone company, called Federal Telephone Service (FTS)– Long distance voice only– On-net only– Leased lines, switches, …– Not very efficient

• Cost $0.27 to $0.40/minute, depending on how the accounting was done

• About 30% to 100% more than commercial rates

FTS2000

• FTS was replaced in 1988 by FTS2000– Services-oriented 10 year contract with

significant volume banding (I.e., lower prices at higher volumes)

– Mandatory use by agencies– Voice, packet-switched data, dedicated circuits– Two vendors, mandated 60/40 split– Two internal recompetitions at years 4 and 7

FTS2000 – Scope

FTS2000 Network A

FTS2000 Network B

0 375 million minutes/month0 $44.0 million/month

0 1.7 million users0 4,200 locations

Customer Premises

Equipment(GSA)

Local Exchange

Carrier

Inter-Exchange

Carrier

Local Exchange

Carrier

Customer Premises

Equipment(Agency)

User User

Service Delivery Points

1989 1990 1991 1992 1993 1994

30

25

20

15

10

5

0

Negotiated Price Decreases

FTS

FTS2000 Cutover Complete

Price Redetermination

Switched Voice Price

(Cents Per

Minute)

FTS2000 Cutover Begins

1995

Year End

FTS2000 Price History

Current FTS2000 price is 1.5 cents/minute less than best

commercial price

FTS2000 Replacement

• Strategy development started in 1994 for planned award in 1998

• Called FTS2001

• Situation changed– No mandatory use– Technology advances– Deregulation/local competition

FTS Program• Objectives

– Provide high quality telecommunications services that meet users’ needs

– Leverage the large volumes of Government traffic to obtain the best prices

• Characteristics– Flexibility as a means to deal with uncertainty

(technology, market, regulatory, requirements)– Maximize competition– Agency choice– Market oriented– Rely on private sector– Use commercial best practices

Post-FTS2000 - Increasing the Use of the Private Sector Infrastructure

Strategic Alternatives

Continue Current Compre-hensive

Contracts (Alternative 1)

Integration Contractor

(Alternative 2)

Span-Specific Contracts

(Alternative 3)

Regional Compre-hensive

Contracts (Alternative 4)

Integrated Business Process

Solutions (Alternative 5)

Service-Specific

Contracts (Alternative 6)

Service/Span-Specific

Contracts (Alternative 7)

Government-wide Approach?

Individual Agency

Acquisitions (Alternative 8)

Agencies Agree on Coordinated Approach

Partitioned

by Serviceby Span

Comprehensive

by Span and

Service

Yes No

Strategy Choice

• High-level agency (customer) working group

• Decision support tools (Analytic Hierarchy Process)

• Inputs from oversight bodies

Strategy Choice (2)

• Comprehensive contracts– 1 or 2 contracts, 8 years– Expanded technology suite– Internal recompetition– Provision for local access competition– Need for significant commitment

• $750M Minimum Revenue Guarantees

• Agency commitment to support

Pricing Structure - Objectives

• Pricing structure must support objectives:– Award two or three contracts with almost

equal prices over likely range of traffic (e.g., 20% to 60%)

– Don’t leave money on the table• Want total FTS2001 cost close to lowest possible

– Facilitate internal competition

Pricing Structure – Problems

• Whatever range of traffic volumes is used for evaluation, offerors will likely bid at least these three price break points:

– Just below the lower limit– Just below the upper limit– Just below 100%

• Probably will bid more breaks

Pricing Structure – Problems (2)

• Two or three awards probably will cost more than single award, in the short-term

– Second and third vendors for any service will likely raise prices

• Declining price-volume curves

– FTS2000 experience - initial 2-vendor award cost ~15% more over first 4 years

• Break-even not achieved until Year 7

Pricing Structure Problems (3)

• Effect worse when 100% prices are significantly lower than 20% - 60% prices

• Possible exception if vendors have significantly different prices for high-volume services– Effective candidates limited to SVS, 800/900

and DTS

Pricing Structure - Example of Possible Bids

EvaluationRange

100%

Price

Volume

Offeror A

Offeror B

50%

Pricing Structure - Example of Resulting Problems

EvaluationRange

100%

Price

Volume

Offeror A

Offeror B

50%

Two herecost more than one here

Premium paid for twocontractors

A is better within theevaluation range, but B is better at 100%

Pricing Structure - The 100% Problem

• If 100% is not evaluated, GSA leaves an unknown amount of money on the table

– And may inadvertently award 100% to a higher bidder– Someone will work out how much and publicize it

• If 100% is evaluated, offerors will most likely structure their bids to drive to a winner-take-all outcome

– Cannot recoup excess costs by later internal competition

– May actually result in significant savings to Government over first 4 years

Pricing Structure - Solution• As initially constrained with price-volume

banding, GSA could not win• Must change constraints:

– Flatten prices by eliminating or severely restricting volume discounts

• Reduces gaming by offerors

• Eliminates government volume-band chasing after award

• Conforms more closely to commercial practice

• Simplifies pricing and billing

Still A Problem

• Elimination of volume bands removes the 100% problem

• But does not move closer to ensuring two providers with low and nearly-equal pricesw

Solution

• Move to two-stage award process• Initial award for nominal (but not guaranteed)

50% of network• Publish prices at high level• Allow offerors to bid new prices for remaining

nominal 50%– Structure this as a contract modification for winner of

round one– Means these prices apply to his initial 50% whether or

not he wins the additional 50%

22

RedetermineCompRange

EvaluateResubmission

EvaluateProposals

EstablishCompRange Negotiations

andResubmissio

n

Request BAFO

EvaluateBAFO

Repeat BAFOBAFO Received Make

Award(s)

Publish Prices

StopRequest APOIf Only One

Award

Initial Evaluation BAFO Evaluation APO Evaluation

ReceiveProposals

EvaluateAPO

Repeat APOAPO Received

Make Award

Stop

AWARD PROCESS

Stop

Stop

Results

• Sprint won Round One with very low prices– Chose not to bid for second 50%

• WorldCom won second 50% with prices a few percent lower than Sprint

• Objectives achieved.

FTS Switched Voice Service Unit Prices

0

10

20

30

Oct

-88

Oct

-90

Oct

-92

Oct

-94

Oct

-96

Oct

-98

Oct

-00

Oct

-02

Cen

ts p

er M

inut

e

FTS Switched Voice Service Prices (log scale)

1

10

100O

ct-8

8

Apr

-89

Oct

-89

Apr

-90

Oct

-90

Apr

-91

Oct

-91

Apr

-92

Oct

-92

Apr

-93

Oct

-93

Apr

-94

Oct

-94

Apr

-95

Oct

-95

Apr

-96

Oct

-96

Apr

-97

Oct

-97

Apr

-98

Oct

-98

Apr

-99

Oct

-99

Apr

-00

Oct

-00

Apr

-01

Oct

-01

Apr

-02

Year

Cen

ts p

er M

inut

e

2

3

4

5

20

30

40

50

Assignment

A

B

C

0.7 0.8

0.9

Calculating the reliability of this networkby series reducing two edges (e.g., AB,BC)then parallel reducing the resulting pair ofedges (as described in Cahn)yields different values dependingupon the order in which the edges are chosen.

Derive a methodology, and calculate the truevalue of the reliability.

Hint: the network is connected if all three edges or any pairare working.