tcom 541 session 6. and now for something completely different … back in the 1970’s, the general...
TRANSCRIPT
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.