Navy's Orders To EDS For Network Delayed By House

Bloomberg.com | July 1, 2002 | Tony Capaccio

[Stand Watch Listen]

Washington -- The U.S. Navy can't order more computer workstations from Electronic Data Systems Corp. until those already on contract are tested more thoroughly, the U.S. House of Representatives said.

The Navy's new communications network is the Pentagon's most extensive and costly information technology program. The service already has contracted for 160,000 stations and planned to order 150,000 more by Sept. 30.

``I don't think they have done some of the analysis as to the adequacy of the program to spend money as rapidly as they like,'' said Representative Jerry Lewis, a California Republican who heads the House Appropriations Committee's panel on defense.

EDS has a five-year $6.9 billion contract with the Navy and has been paid about $100 million. Meantime, the company has invested about $1.5 billion to refit the Navy's existing networks with new software, wiring and hardware.

Plano, Texas-based EDS, the nation's No. 2 computer services company, in 2000 beat out No. 1 IBM Corp. and No. 3 Computer Sciences Corp. for the fixed-price contract to build and maintain a computer network linking sailors and Marines at over 300 bases in the continental U.S., Hawaii, Alaska, Puerto Rico and Guantanamo Bay, Cuba.

Ships at dockside would be connected via teleport and the Navy has plans to connect ships at sea via military satellite.

Won't Affect Earnings

Navy spokeswoman Lt. Elissa Smith said the service wouldn't comment until the budget process is complete.

Chris Grey, an EDS spokesman, said the House action ``sends a message to the Navy but would not affect 2002 or 2003 earnings projections because EDS would still be working off and getting paid for those early orders of 160,000.''

Separately, EDS today said 2002 profit may trail forecasts should client WorldCom Inc. fail to pay its bills. EDS fell $6.70 to $30.45 on trading of 22.7 million shares on the New York Stock Exchange. Shares have fallen 51 percent in the 12 months while the S&P Information Technology Consulting & Services Index fell 30 percent.

``I want to make sure we get it right,'' Lewis told Bloomberg News. His committee ordered the delay in the fiscal 2003 $354 billion defense spending bill the House passed Thursday. ``This is a program that we could find ourselves rushing to failure on,'' Lewis said.

The House approved all but $120 million of the $1.42 billion the Navy requested for fiscal 2003 to convert its existing systems into the so-called Navy-Marine Corps Intranet. The Senate hasn't completed its work on the budget but has cut no funds.

The Senate is expected to approve the House directive on delaying the Navy's order from EDS because Congress since 2000 has been concerned about the pace of the Intranet program.

Congressional appropriations committees can limit Pentagon programs before money that's been authorized is spent. The directive to the Navy was the only such limit the House put in the 2003 defense appropriations budget.

`Significant Problems'

Lewis's committee warned in its budget report that more than 300,000 of the program's 410,000 workstations would be on contract prior to realistic testing next June.

``If the history of this program is any indication, significant problems are likely to be discovered when the system is subjected to rigorous operational test and evaluation,'' the committee said. ``Any solutions will have to be deployed to a far greater population on the network and at a greater cost, than if this testing occurred earlier.''

Instead of allowing the Navy to put another 150,00 stations on order, the service must conduct a rigorous test on the first 20,000 EDS deems ready to put on the network.

Those first 20,000 stations will be ready this summer, EDS program executive Rick Rosenburg said.

``We feel we can meet the requirements of the language without slowing down the program,'' he said. ``What would be unfair is characterizing this language as halting the program. That would be inaccurate.''

$2 Billion in Savings

Rosenburg stressed that the House directive would have no impact on company revenue. That's because EDS doesn't get paid when workstations are ordered but when they're declared ready for transfer into the software system.

The company will be paid for work on the 160,000 stations ordered into early next year, he said.

The Intranet will replace a current patchwork of disparate information technology networks that largely can't communicate and cost about $1.6 billion a year to maintain.

The Navy and EDS say the new system will save about $2 billion over the first five years by removing or upgrading older equipment, consolidating hundreds of disparate systems, improving management and ultimately reducing manpower.

The information available through the network would include everything from updates on retirement benefits to spare-parts inventories to top-secret target information.