IBM Temporarily Banned from New Fed Contracts

Tuesday, April 01, 2008 at 08:32 PM

Life in the current federal government just keeps getting stranger. The EPA has banned new contracts with IBM which automatically resulted in IBM being banned from new contracts with all other fed agencies.

The EPA issued its ban after hours on Monday, causing a lot of whispering and rumor in the business community, and an initial dip in the company's stock price, but the stock has since rebounded. The ban apparently applies to:
  • Contracts
  • Delivery/task orders
  • Purchase orders
  • Purchase card transactions
  • Modifications to existing contracts
  • Interagency agreements with servicing agencies that will use IBM or its subsidiaries as the vendor
The mystery is why IBM was suspended. For most of the day, that was a total mystery, but the AP just reported that the suspension concerns a contract on which IBM unsuccessfully bid last year, then protested the EPA's award to another company:
An EPA official confirmed on Tuesday that the suspension is related to a 10-year, $84 million deal awarded Feb. 12, 2007 to CGI Federal, a wholly owned U.S. subsidiary of Canada-based CGI Group Inc. The contract is to modernize the agency's financial management system.

IBM, which was also vying for the contract, protested the award two months later to the Government Accountability Office, according to information provided by market research firm Federal Sources Inc.

Fed Sources said it learned that the GAO upheld IBM's protest in October, but then said earlier this month that investigators there had not made a decision yet on IBM's protest.

A message left at GAO was not immediately returned.

So IBM bids on a contract, doesn't get it, protests the award to someone else, causing an investigation of the bid process, then IBM gets suspended? Makes one wonder what IBM could have been doing during the bidding.

Perhaps even stranger is that IBM's stock has not really been affected. The proffered reason that Wall Street doesn't care is that fed contracting amounts to only 1% of its revenues, according to the AP story. The AP story reported that:

Citi Investment Research analyst Richard Gardner, who rates IBM "Buy," said the U.S. federal government contributes just 2 percent of the company's total sales. And about half of that is from existing multiyear contracts, which the suspension won't affect.
Yet, since the ban applies to modifications of existing contracts, the ban might well impact some of those "existing multiyear contracts." In any case, it seems odd to me that a major American company can be banned from contracting with the federal government, then have it's stock unaffected or even go up a bit. Is that a sign of the times in America, or just a sign that the business community thinks IBM will be cleared to resume contracting without revelation of any major misdeeds?


The ban also extends to other potential contractors who supply IBM equipment to the government. So if you are a small company bidding on an IT contract, and you intend to supply IBM equipment as part of the contract--you're sunk.

That's a big deal to many small IT bidders. As one anonymous small bidder put it:

The whole thing stinks, and someone ought to ask EPA, 'Who are you to shut down critical components of government IT, and stick people like us with this problem?'

This whole episode is still pretty strange, given the circumstances in which it arose, the prominence of IBM, and the impact of such a broad ban.

My initial reaction was that the EPA just might have uncovered some serious IBM wrongdoing in investigating IBM's protest of the award to another company. The more I think about it, and the more I take into account how much the fed agencies now operate like the pre-Glasnost Soviet Union, the more possible it seems to me that an apparatchik in the EPA may be punishing IBM for protesting an award which the appartchik really doesn't want to have scrutinized.

I don't know what happened, obviously, but it certainly does not seem to be beyond the realm of possibility.

Crazy? Paranoid? Well, Alphonso Jackson just resigned from HUD under allegations pretty similar to my suspicions about the EPA action, so if I'm paranoid, it's with reason.