Washington Rethinks ACS Contract, Puts It Out To BidWashington Rethinks ACS Contract, Puts It Out To Bid

A federal Department of Education IT contract awarded to Affiliated Computer Services Inc. has been yanked after a competitor complained that the deal was improperly struck in the absence of open bidding.

The contract, which would be ACS's largest, calls for service and support of the Department of Education's Internet-based student-loan-servicing system. The department decided to put the contract out for bid after ACS competitor SLM Corp., better known as Sallie Mae, lodged a formal complaint. ACS disclosed the news late Friday after the close of the stock market. In midday trading today, ACS shares were down 7.5%, to slightly more than $50. The contract would amount to about 4% of ACS's annual revenue.

The contract was originally awarded to ACS in 1993 and was set to expire this year. In 2001, the DOE extended the deal to 2006 with the option for another extension to 2007. The extension was awarded under a process known as sole-source procurement. Federal rules allow agencies to use sole-source contracts--awarded to private contractors without bidding--in certain circumstances. An official at Sallie Mae was not immediately able to detail the substance of the company's complaint.

The contract was originally awarded to ACS on what's known as a share-in-savings model. Under the arrangement, ACS essentially would provide the DOE with technology free of charge with the understanding that it would share in any budgetary savings enjoyed by the agency through the use of its systems. AFSA Data Corp., since acquired by ACS, and Accenture were also part of the deal.

Some analysts believe ACS has a good chance at prevailing in an open bid for the contract. The company could win based on its "longstanding relationship with the Department of Education and its leadership role in business-process outsourcing," Merrill Lynch analyst Jennifer Dugan wrote in a research report issued Monday morning.

Dugan wrote that the bidding process could take six to nine months. She estimates losing the contract would cost ACS 5 cents per share annually. Credit Suisse First Boston pegs ACS's potential per-share loss at between 4 and 7 cents. Calls to ACS and the Department of Education were not immediately returned.