CSC soars on IRS contract win

Computer Sciences Corporation beat out aerospace giant Lockheed Martin for a 15-year contract, estimated at $3 billion, to revamp the Internal Revenue Service's internal computer systems. With the IRS's own internal computer modernization project scrapped, a team of technology companies led by CSC will begin immediately to build new applications that customers can access easily over the Internet or by phone.

News of the win sent CSC's shares soaring, up 2-3/4 to 69-1/2 in early trading. That's down from a 52-week high of 74.8 and up from a 52-week low of 37.5. Brokerage house Warburg Dillon Read said today it has raised its rating on CSC to buy from hold based on the IRS deal.

"To improve service, the IRS needs to break out of its technological time warp from the 1950s and 1960s," Charles Rossotti, commissioner of Internal Revenue, said in a statement. "In the long run, this new partnership will help us replace archaic technology with the modern tools we need to develop top-quality service to taxpayers."

As previously reported, the IRS did not disclose the exact value of the deal. The contract will probably add up to $5 billion to $10 billion over its duration, said Merrill Lynch analyst Steve McClellan. McClellan last week raised his rating for CSC, the third-largest U.S. provider of computer consulting and maintenance services, to "long-term buy" from "near-term buy." McClellan said he expects the contract to be the largest in outsourcing history.

Work to revamp the antiquated computer system will begin immediately.

The project, dubbed the CSC PRIME (prime systems integration contract) Alliance, will include a team of vendors that will work under project overseer CSC, including IBM, KPMG Peat Marwick, Lucent Technologies, Northrop Grumman, SAIC, and Unisys. The project is intended to bring the IRS tax system into the 21st century, with some work overlapping with the agency's extensive Year 2000 efforts.

Revenue from the contract will be split among the vendors, who will be paid according to what they bring to the table, said Michael Laphen, president of CSC's Civil Group.

"We will be running as an integrated team and selecting these companies' best resources," he said.

Under the contract, the first six months will be devoted to improving customer service by phone and via the Internet, giving faster access to tax information forms and customer service; expanding electronic tax filing capabilities; and installing faster, more secure workstations.

The IRS has spent as much as several billion on recent technology initiatives, with limited success to date.

"I don't know if we can speak to what might be salvaged," Laphen said, responding to a question at a press conference this morning.

Under new commissioner Rossotti, however, the IRS's approach toward technology has shifted toward building business applications instead of "technology for technology's own interest," Laphen said. Initial contract funding provides $10.5 million for the first six months, as well as the $506 million Congress has earmarked for the project's start-up phase.

CSC and Lockheed Martin teams were considered in equal running to win the contract. "This was a tough decision to make, but we felt this group offered the best match for what we need," said Paul Cosgrave, chief information officer at the IRS. IRS executives said the agency chose CSC for its wide breadth of experience with financial applications.

The IRS has several other ongoing projects with Lockheed Martin, Cosgrave noted. Bethesda, Maryland-based Lockheed is three times the size of CSC, which had revenue last fiscal year of $6.6 billion.

Besides the IRS contract, CSC is also competing with IBM Global Networks and Electronic Data Systems for a $1.5 billion deal with the state of Connecticut. In addition, Alcatel, the French telecommunications equipment maker, plans to hire CSC to run its computer systems, an estimated $500 million deal, McClellan said.

In the coming months, CSC is also expected to land several huge deals worth more than $500 million, which should spark annual growth of 20 to 22 percent for its fiscal year beginning in April, according to analysts. A CSC spokesman said the company expects to ink a $1 billion contract with a chemical company within the next month. In January, the company is also expected to announce the outcome of negotiations for a multiyear outsourcing contract to provide services to AT&T.

To date, the two largest outsourcing contacts have been IBM Global Services' $3 billion deal with Lucent and Dupont's $4 billion contract with Andersen Consulting and CSC.