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Published in Print: December 11, 2002, as E-rate Plans Involving IBM Draw Scrutiny

E-rate Plans Involving IBM Draw Scrutiny

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Officials in charge of the federal E-rate program, which awards discounts to help school districts afford telecommunications services and infrastructure, say they have identified a disturbing pattern in E-rate applications involving the International Business Machines Corp., one of the largest vendors under the program.

The officials in the Universal Services Administrative Co. in Washington sent a letter last week to the Ysleta school district in Texas rejecting its bid for more than $18 million in E-rate money. IBM was the sole vendor in the 46,000- student district's major telecommunications project for the 2002 funding year, which runs from last July through June 2003.

In the 12-page letter, the agency says it has concluded that the district made errors that deprived other companies of a chance to compete fairly against IBM for the project.

On Dec. 3, the day that it informed Ysleta of its decision, USAC splashed a notice across its Web site, warning that "a sizable number of funding year 2002 applications associated with a particular service provider are not consistent with" the regulations of the Federal Communications Commission, which oversees the E-rate.

George McDonald, the vice president in charge of USAC's schools and libraries division, confirmed in an interview last week that IBM is the service provider referred to in the warning—an unusual disclosure for an agency normally reticent about identifying vendors in school district's applications.

He said other applications involving IBM are currently under review and may also be denied funding. Yet he also underscored that some large projects involving IBM have been provided funding for the same application cycle. Mr. McDonald said that USAC wanted to alert other applicants quickly about the potential problems because districts are in the midst of applying for the 2003 funding year, and may yet avoid the same problems in those applications.

IBM spokesman Andy Kendzie said last week that the company had committed no wrongdoing regarding any E-rate applications.

"All our dealings with school systems, as in our dealings with any of our customers, are absolutely and fully consistent with FCC and SLD regulations," he said, referring to the schools and libraries division headed by Mr. McDonald. "As for any intimations that we are being uncompetitive, that's not our approach."

Mr. Kendzie would not discuss the specifics of the Ysleta application or of USAC's criticisms, but said, "We have contacted the FCC and are in discussions with them. I'm optimistic we can reach a resolution in short order." The FCC can overrule USAC's funding decisions.

Questions About Proposal

IBM, which is based in Armonk, N.Y., has assumed a major role as a vendor in the $2.25 billion-a-year E-rate program.

For the 2002 funding year, the company is the vendor in E-rate applications that cumulatively request more than $1 billion in funding from the program, according to an analysis of USAC data prepared last summer by the E-rate consulting firm Funds for Learning, based in Alexandria, Va.

IBM offers school districts a single- source option for their E-rate projects. The company will help districts complete technology plans, prepare E-rate applications, and manage the entirety of a large and complex technology project.

The company also tells districts how they can maximize the E-rate funds they receive by focusing on schools that serve the largest proportions of needy students and therefore qualify for the highest discount rate. "The IBM E-rate team only applies for internal connections funding at the 90 percent discount level to assure maximum funding," states one of the company's sales documents.

In the El Paso-area Ysleta district, IBM was to have been "the system integrator" responsible for wiring some of the district's 60 schools. The computer giant was to provide Internet and network-management services, with most of the costs to be covered by the E-rate.

In its letter, USAC faults Ysleta school officials for first declaring that they did not intend to issue a "request for proposals" for the project, but then later issuing such a request for a "technology partner," on largely unspecified projects financed through the E-rate application. Ysleta later signed a contract with IBM to be that technology partner.

The E-rate rules require applicants to choose service providers to offer specific, clearly defined services, according to USAC.

Ysleta school officials blame IBM for the mistakes leading to the application's denial. "We got slammed, we got slammed badly; it was because we followed IBM's advice," said interim Superintendent Roger Parks. "We went with them as our sole resource, for consulting."

Mr. Parks said the district would appeal to federal officials to reverse the decision. But the district has dropped IBM from its consulting role for its E-rate applications for 2003.

Vol. 22, Issue 15, Page 3

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