What is CGI Federal?
CGI Federal is a wholly owned subsidiary of the Canadian firm CGI Group, which was founded in Quebec City in 1976 by a pair or 26-year-olds named Serge Godin and Andre Imbeau. (CGI stands for "Conseillers en Gestion et Informatique" in French, which roughly translates to "Information Systems and Management Consultants"). Growing through scores of acquisitions, and providing outsourced IT services to massive companies such as Bell Canada and Quebec's provincial pension plan, CGI's business model depends on embedding itself deeply within an institution.
"The ultimate aim is to establish relations so intimate with the client that decoupling becomes almost impossible," read one profile of the company.
It's now based in Montreal and has a market capitalization of $8.9 billion on annual revenues of about $4.8 billion. Godin, who stepped aside as CEO in 2006, is now a billionaire and makes upwards of $4 million a year. After buying British rival Logica in July, CGI doubled its employee base, and became Canada's biggest tech firm. CGI Group has 72,000 employees in 400 offices worldwide — many of them in India — and 11,000 in the United States, with D.C.-area locations in Fairfax, Manassas, Washington, and Baltimore.
Wait, why haven't I heard of this giant company?
CGI Federal is a relative newbie on the U.S. government IT contracting scene. It bought the U.S. contractor American Management Systems in 2004, but only started ramping up business after 2008, and accelerated in 2010 with the $1.1 billion acquisition of U.S.-based military IT contractor Stanley Inc. That sent its contracting work through the roof:
Still, CGI is only the 29th largest federal IT contractor, with about $950 million in contracts in 2012, compared to number one Lockheed Martin's $14.9 billion. They also don't make high-profile weapons systems, but rather the guts of government Web sites that rarely bear their names.
That said, they've learned quickly, and see the U.S. federal government as their area of biggest growth. CGI Federal's health-care practice has grown 90 percent year over year, largely due to the Healthcare.gov project. And for a contractor, ballooning projects are a good thing. "In the Federal Government business, we continue to see more extensions and ceiling increases on our existing work, while we further leverage our position on contract vehicles," said CEO Michael Roach on their latest earnings call. Those "contract vehicles" now amount to $200 billion, which Roach later referred to as a "hunting license."
"Accordingly, we continue to view U.S. Federal Government as a significant growth opportunity," Roach continued. CGI Federal now has an $8 billion pipeline of future task orders — doubling its federal business over the period of a year — including big-ticket items such as $871 million for the Defense Information Services Agency, a $143 million contract to do visa processing in China, and a five-year, "indefinite quantity" contract for the Department of Homeland Security and Coast Guard. (It's also working with state governments too — California, for example, handed it a $399 million contract to revamp its tax processing system).
What was their track record before getting the Healthcare.gov gig?
Experience in similar types of projects is very important in getting federal contracts. CGI had done work in the healthcare arena, and not all of it good: Its performance on Ontario, Canada's health-care medical registry for diabetes sufferers was so poor that officials ditched the $46.2 million contract after three years of missed deadlines, the Washington Examiner reported. A spokeswoman for CGI says that both parties are bound by confidentiality agreements, but they're working on resolving the situation.
It has, however, helped deliver complex projects on time and on budget. Back in 2009, the White House's Recovery Board retained CGI Federal to adapt a well-functioning system it had built for the U.S. Environmental Protection Agency into FederalReporting.gov, another very complex, public-facing and high-volume site that would handle all contracts granted under federal stimulus legislation. This one got built in six weeks, for much less money, and won accolades for its flexibility and reliability.
How did CGI land the Healthcare.gov contract?
CGI Federal's winning bid stretches back to 2007, when it was one of 16 companies to get certified on a $4 billion "indefinite delivery, indefinite quantity" contract for upgrading Medicare and Medicaid's systems. Government-Wide Acquisition Contracts — GWACs, as they're affectionately known — allow agencies to issue task orders to pre-vetted companies without going through the full procurement process, but also tend to lock out companies that didn't get on the bandwagon originally. According to USASpending.gov, CGI Federal got a total of $678 million for various services under the contract — including the $93.7 million Healthcare.gov job, which CGI Federal won over three other companies in late 2011.
It's also true that CGI Federal began lobbying as it started winning government work. According to OpenSecrets.org, it has spent $800,000 since 2006 lobbying on several different tax and appropriations bills. That's nothing, though, compared to the many millions of dollars deployed by heavy hitters like Lockheed Martin and Raytheon.*
What exactly were they responsible for?
According to a June report from the Government Accountability Office, a total of 55 contractors were retained to work on the rollout of the federal health-care marketplace. CGI Federal was the primary one, and had received $88 million out of the $394 million that had been spent at that point (the next biggest recipient got $55 million). Along with building sites for the states that elected to participate in the federal marketplace, it's in charge of knitting all the pieces together, making Quality Software Services' data hub work seamlessly with Development Seed's sleek user interface and Oracle's identity management software — or "designing an IT solution that is adaptable and modular to accommodate the implementation of additional functional requirements and services," as CGI Senior Vice President Cheryl Campbell put it in a September hearing on the progress of the site.
What exactly went wrong?
That is a matter of some disagreement. And the answer isn't necessarily that CGI is wholly responsible.
Some people think that the system was underfunded: Donald Berwick, who administered the federal Centers for Medicare and Medicaid Services in 2010 and 2011, says the site failed because they didn't have enough money to build it from the start. Others point fingers at the Department of Health and Human Services, which took years to issue final specifications, preventing CGI from really getting started until this spring.
Either way, it's clear that the site itself isn't well constructed: IT professionals told the Wall Street Journal that in addition to specific pieces not working, the whole thing was "built on a sloppy software foundation," potentially due to the haste with which code was written. Slate described just how difficult it is to coordinate multiple contractors creating different components of a complex Web portal.
Evan Burfield, who founded the relatively small company that worked with CGI to build Recovery.gov, says the problem lies more in a federal procurement apparatus that makes it nearly impossible for an agile newcomer to bid on projects that in the private sector would take much less time and money. Plus, with so many contractors, everyone could technically fulfill the requirements in their statement of work, and the thing can still not work in the end.
"If it had been a $4 million Web site, it would've had higher likelihood of being a success," Burfield says. "It's not just CGI. It's any collection of government contractors, if you put them together, will find a way to put together something complex enough to justify $400 million."
Even though White House technology officials like Todd Park understand the value of lean development and have taken steps to open the procurement system to smaller companies, the overall structure of contracting rules would require an act of Congress to change.
What's it like inside the company these days?
The healthcare.gov debacle has taken its toll on the working environment at CGI Federal's 10-story complex in Fairfax, Va., according to a staffer working on a related project who asked not to be named. "There's been a lot of agitation and anger, because CGI really prides itself on having family flexibility," he said, noting the firm's liberal telework policy. Instead, the Obamacare contract has sucked more and more staff off other projects, and people have been working around the clock to first get the site ready for Oct. 1, and then fix it when things started to go wrong. "There's a lot of frustration," the staffer said. "People are getting sick, fainting in conference calls."
That's only an escalation in an already unstable work environment. The firm has grown very quickly and turnover is high, as people get poached by larger contractors that can pay higher salaries, the staffer said. Offices sometimes have more contractors than full-fledged staff — which makes things difficult when you're putting together a project that requires as much specialized knowledge as a health-care exchange.
One thing is clear, though: CGI's leadership is really excited about the health-care work, and wants everyone to think it's going okay. Last week, they held an annual meeting with a dinner reception at a nearby Marriott. "They addressed some of the health-care exchange things that people have been hearing on the news," the staffer recalled. "Vague things about how health care is changing in the U.S. and how CGI is going to be at the forefront of that. 'You guys have probably heard some stuff, but this is indicative of any huge rollout of any project.' "
A CGI spokeswoman declined to comment on the staffer's observations.
How's the market reacting to it?
Pretty well actually! Here's the one-month chart from the New York Stock Exchange:
CGI Group's stock has been on the upswing since its huge acquisition of Logica, which added $3 billion in market cap. And it hasn't been punished much by the negative press in recent weeks, either. TD Bank Securities research sent the following note to clients:
"Our concern was that CGI (as a main contractor on the federal health exchange) would be linked in a negative way to exchange difficulties. This by and large has not happened – there is no indication that CGI failed to deliver on its commitments — and the stock is up 4% since Oct. 1 (when enrollment in exchanges began)."
Because of how federal contracting works, it's also unlikely that CGI will be less competitive on bids in the future.
* Corrected to reflect the fact that Booz Allen Hamilton does not lobby, period.