Savings Available to Government on Certain IBM Automatic Data Processing Equipment

Published by the Government Accountability Office on 1971-03-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                       UNITEDSTATESGENERAL ACCOUNTING                OFFICE
                      ‘*: ’        WASHINGTON,   B.C.   20548
                          -   .
                                                                          March 2, 1971


        Dear Mr. Abersfeller:

               The General Accounting Office,   in making its review of programs
        established   under the provisions   of Public Law 89-306, noted that
        effective   January 1, 1971, the International     Business Machines Cor-
        poration offered reductions of from 25 to 40 percent in the purchase
        prices of certain equipment --processing     units for 360/20 and 360/44
        systems, 2361 bulk core storage units, 2314-1 disk drives, and various
        features for the 360 processing units.

               Using present value analysis,   we estimate that by purchasing the
        295 units of the aforementioned equipment in the Government's inven-
        tory of leased equipment as of June 30, 1970, for $20 million        (net
        cost at which the equipment is available),       the Government could save
        up to $15 million    over a 3-year period and up to $34 million     over a
        5-year period.     Additional  savings would accrue to the Government to
        the extent that (1) the equipment has been subject to extra-use rental
        charges, and (2) the equipment is used beyond the 5-year period.
               Our analysis indicated   that the equipment could be purchased at
        from 21 to 39 percent of its original      cost, taking into account the
        January 1, 1971, price reductions and the maximum purchase-option            .
        credits offered under the terms of the International       Business Machines
        Corporation Federal Supply Schedule contract.        The average internal    1
        rate of return is 60 percent over a 5-year period, with rates as much
        as 156 percent.     The payout periods are from 8 to 21 months. The rates
        of return and payout periods are more favorable than those for most of
         the equipment purchased by the Automatic Data Processing Fund.

              We believe that the Government should take prompt action in order
        to realize maximum advantage from the price reductions.          We recognize
        that time is needed to select equipment, adjust plans, and the like;
        however, in the absence of a notification      to the International     Business
        Machines Corporation of intent to purchase, the Government is continu-
        ing to pay rental at the rate of $35,000 per day, or $1 million          a month
        (net of maintenance), for the 295 units.      To further illustrate     the need
        for prompt action, our present value analysis shows that a delay of
        6 months in taking purchase action on the 295 units would reduce the
        potential  savings by as much as $5.$million.

                                  5QTH   ANNIVERSARY    1921-       197
       We reco&end,       therefore, that the General Services Administration
identify     and Arrange for the purchase of that equipment which would
resultrin     saving's to the Government.    In so doing, we suggest that the
General Services Administration:
          --obtain    from agencies, possibly by telephone, information
             on current equipment retention    plans and ensure that the
             plans are based on the reduced purchase prices available;

       --consider  potential  secondary usage of the equipment in
          making purchase decisions;

       --consider  using the Automatic Data Processing Fund to the
          extent that monies are available  when agencies do not have
          funds available  to purchase equipment; and

       --attempt    to arrange with the International   Business Machines
          Corporation for exchange of title     in those cases where pur-
          chase credits on equipment to be released is greater than
          the purchase credits on equipment which is to be purchased.

       We would appreciate having your comments on this matter.   If you
desire, we shall be pleased to meet with you or your representatives
to discuss this matter.

                                      SirLerely   yours,

                                      Assistant   Director

Mr. H. A. Abersfeller,  Commissioner
Federal Supply Service
General Services Administration