Competitive Bidding and the Paradyne Case

Although competitive bidding is a well-established practice in purchasing, it can lead to many ethical problems associated with deception on the part of the vendor or with unfairness on the part of the buyer in choosing a vendor. The idea behind competitive bidding is that the buyer can get a product at the best price by setting up competition between the various suppliers. Especially with large contracts, the temptation to cheat on the bidding is great. Newspapers frequently report stories of deliberate underbidding to win contracts, followed by cost overruns that are una- voidable, theft of information on others’ bids in order to be able to underbid them, etc. Problems also exist with buyers who make purchase decisions based on ele- ments other than the advertised bid criteria, who leak information to a preferred bidder, or who give advance notice or detailed knowledge of evaluation procedures to preferred bidders. The Paradyne computer case is useful in illustrating some of the hazards associated with competitive bidding.

The Paradyne case began on June 10, 1980, when the Social Security Administration (SSA) published a request for proposals (RFP) for computer sys- tems to replace the older equipment in its fi eld offi ces. Its requirement was for computers that provide access to a central database. This database was used by fi eld offi ces in the processing of benefi t claims and in issuing new social security num- bers. SSA intended to purchase an off-the-shelf system already in the vendor’s prod- uct line, rather than a customized system. This requirement was intended to minimize the fi eld testing and bugs associated with customized systems. In March of 1981, SSA let a contract for $115 million for 1,800 computer systems to Paradyne.

Problems occurred immediately upon award of the contract, when the Paradyne computers failed the acceptance testing. The requirements were fi nally relaxed so that the computers would pass. After delivery, many SSA fi eld offi ces reported fre- quent malfunctions, sometimes multiple times per day, requiring manual rebooting of the system. One of the contract requirements was that the computers function 98% of the time. This requirement wasn’t met until after 21 months of operation. After nearly two years of headaches and much wasted time and money, the system fi nally worked as planned [ Davis, 1988 ].

Subsequent investigation by SSA indicated that the product supplied by Paradyne was not an off-the-shelf system, but rather was a system that incorporated new technology that had yet to be built and was still under development. Paradyne

Chapter 2 Professionalism and Codes of Ethics 33

had proposed selling SSA their P8400 model with the PIOS operating system. The bid was written as if this system currently existed. However, at the time that the bid was prepared, the 8400 system did not exist and had not been developed, proto- typed, or manufactured [ Head, 1986 ].

There were other problems associated with Paradyne’s performance during the bidding. The RFP stated that there was to be a preaward demonstration of the prod- uct, not a demonstration of a prototype. Paradyne demonstrated to SSA a different computer, a modifi ed PDP 11/23 computer manufactured by Digital Equipment Corporation (DEC) placed in a cabinet that was labeled P8400. Apparently, many of the DEC labels on the equipment that was demonstrated to SSA had Paradyne labels pasted over them. Paradyne disingenuously claimed that since the DEC equipment was based on a 16-bit processor, as was the P8400 they proposed, it was irrelevant whether the machine demonstrated was the DEC or the actual P8400. Of course, com- puter users recognize that this statement is nonsense. Even modern “PC-compatible” computers with the same microprocessor chip and operating system can have widely different operating characteristics in terms of speed and the software that can be run.