Pentagon’s $1 Billion Cloud Deal May Signal New Era in Government Buying
Pentagon’s $1 Billion Cloud Deal May Signal New Era in
Government Buying
BLACKBOARD/SHUTTERSTOCK.COM
By Frank Konkel, Executive Editor FEBRUARY 27, 2018
Congress wants the Defense Department to buy technology faster.
Now it's beginning to do just that.
In early February, a small Virginia-based company—REAN
Cloud—that partners with Amazon Web Services announced a nearly $1 billion deal
to provide cloud computing services for the Defense Department.
The contract caught many industry players by surprise, in
part due to the $950 million value and partly because it was awarded without a
traditional government procurement. This deal may be a harbinger for how the
Defense Department plans to purchase certain technologies moving forward.
Using buying powers quietly imbued by Congress over the
past three years, U.S. Transportation Command made the award to REAN Cloud
under an other transaction production contract based on a prototype project
last year to migrate military applications to Amazon Web Services' GovCloud
region. The contract is a type of other transaction authority, commonly called
an OT or OTA.
Led by the Defense Innovation Unit Experimental, which
acts as a liaison between the Pentagon and industry, the Defense Department is
targeting non-traditional suppliers to rapidly provide cutting-edge commercial
technologies that address national security and military challenges.
And unlike traditional purchases under the Federal
Acquisition Regulation, which can take months or often years to award, OTAs can
be issued in a matter of weeks.
“What we’re seeing is a strong shift in the pendulum of
those who’d like to replace regular contracting processes with OTAs,” said
Andrew Phillip Hunter, director of the Defense-Industrial Initiatives Group at
the Center for Strategic and International Studies.
REAN Cloud, which helps customers migrate to commercial
cloud environments, is among the first companies to transition from a pilot
contract with DIUx to a follow-on production contract.
REAN Cloud was awarded a $2.5 million proof of concept
last May by U.S. Transportation Command only five weeks after responding to a
DIUx white paper, the company’s managing partner, Sekhar Puli, told Nextgov.
REAN Cloud earned about 70 percent of its $70 million in revenue last year from
the commercial sector, where Puli said business happens fast and there are
fewer bureaucratic hoops to jump through.
“Normally, we just don’t play that [public sector] game,”
Puli said. “We were pleasantly surprised at the speed at which [DIUx and
TRANSCOM] were moving.”
The company’s successful pilot led to February’s much
larger award—without additional competition—that could grow its business
tenfold.
How Congress is Changing Procurement Rules
The Defense Department’s new experiments with OTAs come
from congressional pushes to buy technology more quickly.
Congress first granted the Defense Department the ability
to use OTAs in 1994, mirroring authorities NASA first used in 1958. Congress
rescinded some of those authorities to the Defense Department after the epic
failure of Future Combat Systems, an OTA program that cost taxpayers $18
billion and produced almost nothing of value by the time the department
canceled it in 2009.
Several years ago, however, defense hawks like Senate
Armed Forces Committee Chairman John McCain, R-Ariz., became concerned that
adversaries like China and Russia were gaining technological ground on the U.S.
military. Those countries exert control over companies within their borders and
forsake fair and open competition for speed to market.
To combat the growing threat, the House and Senate Armed
Services committees began expanding acquisition authorities in the 2016
National Defense Authorization Act, said Bill Greenwalt, formerly a Senate
Armed Services Committee staffer who helped write portions of the 2016 and 2017
NDAAs.
New authorities gave the Defense Department the ability
to grant follow-on production contracts without competition if competitive
features were used to select prototype participants and participants
successfully completed the prototype. The 2016 NDAA also allowed the Defense
Department to grant OTAs to “a novel application of commercial technologies for
defense purposes,” a broad scope that brings ubiquitous technologies like cloud
computing into the fold. Most analysts estimate the market for cloud computing
within the Defense Department is several billion dollars and growing, due to
the $40 billion it spends on IT each year.
The 2018 NDAA also upped the ante for what the Defense
Department can spend on OTAs from $250 million to $500 million per transaction.
The 2018 NDAA also appears to institute a preference for
awarding OTAs in science, technology and prototyping “to be applied in
circumstances determined appropriate by the [secretary of Defense].”
“Congress has set up an alternative pathway, and that’s
an OTA,” Greenwalt said, adding that lawmakers “really wanted to make it easier
for the Defense Department to do business with companies.”
OTAs can be issued to consortiums or directly to
companies in as few as 10 days, and in the right circumstances, can avoid
traditional contracting under the Federal Acquisition Regulation that Greenwalt
said can be “mind-numbingly bureaucratic.”
But oversight of OTAs is a concern, Hunter said.
The Government Accountability Office, which adjudicates
bid protests over traditional contracts, does not handle disputes over OTAs.
Companies that contest an OTA must make their case to the U.S. Court of Federal
Claims. Few additional oversight measures are spelled out in the law. Payments
of $5 million or more require examination by the Comptroller General, and
transactions worth more than $500 million require the signoff of the Pentagon’s
top acquisition official.
In any case, Hunter said Congress will be watching.
“Congress giveth and Congress taketh away,” Hunter said.
“This is one of those great debates. From almost the first implementation of
OTAs, there were those who said this is a better mousetrap than the federal
contracting system and said the goal should be to replace regular contracting
with OTAs. And then there are those who say OTAs have a specific, concrete
place and that we should limit OTA authority to ensure they aren’t abused.”
OTAs Business is Booming
REAN Cloud is the second major production OTA award after
California-based Tanium captured a contract worth up to $750 million from the
U.S. Army Network Enterprise Technology Command. Production contracts like
those for REAN Cloud and Tanium are funded entirely by customer agencies, not
DIUx. In total, DIUx has awarded $184 million for 59 pilot projects since it
relaunched in May 2016.
Analysts at Bloomberg Government state the Defense
Department spent a record $412 million in obligations through OTA contracting
in fiscal 2017, a massive increase over $3.5 million reported for OTA
obligations in fiscal 2013.
If Congress is dangling OTAs like carrots, the Pentagon
is biting.
“Time is of the essence. The work of groups like DIUx,
the Strategic Capabilities Office, and the Rapid Capabilities Office should
become standard practice, not workarounds to the regular system,” McCain said
in a Senate Armed Services Committee hearing Dec. 7. “And we need these
innovations for major defense acquisition programs, not just science and
technology efforts.”
REAN’s Win Is Also an Amazon Win
REAN Cloud makes its money helping customers migrate
applications, services and data to the cloud. In real estate terms, REAN Cloud
helps customers move their belongings to the cloud of their choosing—their new
home—but it doesn’t own the cloud infrastructure itself, just as a realtor
doesn’t own the dwelling he or she is selling. REAN Cloud’s biggest partner is
AWS, which is the most profitable business within tech giant Amazon.
Its main competitors in the government space—IBM, CSRA
(now General Dynamics), Oracle, Google and Microsoft—were noticeably absent
from REAN Cloud’s press release announcing its Defense Department contract.
That’s because REAN Cloud has thus far migrated applications and services for
TRANSCOM only to AWS GovCloud. The company, if customers want, can migrate to
Microsoft’s Azure environment through specific task orders. Puli said REAN
Cloud is beginning to work with Google and Oracle and hopes to soon be able to
migrate Defense Department data to those popular environments, too.
By virtue of its partnership with REAN Cloud and its
popularity as a cloud platform, AWS stands to make a lot of money through its
smaller partner’s $950 million award.
The timing of REAN Cloud’s award is important, too. If a
large number of Defense Department customers target the REAN Cloud contract as
a vehicle to migrate their applications to the cloud, it could impact the
Defense Department’s Joint Enterprise Defense Infrastructure cloud acquisition.
That acquisition, which materialized after a West Coast road trip by the
Defense Department’s top officials, could be worth billions but has been mired
in controversy.
It would provide all Defense Department customers a
vehicle through which to purchase commercial cloud services, though several
existing vehicles, such as milCloud 2.0, offer similar options.
Pentagon officials initially planned to award a 10-year
JEDI contract to a single company by the fourth quarter of 2018, but the plan
has reportedly evolved to a multi-award approach and its early timeline has
slipped. The Defense Department will host an industry day for the acquisition
on March 7. Any significant delays in that process could sway customers toward
TRANSCOM’s contract, which the entire Defense Department can use.
Already, Puli told Nextgov his company is adding about
100 employees to meet current demand.
All told, REAN Cloud turned a simple five-page white
paper response into potentially hundreds of millions of dollars of revenue by
trying a different approach to government contracting that Congress opened up
in recent years. Skeptical at first, Puli said the industry players that have
long dominated federal contracting better take note because the Defense
Department is tired of “traditional beltway bandits milking contracts through
time and material.” OTAs, he said, alleviate some of what’s wrong with
traditional government contracting.
“At first, we thought it sounded interesting and gave it
a shot,” Puli said. “I definitely hope other government agencies take a leap
from this and implement technology in a similar way. I think there is something
to be learned here."
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