US Defense Department awards Microsoft lucrative JEDI contract ahead of Amazon - a done deal?

Profile picture for user gonzodaddy By Den Howlett October 27, 2019
Summary:
The award of the US JEDI deal to Microsoft has taken many people by surprise. I am not among those. Here's why.

the pentagon

Late last Friday came the announcement that the US Department of Defense has awarded Microsoft the much fought over JEDI award, which has an eye-catching $10 billion price tag. But when you look at what has been said by the DoD, this award does not look like the all-embracing and much-discussed $10 billion deal. 

Almost from the beginning, the JEDI deal has been mired in controversy. The notion that large scale enterprise cloud infrastructure should be in the hands of a single provider has long been a topic of discussion. While the idea has the air of credibility, the reality is that enterprises rarely, if ever, pick a single throat to choke. You can argue that in an age of accelerated commodification, the single-vendor argument takes on greater credence. Still, as we know only too well, the IaaS market has not reached commodity status - just yet. 

Nevertheless, the DoD had taken the view that with a sprawl of many hundreds of providers in its IT landscape, the single-vendor argument trumped all others in its efforts to secure cost and operational efficiency. A Congressional Research Service document (PDF) reveals that:

As of mid-2018, DOD reported maintaining more than 500 public and private cloud infrastructures that support Unclassified and Secret requirements.

That same document also notes that hyperscalers like Amazon Web Services, which was widely expected to win the JEDI deal, and Microsoft, increasingly offer services that span the IaaS, PaaS, and SaaS buckets of cloud services. As Derek duPreez noted in Reducing friction, multi-cloud, boosting productivity and the future of work - 2019’s themes for the digital enterprise

There’s not a huge amount of value add for a buyer if the technology they’re procuring is a commodity. Equally, becoming a technology commodity piece doesn’t deliver huge amounts of growth or value add for a vendor over the long-term (unless you’ve got a monopoly).

This is why we are beginning to see the likes of MongoDBDataStax and Google Cloud Platform all think about what additional services that they can bring to the table - moving up the stack - to ensure that they remain strategic for an enterprise buyer, not just a small piece of the puzzle.

While this will likely mostly be of interest to market watchers such as myself, it should also spell good news for those with budgets looking to make technology purchase decisions. Why? Because the market is being forced to think about how it can differentiate in terms of value for their customers. Companies that compete on value is a good thing and is certainly a different approach to the enterprise vendor market 20 years ago.

The JEDI award appears to reflect at least some of that reality. Here's why.

The JEDI deal has the potential to run ten years with a capped spend of $10 billion. Crucially, and why this has been keenly fought over, the transaction is touted as a one-stop-shop arrangement. But is it? Check the wording of the Friday release:

Today the Department of Defense has taken another step forward in the implementation of our Cloud Strategy with the award of an enterprise general-purpose cloud contract to Microsoft. This continues our strategy of a multi-vendor, multi-cloud environment as the department’s needs are diverse and cannot be met by any single supplier. This contract will address critical and urgent unmet warfighter requirements for modern cloud infrastructure at all three classification levels delivered out to the tactical edge.

(My emphasis added)

Even then, the award is not set in stone. Rather it starts small at a minimum of $1 million spend but with an anticipated ramp-up of spend to $210 million over a 'base period' of two years. Continuing, the release says:

The Department continues to assess and pursue various cloud contracting opportunities to diversify the capabilities of the DoD Enterprise Cloud Environment. Additional contracting opportunities are anticipated.

“The National Defense Strategy dictates that we must improve the speed and effectiveness with which we develop and deploy modernized technical capabilities to our women and men in uniform,” DOD Chief Information Officer Dana Deasy said. “The DOD Digital Modernization Strategy was created to support this imperative. This award is an important step in execution of the Digital Modernization Strategy.”

DOD will continue to partner closely with industry to bring the best of commercial innovation to bear on behalf of our nation’s warfighters.

(My emphasis added)

What's more, while the contract may have a headline $10 billion price tag, Microsoft might capture little, some or all of that value, because there are performance reviews that occur at two, five and eight year intervals. These are 'break' periods that are contractually written, ostensibly with the purpose of allowing buyers a 'get out' but also allowing vendors opportunities to renegotiate based on changing circumstances. In that sense, this deal looks remarkably similar to many data center deals. 

Inquiring minds are bound to ask fresh questions, especially given the much discussed deal that President Trump is said to have issued a 'screw Amazon' edict late in the procurement process. In his analysis, Stuart Lauchlan said: 

I have some sympathy with the objections to the 'single supplier' approach to such a mega-contract. It smacks of 'Big IT' of the worst kind. That said, a moving of the goalposts at this late stage of the Jedi procurement would be highly unusual, but feasible if that's what Esper concludes he (and the President) wants.

But the Department of Defense CIO Dana Deasey has previously warned that a delay to the Jedi delivery timeline would slow down the program’s objective to develop next-generation applications and systems for the defense and security of the United States. 

My take

Political consideration aside, it appears that the DoD has done what it likely should have done all along. The current award may have gone to Microsoft, but the DoD spends billions of dollars each year procuring IT. The procurement process is always hotly contested, but the DoD, like any other enterprise, has multiple choices in ways that it did not just five years ago. And it's not all over given the contract structure. 

The fact that Microsoft has pulled the proverbial rabbit out of the hat has surprised many commentators. I'm not among them. Microsoft has a well-oiled sales machine that knows how to get these types of deal done. You only need to check the current emphasis on SAP/Microsoft in a world where SAP has partnered with all the hyperscalers to see what I mean. AWS does not have the same level of sales execution capability, nor does it have the same broad reach of aaS components, a topic which is starting to come into focus.

Where AWS scores is in the handling of classified information where it is thought to be far ahead of the competition. That is evidenced in the 2013 $600 million CIA contract. Microsoft will have to overcome that hurdle, albeit that is a post-contract requirement.  

Curiously, Oracle, which complained in a lawsuit about the apparent one horse JEDI race (and lost,) may end up as a beneficiary in the JEDI. Oracle has a long if a somewhat bumpy history of US government contracting. In turn, Oracle has cozied up to Microsoft in recent times. See where that might go?

One side effect of this might be that enterprises considering cloud infrastructures review their strategy in light of this decision to assess what they can learn. Whether this means changes in approach is open to considerable debate and is a topic I shall be discussing later this coming week with someone, who has deep operational experience of all hyperscalers. 

Finally, while $10 billion sounds like a lot of money, it should be seen in a context where, according to Forrester, the global cloud market will top $230 billion this year. And Microsoft is guaranteed how much again under this deal? Chump change.