International Business Machines Corporation (IBM)

Microsoft’s $10 Billion Pentagon Deal at Risk Amid Amazon Fight

(Bloomberg) -- Microsoft Corp. is in danger of losing a contract to provide $10 billion of cloud computing services to the Pentagon, a deal the government has threatened to scrap altogether after years of legal squabbling.The U.S. Defense Department said it will reconsider the controversial procurement if a federal judge declines to dismiss Amazon.com Inc.’s allegations that former President Donald Trump’s meddling cost the company the winner-take-all contract. That means the fate of a cloud project the Pentagon considers critical for its war fighters may rest in the hands of the U.S. Court of Federal Claims, which could soon issue a ruling on Amazon’s accusations.The Pentagon said last month it would take too long to prove in court that its decision to award Microsoft Corp. the lucrative cloud deal wasn’t unduly influenced by the White House. If the judge allows Amazon to argue its bias claims in the case, the government may decide to stop fighting.“If the court denies the government’s motion we will most likely be facing an even longer litigation process,” Pentagon spokesman John Kirby said at a press conference late last month. “The DOD Chief Information Officer will reassess the strategy going forward.”The warning is another twist in a contentious process that has involved years of legal challenges, behind-the-scenes lobbying and a public relations campaign by technology rivals to unseat Amazon as the original front-runner for the cloud contract when it was unveiled in 2018. More than a year after Microsoft was named the winner, the Defense Department is still fighting to execute the Joint Enterprise Defense Infrastructure cloud -- or JEDI, an acronym intended to evoke “Star Wars” imagery -- to serve as the primary data repository for military services worldwide. The deal is worth $10 billion over a decade.There are signs the Pentagon is already moving on. The Defense Department is talking up its other cloud contracts beyond JEDI, and some of the program’s biggest cheerleaders have left the department, leaving new leaders to make decisions on a procurement they inherited from the Trump administration. Even Microsoft executives are trumpeting all the other work the company plans to keep doing for the Defense Department, in the event that its image-boosting JEDI deal goes south.“We know that very clearly” the Defense Department needs the JEDI project “in order to support its mission,” Tom Keane, vice president of Microsoft Azure, said in an interview. “But we are not waiting for a single vehicle, we are using every single vehicle that we can” to partner with the Pentagon, he said.The Defense Department has stressed that it has 13 other cloud projects including partnerships with Oracle Corp., Amazon, General Dynamics Information Technology and even Microsoft. The software giant expanded Pentagon employees’ access to its video and chat tools during the pandemic last year through Microsoft Teams.Last year, the Central Intelligence Agency also hired multiple companies to offer cloud services to the Intelligence Community, a collection of national security units spanning several agencies including the Pentagon, eight years after the agency awarded a $600 million cloud deal to Amazon.Meanwhile, the most visible champions of the JEDI project’s single-source approach have exited the Defense Department. Chris Lynch, the former director of the Defense Digital Service, which designed the project, left to start a new company selling technology to the government. Dana Deasy, the Pentagon’s former chief information officer, was replaced by John Sherman, who previously served as CIO for the Intelligence Community at a time when it decided to fully embrace multiple vendors.From the start, companies such as Oracle and International Business Machines Corp., which were eliminated early from the contest, pressured the Pentagon to choose several vendors for a contract they said was clearly tailor-made for Amazon. Amazon Web Services, the company’s cloud unit, was widely seen as the front-runner for the contract because it won the CIA deal and had earned the highest levels of federal security authorizations.When the contract was announced, the state of the art for corporate cloud setups was already moving away from relying on a single vendor for everything -- many customers were opting for multiple cloud vendors and selecting the best option for specific tasks. The JEDI contract seemed to represent an earlier time in cloud migrations, when there were fewer choices and the vast majority of deals went to Amazon. The Defense Department said at the time that using multiple cloud providers would increase the complexity of the project.After Microsoft’s unexpected win, the e-commerce giant filed a lawsuit arguing that its rivals’ private maneuvering and Trump’s well-known animus for Amazon founder Jeff Bezos -- documented in tweets and public statements throughout his campaign and presidency -- made it difficult for the Pentagon to choose the winner impartially.As part of its complaint, Amazon has asked the judge for permission to question Trump, former Defense Secretaries James Mattis and Mark Esper, and other individuals involved in the selection process. Federal Claims Judge Patricia Campbell-Smith has yet to rule on whether to dismiss Amazon’s bias allegations or grant its request for more discovery, but that decision could come at any time.To press its claim, Amazon chronicled a laundry list of actions showing the White House’s bias against Amazon. The company cited a book by Guy Snodgrass, a speech-writer to Mattis, which alleges that Trump in the summer of 2018 told Mattis to “screw Amazon” and lock it out of the bid. Mattis didn’t do what Trump asked, Snodgrass wrote.The lawsuit also mentions Trump’s comments during a press conference in July 2019, when he openly questioned whether the JEDI contract was being competitively bid. Later that month, Trump tweeted television coverage that characterized the JEDI contract as a “Bezos bailout,” the lawsuit says.The Pentagon and Microsoft, an intervening defendant in the case, argue Amazon should have raised its objections about political interference earlier. The U.S. also says Amazon’s claims are undercut by a report from the Defense Department’s inspector general, which found no evidence that the award decision was affected by Trump. The Pentagon’s watchdog also said its investigation into the contract was limited by the White House.While Microsoft may make up any lost revenue through other federal deals, JEDI’s dissolution would still hurt, mainly by taking away one of the clearest validations yet that the company was catching up to Amazon in cloud services. In the wake of the contract’s announcement, Microsoft analysts touted it as possibly “the largest cloud contract award in history” and a “great win” that “validates Azure as a leading hyperscale cloud and signals that Azure continues to gain ground on AWS.”Steven Schooner, a procurement expert and professor at George Washington University Law School, said it’s unlikely the judge is going to toss out Amazon’s bias allegations altogether.“I’m hard-pressed to imagine a scenario in which the Court -- after all of these months -- simply says ‘never mind, sorry for the inconvenience and delay’” to the Defense Department, he said in an email.The Amazon case came after the Defense Department faced down many other legal hurdles to its implementation of JEDI. So far, the Pentagon has fought two challenges with the Government Accountability Office, two lawsuits in federal court, and an investigation by the Inspector General’s office. Though it has prevailed up to now, the legal challenges have forced the Pentagon to delay executing the project by more than two years after its planned start date.“It’s not just that it’s been delayed so long but it’s been delayed long enough that the world is changing,” said Stan Soloway, a deputy undersecretary of defense under President Bill Clinton and now president of Celero Strategies, a Washington-area consulting firm. “The question becomes do you really want or need a single-cloud solution?”Even if the court tosses out Amazon’s political bias allegations, it will still take several months to litigate the company’s other complaints about the Pentagon’s evaluation and award process. Win or lose the case, the DOD says it will get the cloud computing services it needs.“The Department continues to have an urgent, unmet requirement,” the Pentagon said. “This requirement transcends any one procurement, and we will be prepared to ensure it is met one way or another.”For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.