Analysts: Pentagon’s Multibillion-Dollar DEOS Contract is Guaranteed for Microsoft

In the coming weeks, the Pentagon—through its partner, the General Services Administration—will bid out a cloud-based contract for enterprisewide email, calendar and other collaboration tools potentially worth as much as $8 billion over the next decade.

The Pentagon’s goal is to establish a single baseline cloud architecture across military branches and combatant commands, creating the kind of seamless workflow and information-sharing environments common in America’s largest corporations.

Yet former defense officials, contracting analysts and industry experts tell Nextgov the Defense Enterprise Office Solutions contract is one that tech giant Microsoft—with its Office 365 Suite—simply cannot lose.

“Microsoft is the only company that has the capabilities the Pentagon is asking for, is already widely used across the Defense Department, and has the security certifications to handle sensitive military data,” said Alex Rossino, an analyst for Deltek. “I really don’t see another choice. Every systems integrator bidding for DEOS will be bidding Office 365.”

In such a scenario, Microsoft does not have to bid directly on the DEOS contract to win revenue—and in fact, the company has said it will not.

Instead, Microsoft would partner with any of several large systems integrators—companies seeking to execute and manage the contract—bidding on DEOS. By being on the winning team, Microsoft stands to collect revenue licensing its products. The Defense Department indicated in a draft solicitation earlier this year it wants DEOS to scale to at least 3 million users with potentially more to follow. Microsoft, experts believe, figures to be part of any and all bids for DEOS.

“It’s Microsoft or nothing,” said Daniel Goure, senior vice president at the Lexington Institute, an Arlington, Virginia-based nonprofit public policy research. “It’ll be on the fringes of the bids where the decisions are made as to what team actually wins DEOS. Microsoft will simply offer the same stuff at the same price to everyone.”

There are no points for second place in government contracting, but even if there were, it is difficult to find a competitor to Microsoft in the cloud-based communications and business tools market, at least in the public sector.

The company’s Office 365 suite, which contains widely known applications like Word, PowerPoint, Outlook and others, has a massive footprint across Defense and civilian agencies. According to an analysis of government contracting data by Bloomberg Government analyst Chris Cornillie, Microsoft has captured approximately $4.2 billion through software licensing agreements with federal agencies since fiscal 2015.

Google, with its G Suite, is the next closest competitor, capturing about $97 million in government revenue through software licensing agreements during the same time span.

Increasing the gap further, Microsoft has captured another $1.7 billion in revenue in government contracts the company won outright since fiscal 2015.

While Google has made some inroads in civilian agencies like NASA and has some licensing agreements with the Defense Department, Cornillie said it’s unlikely Google will be part of any bid for DEOS. That’s largely because the Pentagon has indicated the cloud provider selected to deliver services through DEOS must meet rigid security requirements—called Impact Level 5 and Impact Level 6—to host the military’s most sensitive and in some cases, classified data.

Currently, Amazon Web Services is the only commercial cloud provider that meets those requirements, although Microsoft expects to meet them, potentially within the year. It's unclear if AWS will bid on DEOS, and Google is potentially years away from meeting the security requirements necessary to do so.

“Even if Google were trying to get involved in DEOS, it is not readily obvious they could even meet the certifications in time,” Cornillie said. “Microsoft is not the only player in town, but they are the only player in town capable of meeting [Impact Levels] 5 and 6 and delivering what the Defense Department says it wants.”

Google did not respond to requests for comment from Nextgov, nor did AWS. 

In a statement to Nextgov, Microsoft said it looks “forward to competing for the DEOS contract and continuing to provide the Defense Department with our latest commercial innovations.”

“We believe our 40-plus year partnership with the Defense Department, in concert with our efforts to modernize productivity and collaboration with Microsoft Teams and Microsoft 365, provides innovative, proven and secure technology to support the DoD’s mission,” the company said.

‘Mother of All Enterprise IT Contracts’

By any standard, DEOS is a major defense contract. Last year in a draft solicitation, the Pentagon estimated its value at $8 billion. Since then, the Pentagon revised its contracting strategy, bidding the contract through GSA’s IT Schedule 70, which vets contractors and their commercial offerings.

The strategy also divided the contract into three phases. What’s now called DEOS is only the first phase of the Defense Department’s three-phase Enterprise Collaboration and Productivity Services, or ECAPS. The second and third phases, which will include voice, video and assured voice services, will be bid out later. A GSA spokesperson told Nextgov they may need to interoperate with DEOS’ solution.

Whatever team wins DEOS would then have a leg up in competing for future phases.

“DEOS really is the mother of all enterprise IT contracts, it’s the largest contract you’ve probably never heard of,” a former senior defense official told Nextgov. “It is a massive multibillion effort to harmonize the way the Defense Department buys the main workflow tools used for defense personnel, and Microsoft is clearly the favored solution for DEOS.”

According to Defense Department spokeswoman Elissa Smith, the intent is for DEOS to replace all the disparate, duplicative collaboration tools Defense Department agencies use around the world. Components, including the Army, Navy and Air Force, “will be required” to use the same cloud-based business tools.

“It is expected that DEOS will be designated as an enterprise solution for DOD-wide adoption and organizations,” Smith told Nextgov. “Components that have already implemented different solutions with similar functionality will be required to migrate to DEOS.”

A GSA spokesperson told Nextgov the DEOS procurement “will be a full and open competition” in accordance with Federal Acquisition Regulation, and further said the agency has “taken great pains not to specify the technical solution.”

“We have done extensive market research through requests for information and draft requests for proposal. The resulting solicitation is designed to allow competition on the underlying technology as well as service provider,” the GSA spokesperson said. “The functional requirements document specifies what functions the service must provide as well as the key non-functional requirements that will ensure the service quality meets DoD's needs. DoD’s workforce uses a variety of email, collaboration and productivity tools and our solicitation is intended to offer a chance for industry to meet the department's needs via any commercially proven service offering.”

GSA officials told Nextgov they expect to bid DEOS out in mid-April.

With a 5-year base and length of up to 10 years, the DEOS winners won’t be hurting for business.

“I don’t know a single integrator that is looking at DEOS without Microsoft, and when they win, Microsoft and its integrators will have an enormous hunting license worth several billion dollars,” the former senior Defense Department official said.

JEDI Awaits

DEOS is the lesser known of two major, multibillion-dollar cloud contracts the Pentagon could award this year. The Joint Enterprise Defense Infrastructure contract will have a ceiling of $10 billion over 10 years. Through JEDI, the Pentagon aims to put a single cloud service provider in charge of hosting and distributing mission-critical workloads and classified military secrets to warfighters around the globe. If DEOS is the Pentagon’s planned business collaboration cloud, JEDI would be its war cloud.

The contracts share similarities in size, duration and single-award nature, and both have clear favorites. AWS, by virtue of its market-leading position, existing contract with the CIA and having met the most stringent security requirements for government data, is considered by experts to be the clear favorite for JEDI. Microsoft has such a hold on public-sector business collaboration tools it might not be able to lose DEOS even if it tried.

Yet JEDI has been highly scrutinized since its inception in late 2017.

Even before it was bid out last year, industry groups lobbied Congress to intervene in the Pentagon’s decision-making last year, suggesting its single-award nature creates a single point of failure or could cause vendor lock-in that harms national security by reducing innovation. There was even a campaign waged to discredit JEDI, the Pentagon and AWS, replete with dossiers alleging all sorts of tabloid fodder.

The same criticisms haven’t been lobbied against DEOS despite obvious similarities to JEDI.

“For a contract looking like it will be worth $8 billion there just doesn’t seem to be the same scrutiny on it as JEDI,” Cornillie said.

Cornillie said one of the reasons for muted backlash is that agencies are so used to using Microsoft’s office software. Attend any government conference and you’re practically guaranteed to view a PowerPoint presentation; most feds sending email are using Outlook, typing notes in Word or tabulating spreadsheets in Excel. While DEOS is a massive contract, it will essentially deliver—in enterprise fashion—services and apps people are familiar with.

JEDI, however, “is so disruptive that it was perceived as a threat by established Beltway players,” according to the former senior Defense Department official. JEDI would move military functionality from on-premise data centers to the commercial cloud, a market Amazon currently rules. JEDI also excludes powerful systems integrators and traditional defense contractors from bidding, requesting bids directly from cloud service providers. The former defense official said established contractors reacted to Amazon’s encroachment on the defense market by “trying to disrupt the disruption.”

As it stands, JEDI has survived two bid protests—from IBM and Oracle—and is currently on hold due to court proceedings in a federal lawsuit filed by Oracle. The Defense Department is investigating whether, as the lawsuit claims, an Amazon employee who previously worked at the Defense Department improperly impacted the integrity of the JEDI contract. The contract has not even been awarded yet.

“The knives were out for those people who want to disrupt the cloud business, but DEOS can survive more in the shadows and there is not a natural opponent to Microsoft in DEOS,” the former senior Defense Department official said.

But AWS has competitors for JEDI, and Microsoft is the one best positioned to pounce if AWS’ JEDI bid falters.

Could Microsoft actually win DEOS and JEDI? Experts debate whether the Pentagon would put those two major cloud eggs in a single provider’s basket, but if it did, Cornillie said Microsoft would immediately become the single largest cloud vendor to the federal government.

“The federal government spends something like $4.5 billion on cloud today and in 2020, it might be double that with JEDI and DEOS,” Cornille said. “At least a quarter of what the whole government would spend on cloud would be with Microsoft.”