Judge: IBM gamed procurement system in CIA cloud bid

A U.S. Court of Federal Claims judge said IBM "manipulated its pricing to create a bid protest" and "intentionally manufactured a protest argument" against Amazon Web Services, which went on to win a $600 million cloud computing contract from the CIA that Big Blue later protested.

Federal judge Thomas Wheeler made the statements in a partially redacted legal opinion that was unsealed Nov. 8, one month after he overturned IBM's successful bid protest and ordered AWS to get back to work building a cloud computing infrastructure for the intelligence community.

In the opinion, Wheeler wrote that IBM intentionally gamed the procurement system by changing its final pricing strategy – a conclusion that IBM strongly denied – so that if it lost the contract, it could protest to the Government Accountability Office. The strategy -- pricing data analytics tools based on a single 100 terabyte processing run instead of a continuous year as instructed by the CIA -- reduced IBM's pricing significantly, which the agency tried to normalize. IBM later protested on those grounds, and Wheeler said GAO should have but did not address the issue in its June ruling favoring IBM.

"IBM appears to have intentionally manufactured a protest argument relating to the [scenario] pricing requirement, which it hoped to pursue if it lost the [cloud] competition with AWS," Wheeler wrote in his opinion. "Knowing full well from its pre-proposal questions what the [scenario] requirements were, IBM drastically departed from the approach followed in its initial proposal when it came to submitting its final proposal revision. If it did not win the award, IBM could argue that the agency did not evaluate . . . prices on a common basis."

Wheeler said GAO's decision to uphold IBM's bid protest was irrational because IBM "lacked any chance" to win the contract. The CIA rated AWS's proposal superior to IBM's in every comparative category except management – AWS was "satisfactory" and IBM was "very good" – with both companies scoring passing grades for security. While IBM's price came in significantly lower, its risk was "high" and AWS's was "low." Ultimately, the CIA's evaluation team determined AWS's "technical proposal was sufficiently superior to IBM's proposal to warrant a significant price premium."

AWS's total evaluated price was about $150 million; IBM's was about $94 million. "The bottom line is that IBM did not lose the competition because of the Scenario 5 price evaluation or AWS's post-solicitation negotiations, but because of the overall inferiority of its proposal," Wheeler stated. "This proposal contained numerous weaknesses, including some 'significant' weaknesses, a technical deficiency, and an overall high risk rating."

Wheeler noted that IBM's pricing advantage was likely inflated because, according to the CIA's procurement team, IBM proposed a guaranteed minimum of $39 million – nearly double IBM's earnings from services in the contract's first year – compared to AWS's guaranteed minimum of $25 million. CIA officials also noted IBM's proposed contract terms would allow it to restructure the agreement after two years if the service price did not exceed the government minimum. The terms, Wheeler said, allowed IBM "to propose a low price for the agency's proposal evaluation purposes, but then to argue for negotiation of a higher price in the later years of performance."

"In sum, AWS's offer was superior in virtually every way but price, and IBM's advantage in that area was likely not as great as IBM attempted to make it appear," Wheeler said.

Wheeler's Oct. 7 bench ruling allowed the CIA and AWS to continue work on the cloud project, and AWS will receive no further injunctive relief. Not that it matters to AWS, which is quite content to be back working with its new intelligence customer.

"Amazon Web Services is pleased that the legal process has validated the CIA's selection of AWS to assist the CIA with this transformative project to implement proven, innovative commercial cloud technology," said an AWS spokeswoman. "AWS presented the agency with the superior and best value solution. We look forward to a successful relationship with the CIA."

IBM, which withdrew its injunction request following Wheeler's ruling after the government's request to move forward in light of national security concerns, maintains GAO's findings were accurate and believes the contract should have been rebid.

"IBM respectfully but strongly disagrees with the court's unwarranted assertions," said IBM spokesperson Clint Roswell. "Our position remains, the GAO's findings were appropriate and the contract should have been rebid."

Nevertheless, officials with knowledge of the situation say IBM is not likely to appeal.

CIA spokesman Todd Ebitz said the agency "is pleased that the Court of Federal Claims validated our original award decision, which allows the Agency to press forward with procuring cloud services for the Intelligence Community. We welcome the opportunity to work with Amazon Web Services on this important project. IBM remains a valued strategic partner for CIA and we recognize its significant contributions to the Agency's national security mission."