- An $8 billion contract with the Department of Defense, called the Defense Enterprise Office Solution, is up for grabs.
- The contract involves updating the department's software for email, collaboration, file storage, messaging, and the like.
- Analysts say that both Microsoft and Google offer the right suite of products but that Microsoft is the only one with the qualifying security requirements, essentially making it a one-horse race.
- An important nuance: Microsoft isn't going after the contract directly; rather, consultants will bid with proposals to resell and maintain Microsoft Office 365. It still means Microsoft comes out way ahead.
- However, winning DEOS might actually be bad news for Microsoft, which is in contention for the Pentagon's $10 billion JEDI cloud contract too — and one analyst suggested to Business Insider that the government may not want to put all its cloud eggs in one cloud basket.
Right now, all eyes in the cloud industry are on the JEDI contract, a winner-take-all $10 billion cloud deal with the Pentagon. Amazon is considered the far-and-away frontrunner, with Microsoft in the rare position of underdog.
But there's another big Department of Defense contract up for grabs. And valued at $8 billion, it stands to be nearly as lucrative, if not as high-profile, as JEDI.
The 10-year contract is called the Defense Enterprise Office Solution — and Microsoft appears to have it on lock.
Like JEDI, DEOS will be awarded to a single company. But where JEDI is all about providing the Pentagon with cloud infrastructure, DEOS is focused on finding new cloud-based software to the replace on-premise productivity software — for email, collaboration, file storage, messaging, video-calling, and the like — that the Department of Defense uses for over 3 million military personnel.
Bidding is likely to begin sometime in February or March, and an award could come in April or May. Microsoft told Business Insider it wouldn't bid for DEOS directly but work with third-party resellers of Microsoft services who would handle the implementation of the deal should they win. Google did not respond to requests for comment about whether it would bid.
"If the proposal is successfully adopted by its intended recipients, it will mark the first time that all of the military branches and headquarters agencies have accepted a single, centralized set of common services," Charles King, the president and principal analyst of Pund-IT, told Business Insider.
Analysts say there are only two cloud productivity suites that fit the bill: Microsoft Office 365, and Google's G Suite. Google doesn't have the required security certifications for this kind of government project, but Microsoft does. That means that while Google is a competitor on paper, experts agree that one way or another Microsoft will win this.
Google hasn't "invested the same amount of time and energy as Microsoft and Amazon have in DoD-ready cloud services," Chris Cornillie, a federal technology market analyst at Bloomberg Government, told Business Insider. "It's looking like this is going to be a one-horse race."
Google versus Microsoft
Microsoft has one very large advantage here: its long association with lawmakers in general and the Department of Defense in particular.
What's more, the contract requires vendors to hold stringent security requirements for classified data — requirements that Microsoft said its cloud would meet entirely by the end of the year.
"We believe our 40+ year partnership with the DoD, 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. We look forward to competing for the DEOS contract and continuing to provide the DoD with our latest commercial innovations," Microsoft said in a statement.
If Microsoft Office 365 does become the Pentagon's new cloud software solution, "it would cement a long-term relationship with Microsoft, which frankly they already had," Rick Holgate, a senior director and analyst at Gartner, told Business Insider.
Holgate said he thinks that even if Google had the security certifications required by the contract, it would have another big disadvantage: It dropped out of the running for the JEDI contract, citing concerns that working with the Pentagon could violate its corporate code of ethics — and it seems likely that Google would have similar concerns about the DEOS contract.
That said, Microsoft is facing resistance from employees, some 50 of whom signed a letter asking the company not to work with the Army on augmented-reality technology for soldiers; CEO Satya Nadella has said Microsoft will not cancel that contract.
An important nuance
Again, neither Microsoft nor another vendor is likely to bid directly on this deal. Instead, it will be a battle among consultants who have obtained the important Schedule 70 certification to provide IT services to the government. Those consultants will then resell software to the Pentagon and install and maintain it, according to the terms of the DEOS contract.
Relationships with those kinds of consultants is a particular strength of Microsoft, which has built a deep bench of partners over the years in just about every industry possible. The analysts Business Insider spoke with said they expected General Dynamics and Perspecta to bid on DEOS with a proposal based on Microsoft Office 365, while Accenture, BAE Systems, and Leidos could also take part.
"Clearly, Microsoft is in a good position," James Bach, a federal spending analyst at Bloomberg LP, told Business Insider. "I would consider their software offering as a frontrunner in this position."
Any bidder could work software from other vendors, like IBM or Oracle, into their proposal. But the analysts said that even if that happened, Microsoft Office 365 would likely still form the backbone of the bid — meaning Microsoft comes out as the biggest winner regardless, as the center of a wide-reaching modernization effort at the Department of Defense.
"This would be the first time the DoD as an enterprise has adopted a commercial service for something like email and word processing and presentations and spreadsheets," Cornillie said. "It would be pretty significant there."
What it all means for JEDI
Analysts say there's relatively little controversy around DEOS compared with the dramatic race for the JEDI contract, in which Microsoft is also participating.
Amazon Web Services, the frontrunner for JEDI, has attracted a smear campaign. And the Department of Defense is investigating allegations levied by Oracle that AWS is unfairly benefitting from conflicts of interest. IBM and Oracle have filed formal complaints about the JEDI bidding process, specifically about the winner-take-all nature of the contract.
"The JEDI contract is a little different because there's more potential for changing the way the Defense Department stores information," Cornillie said. "But also, JEDI meant that a lot of incumbent contractors — for example, IBM and Oracle — were going to lose business. Naturally, these companies sounded the alarm."
Analysts say DEOS is pretty much a guaranteed win for Microsoft. But Cornillie said that winning it might also mean Microsoft hurts its chances with JEDI — the Pentagon might not want to rely on one company to provide that much of its IT infrastructure.
"In general, the Pentagon needs to be observant about the fact that if it puts too much of its eggs in one basket, it creates a single point of failure," Cornillie said. " I think that is one of the reasons why the Pentagon is going to be much more reluctant to award both contracts to the same vendor."
Holgate said he thinks that getting the DEOS contract wouldn't hurt Microsoft's chances with JEDI but that it might start some conversations within the government about whether it's a good idea.
"It would essentially be putting all your eggs in one very big basket without a lot of opportunities to shift if something goes wrong in that relationship," Holgate said. "It wouldn't make Microsoft less likely, but it would give the DoD another set of factors to consider."
Still, companies are not making much of a racket about DEOS, and it's most likely because they are picking their battles, Holgate said. After all, Microsoft's application suite seems to be the only one that fits what the contract is asking for, in terms of the software and its certifications.
"The industry has recognized that this is a lock-in for Microsoft," Holgate said. "Unless something dramatic happens, like something reputation-damaging for Microsoft, with this one the industry says we just need to let this go. There's resignation that it can't provide a competitive offering to what Microsoft has already put together."