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Faced with increased criticism, Pentagon slashes cloud computing contract awarded to an Amazon partner

The Pentagon says moving its computing systems to the cloud is a priority. (Charles Dharapak/AP)
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This story has been updated with a comment from a founder of the Amazon corporate partner. 

Faced with criticism over how it awarded a contract to move computer systems to the Internet cloud, the Pentagon on Monday slashed a deal awarded to an Amazon partner, cutting the amount from nearly $1 billion to no more than $65 million, while dramatically limiting the scope of work.

When the Pentagon awarded the $950 million contract to Herndon, Va.-based Rean Cloud last month, it was immediately hit with criticism for showing favoritism to a partner of Amazon Web Services (AWS), which industry officials fear has an inside track on the Pentagon’s cloud computing work. (Amazon founder Jeffrey P. Bezos owns The Washington Post.)

Moving its computing systems to the cloud has become a priority for the Pentagon, which says the change will allow it to innovate faster at a time when it worries that it is losing its technological edge over potential adversaries, such as China. In a memo last year, Deputy Defense Secretary Patrick Shanahan said the department would accelerate its move to the cloud as part of an effort to “ensure we are employing emerging technology to meet warfighters’ needs, and to increase speed and agility in technology development and procurement.”

The move to curtail the value of Rean’s contract by more than 90 percent comes just two days before the Pentagon is set to host an “industry day,” a chance for companies interested in bidding on the Pentagon’s cloud computing contract to hear from government procurement officials.

And it follows weeks of criticisms from some in industry that the procurement wasn’t handled properly — charges that Pentagon officials strongly denied. Those criticisms peaked last month when Rean won the $1 billion contract to migrate defense agencies’ systems to the cloud. Rivals said it made no sense to pick a company to migrate the services when the ultimate cloud provider had not yet been chosen.

In response to the Rean award, Oracle filed a bid protest with the Government Accountability Office last month that called the procurement “an egregious abuse” of the procurement process for a contract that it charged was “shrouded in secrecy.” And it argued that Rean “serves as a front for AWS” and that its close relationship to AWS created a conflict of interest.

Industry officials also lamented the fact that the Pentagon did little to announce the award to Rean; it largely became public when the company put out a news release touting the contract.

In an interview, Sekhar Puli, the co-founder of Rean, said that the Pentagon had not notified the company of the change, and that it found out about it through media reports. “The irony of this is to date I have not received anything in writing from anybody, either saying it has been protested or that they are changing the contract,” he said. “The only thing we are seeing is what’s in the press.”

He said he was waiting for official word from the Pentagon before deciding how to respond. “I don’t think they can unilaterally just change anything,” he said. “I have a contract that says 950. If that number needs to change that contract needs to be updated.”

Last month, Puli said that while the vast majority of the company's federal work has been with AWS, this contract was specifically worded to allow his company to work with any cloud provider that agencies might ask for.

“There is a perception that this is an Amazon contract, but there is little to no truth on that because we were very careful on wording the contract to say it could work with any cloud service provider,” Puli said. “We are not deciding on what cloud the customer should be on. They can pick any cloud they want, and our platform would support all of that.”

But since the Pentagon has not yet awarded the larger contract, estimated to be worth billions of dollars over many years, for its cloud system, it shouldn't have awarded such a large contract to start moving its systems to the cloud, rivals argued.

“If in fact you’re going to have an open competition and an industry day to have a multi-vendor opportunity for the cloud, then how does it makes sense to spend a billion dollars to move to Amazon’s cloud before you’ve made the decision of what cloud you’re moving to?” Oracle Senior Vice President Ken Glueck said at the time. “You would think they’d pick what cloud they want to go to first, then decide what migration service system needed to move, if any.”

Monday, the Pentagon backed away from its initial award. Army Col. Robert Manning, a Pentagon spokesman, said in a statement that after reviewing the contract, the Defense Department decided that “the agreement should be more narrowly tailored” so that Rean would build a prototype service for a single agency, the U.S. Transportation Command, instead of many agencies within the military.

The Pentagon was also criticized because the $950 million contract was awarded by an arm of the Pentagon, the Defense Innovation Unit Experimental (DIUx), created to harness the technology and innovation of Silicon Valley-type companies that have traditionally shied away from Pentagon work.

The procurement, a follow-on to a smaller competed contract, was awarded under an “other transaction authority,” a way for the Pentagon to procure goods and services quickly without being subject to the bureaucratic federal acquisitions process. But industry officials said a $1 billion award under that authority was unusually high.

Critics of the “other transaction authority” process say such arrangements are not competitive and insufficiently transparent. Bill Shook, a government contracting lawyer who has represented Microsoft as well as firms that work with AWS, said Rean should not have been eligible for an OTA contract because cloud services are already available in the commercial market.

The Rean Cloud contract award “is an improper use of OTA for readily available commercial services that are already being sold directly to the government by cloud providers,” Shook said. “We need to add back in transparency and a level playing field, rather than the personal preferences of government IT buyers.”

Raj Shah, the head of DIUx, resigned the post last month.

On Monday, Glueck, the Oracle senior vice president, said the move was a step in the right direction. “I think this gets to the right place, and this clearly puts back the notion that there should be a competition for what really should be multi-vendor cloud services,” he said. “And once that is over, there should be a focus on how to deal with migration and integration.”