Congress wants the Defense Department to buy technology faster. Now it's beginning to do just that.
In early February, a small Virginia-based company—REAN Cloud—that partners with Amazon Web Services announced a nearly $1 billion deal to provide cloud computing services for the Defense Department.
The contract caught many industry players by surprise, in part due to the $950 million value and partly because it was awarded without a traditional government procurement. This deal may be a harbinger for how the Defense Department plans to purchase certain technologies moving forward.
Using buying powers quietly imbued by Congress over the past three years, U.S. Transportation Command made the award to REAN Cloud under an other transaction production contract based on a prototype project last year to migrate military applications to Amazon Web Services' GovCloud region. The contract is a type of other transaction authority, commonly called an OT or OTA.
Led by the Defense Innovation Unit Experimental, which acts as a liaison between the Pentagon and industry, the Defense Department is targeting non-traditional suppliers to rapidly provide cutting-edge commercial technologies that address national security and military challenges.
And unlike traditional purchases under the Federal Acquisition Regulation, which can take months or often years to award, OTAs can be issued in a matter of weeks.
“What we’re seeing is a strong shift in the pendulum of those who’d like to replace regular contracting processes with OTAs,” said Andrew Phillip Hunter, director of the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies.
REAN Cloud, which helps customers migrate to commercial cloud environments, is among the first companies to transition from a pilot contract with DIUx to a follow-on production contract.
REAN Cloud was awarded a $2.5 million proof of concept last May by U.S. Transportation Command only five weeks after responding to a DIUx white paper, the company’s managing partner, Sekhar Puli, told Nextgov. REAN Cloud earned about 70 percent of its $70 million in revenue last year from the commercial sector, where Puli said business happens fast and there are fewer bureaucratic hoops to jump through.
“Normally, we just don’t play that [public sector] game,” Puli said. “We were pleasantly surprised at the speed at which [DIUx and TRANSCOM] were moving.”
The company’s successful pilot led to February’s much larger award—without additional competition—that could grow its business tenfold.
How Congress is Changing Procurement Rules
The Defense Department’s new experiments with OTAs come from congressional pushes to buy technology more quickly.
Congress first granted the Defense Department the ability to use OTAs in 1994, mirroring authorities NASA first used in 1958. Congress rescinded some of those authorities to the Defense Department after the epic failure of Future Combat Systems, an OTA program that cost taxpayers $18 billion and produced almost nothing of value by the time the department canceled it in 2009.
Several years ago, however, defense hawks like Senate Armed Forces Committee Chairman John McCain, R-Ariz., became concerned that adversaries like China and Russia were gaining technological ground on the U.S. military. Those countries exert control over companies within their borders and forsake fair and open competition for speed to market.
To combat the growing threat, the House and Senate Armed Services committees began expanding acquisition authorities in the 2016 National Defense Authorization Act, said Bill Greenwalt, formerly a Senate Armed Services Committee staffer who helped write portions of the 2016 and 2017 NDAAs.
New authorities gave the Defense Department the ability to grant follow-on production contracts without competition if competitive features were used to select prototype participants and participants successfully completed the prototype. The 2016 NDAA also allowed the Defense Department to grant OTAs to “a novel application of commercial technologies for defense purposes,” a broad scope that brings ubiquitous technologies like cloud computing into the fold. Most analysts estimate the market for cloud computing within the Defense Department is several billion dollars and growing, due to the $40 billion it spends on IT each year.
The 2018 NDAA also upped the ante for what the Defense Department can spend on OTAs from $250 million to $500 million per transaction.
The 2018 NDAA also appears to institute a preference for awarding OTAs in science, technology and prototyping “to be applied in circumstances determined appropriate by the [secretary of Defense].”
“Congress has set up an alternative pathway, and that’s an OTA,” Greenwalt said, adding that lawmakers “really wanted to make it easier for the Defense Department to do business with companies.”
OTAs can be issued to consortiums or directly to companies in as few as 10 days, and in the right circumstances, can avoid traditional contracting under the Federal Acquisition Regulation that Greenwalt said can be “mind-numbingly bureaucratic.”
But oversight of OTAs is a concern, Hunter said.
The Government Accountability Office, which adjudicates bid protests over traditional contracts, does not handle disputes over OTAs. Companies that contest an OTA must make their case to the U.S. Court of Federal Claims. Few additional oversight measures are spelled out in the law. Payments of $5 million or more require examination by the Comptroller General, and transactions worth more than $500 million require the signoff of the Pentagon’s top acquisition official.
In any case, Hunter said Congress will be watching.
“Congress giveth and Congress taketh away,” Hunter said. “This is one of those great debates. From almost the first implementation of OTAs, there were those who said this is a better mousetrap than the federal contracting system and said the goal should be to replace regular contracting with OTAs. And then there are those who say OTAs have a specific, concrete place and that we should limit OTA authority to ensure they aren’t abused.”
OTAs Business is Booming
REAN Cloud is the second major production OTA award after California-based Tanium captured a contract worth up to $750 million from the U.S. Army Network Enterprise Technology Command. Production contracts like those for REAN Cloud and Tanium are funded entirely by customer agencies, not DIUx. In total, DIUx has awarded $184 million for 59 pilot projects since it relaunched in May 2016.
Analysts at Bloomberg Government state the Defense Department spent a record $412 million in obligations through OTA contracting in fiscal 2017, a massive increase over $3.5 million reported for OTA obligations in fiscal 2013.
If Congress is dangling OTAs like carrots, the Pentagon is biting.
“Time is of the essence. The work of groups like DIUx, the Strategic Capabilities Office, and the Rapid Capabilities Office should become standard practice, not workarounds to the regular system,” McCain said in a Senate Armed Services Committee hearing Dec. 7. “And we need these innovations for major defense acquisition programs, not just science and technology efforts.”
REAN’s Win Is Also an Amazon Win
REAN Cloud makes its money helping customers migrate applications, services and data to the cloud. In real estate terms, REAN Cloud helps customers move their belongings to the cloud of their choosing—their new home—but it doesn’t own the cloud infrastructure itself, just as a realtor doesn’t own the dwelling he or she is selling. REAN Cloud’s biggest partner is AWS, which is the most profitable business within tech giant Amazon.
Its main competitors in the government space—IBM, CSRA (now General Dynamics), Oracle, Google and Microsoft—were noticeably absent from REAN Cloud’s press release announcing its Defense Department contract. That’s because REAN Cloud has thus far migrated applications and services for TRANSCOM only to AWS GovCloud. The company, if customers want, can migrate to Microsoft’s Azure environment through specific task orders. Puli said REAN Cloud is beginning to work with Google and Oracle and hopes to soon be able to migrate Defense Department data to those popular environments, too.
By virtue of its partnership with REAN Cloud and its popularity as a cloud platform, AWS stands to make a lot of money through its smaller partner’s $950 million award.
The timing of REAN Cloud’s award is important, too. If a large number of Defense Department customers target the REAN Cloud contract as a vehicle to migrate their applications to the cloud, it could impact the Defense Department’s Joint Enterprise Defense Infrastructure cloud acquisition. That acquisition, which materialized after a West Coast road trip by the Defense Department’s top officials, could be worth billions but has been mired in controversy.
It would provide all Defense Department customers a vehicle through which to purchase commercial cloud services, though several existing vehicles, such as milCloud 2.0, offer similar options.
Pentagon officials initially planned to award a 10-year JEDI contract to a single company by the fourth quarter of 2018, but the plan has reportedly evolved to a multi-award approach and its early timeline has slipped. The Defense Department will host an industry day for the acquisition on March 7. Any significant delays in that process could sway customers toward TRANSCOM’s contract, which the entire Defense Department can use.
Already, Puli told Nextgov his company is adding about 100 employees to meet current demand.
All told, REAN Cloud turned a simple five-page white paper response into potentially hundreds of millions of dollars of revenue by trying a different approach to government contracting that Congress opened up in recent years. Skeptical at first, Puli said the industry players that have long dominated federal contracting better take note because the Defense Department is tired of “traditional beltway bandits milking contracts through time and material.” OTAs, he said, alleviate some of what’s wrong with traditional government contracting.
“At first, we thought it sounded interesting and gave it a shot,” Puli said. “I definitely hope other government agencies take a leap from this and implement technology in a similar way. I think there is something to be learned here."
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