June 7 (Bloomberg) -- International Business Machines Corp. successfully protested the Central Intelligence Agency’s $600 million contract award to Amazon.com Inc. for cloud-computing services.
The U.S. Government Accountability Office yesterday sided with IBM, agreeing that the spy agency failed to properly evaluate prices and waived a contract requirement only for Seattle-based Amazon.
The arbitrator of federal contract disputes recommended that the CIA reopen negotiations with the companies. The ruling means Armonk, New York-based IBM may get another chance to win.
The protest is “potentially preventing a new competitor, like Amazon, in getting more government work,” said Amit Daryanani, an RBC Capital Markets equity analyst in San Francisco.
IBM is a longtime federal contractor, amassing about $1.5 billion in awards in the fiscal year that ended Sept. 30, 2012. Amazon is much newer to the market, with no dedicated government sales division until several years ago. More than 300 U.S. agencies use the company’s computing services, Teresa Carlson, an Amazon vice president, said in May.
The CIA work would help Amazon sell its cloud-computing services to companies and other government agencies, Daryanani said.
“If Amazon can start using the CIA logo, no other agency or company should be worried about security,” he said. “It becomes a marketing tool for them.”
CIA officials didn’t respond yesterday to a telephone call seeking comment on the agency’s next steps or whether they will heed the recommendations from the GAO, an arm of Congress. Agencies generally follow its guidance.
“We now anticipate the reopening of the contract proposal process and look forward to competing for the opportunity to serve this important federal agency on this vital program,” said Clint Roswell, an IBM spokesman.
Amazon officials didn’t respond yesterday to telephone calls and e-mails seeking comment about the decision.
The disputed award is important because it is “probably one of the largest cloud contracts in government,” said Allan Holmes, director of technology research for Bloomberg Government. “This is about $600 million in a shrinking federal market.”
The value of U.S. contracts fell about 4 percent to $512 billion last year from fiscal 2010, according to data compiled by Bloomberg. Automatic reductions under a process known as sequestration began March 1 and will cut as much as $1.2 trillion in federal spending over nine years if President Barack Obama and Congress fail to agree on a broader program of budgetary reductions.
The CIA contract might help open up the market for cloud computing across the government because it “undercuts the argument that the cloud isn’t secure,” Holmes said.
Companies that dominate the $80 billion market for federal technology awards face an “epic battle” against cloud-computing competitors offering services at lower costs, said Vivek Kundra, the Obama administration’s former technology chief, in a March 2012 interview.
“There’s an epic battle that’s going to be waged in the coming years,” Kundra said. “Companies that are going to continue to operate the way they are, I actually don’t know what their business is going to be five to six to seven years from now.”
IBM protested the Amazon award on Feb. 26. The full decision on the contract wasn’t publicly released.
While the GAO said the CIA failed to properly evaluate prices and waived one contract requirement only for Amazon, it denied IBM’s assertion that the agency failed to properly evaluate Amazon’s past performance, including service outages last year, Ralph White, the GAO’s managing associate general counsel for procurement law, said by e-mail.
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