Inside Microsoft's $617M software deal with the DOD

Everyone knew that it was a big deal when Microsoft and the Defense Department entered into a $617 million enterprise licensing agreement a few weeks ago. But it turns out that this deal is more than just a big win; it has implications about the federal market at large.

Under this three-year agreement, the Army, Air Force and Defense Information Systems Agency will have a single vehicle for buying Microsoft products such as Office 2013, Sharepoint 2013 Enterprise and Windows 8.

To reach that deal, Microsoft took a different negotiation tack to reach the deal with the Defense Department and its reseller partner Insight Public Sector.

“Any contract negotiation by nature is going to be a process where we’re smoothing out rough edges and finding out what those good common denominators are,” said Tim Solms, general manager for Microsoft’s Defense Department business. “It has been very collaborative from the beginning."

Microsoft “brought forward the solutions that were really the most relevant and the most cost-efficient with the Department of Defense that were in line with their core initiatives,” he said.

This isn’t always easy though, since the Defense Department has many different components. Typically, the question that Microsoft must ask its customer is “What software products do you want,” which can result in different answers across the department.

But then Microsoft started asking its customer a different question, “Where do you want to be at the end of this contract,” Solms said. The company saw those answers as starting to align better across the department, to the point where Microsoft realized it was possible to enter into an enterprise licensing agreement like this one.

A deal like this is very good for Microsoft for two reasons, Solms said. For one, he looks at it as a referendum on his company’s technology and what Microsoft can offer in terms of solutions.

It is also good because it helps the company continue to serve the Defense Department, who has “spent the majority of the last decade focusing on warfighting,” he said.

Through deals like this one, Microsoft is able to help “lead them into IT modernization while answering the tough questions to taxpayers and the senior leadership across the federal government around cost efficiencies,” he said.

Deals like this one also illustrate some of the management trends at the Defense Department; for Deltek Advisory Research Analyst John Slye, it shows that the department has reached a critical mass in terms of its drive toward a joint enterprise.

It also shows that the Defense Department has been “rigorously standardizing the services that they want to use, and the joint information environment is another way of the staying in a common operating environment,” said Alex Rossino, Deltek principal research analyst.

The deal also makes the Defense Department compliant with the 2013 National Defense Authorization Act that calls for licensing optimization, Rossino said. He it is likely that the Defense Department will also streamline other software licenses in the future, like Adobe, and possibly even Oracle.

One concern that Rossino had about this kind of agreement, though, is that it “sets the playing field for what software needs to be compatible with”; in other words, if you have an application that you want to sell to the Defense Department, it will have to be compatible with Windows operating systems.

This is problematic because it “reduces the amount of spending the [department] is going to do in other areas,” he said; in that sense, it reduces competition.

This kind of enterprise licensing agreement is a good illustration of some of the federal market trends that exist right now, too.

One is a rise in federal agencies going to strategic sources for majority of their needs, Rossino said.

Another is the move to a common operating environment. Rossino said that there have been a number of large deals where, even though a common operating environment might not be specifically stated, a contract will be put in place that creates it.

One other thing that Rossino noted is the implications this agreement has for the Defense Department and the cloud. “Microsoft Office 365 has been getting a lot of traction at federal agencies, like the Transportation Department for example, and this [agreement] would lay the groundwork for moving to 365 cloud for cloud as a service,” he said.