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Oracle, Microsoft barely compete for a quarter of their US Federal contracts
Vendor lock-in: savings of up to $750m a year possible if Uncle Sam didn't predetermine the victor
Oracle and Microsoft – two companies receiving most of the US government's off-the-shelf software spending over the last decade – get at least 25 percent and 30 percent of their respective government revenue through purchase processes which are not competitive.
According to an analysis from IT procurement consultant Michael Garland, the government collectively spends $10-15 billion annually on new software and on maintenance and support for existing software.
Both Big Red and Redmond get 25 percent and 30 percent of their share without effective competition, including non-competitive procurement and "Limited Sources" deals through third parties which specify particular vendors.
For example, in March 2022, the Department of Veterans Affairs (VA) awarded Dell a contract for an omnibus Microsoft enterprise license valued at $1.6 billion over three years. The buyer used the Limited Sources Justification to explain why the VA would only consider Microsoft products, saying it must "continue to utilize the [existing Microsoft license model] to sustain and expand its tenancy," according to the report published by Netchoice, a membership organization backing free enterprise online.
The study estimates that just a 5 percent improvement in price performance, due to enhanced software competition, could produce savings of up to $750 million annually.
Netchoice CEO President and CEO Steve DelBianco said: "Garland's report has exposed how vendor-lock has imposed significant costs on taxpayers, to the benefit of the world's largest software vendors. It's well past time that Congress acted to unlock competition in the federal IT market."
The report, called Vendor-lock and Lack of Competition in the Government's Software Estate [PDF], said: "The COTS software estate can be managed better, vendor-lock and its negative effects can be mitigated, and the government can gain better pricing and innovation by simply putting a focus on competition, diversity and interoperability."
The report pointed out the US government should consider whether competition between software resellers, even for specific products it has predesignated by brand, is "not meaningful."
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"The product winner has been predetermined prior to the competition. This type of procurement may meet the legal definition of 'competition' under the Federal Acquisition Regulation (FAR), but as discussed later in this report, these instances of competition do not deliver meaningful price benefits. As a result, it is easy to speculate that the actual number of awards for Microsoft and Oracle products, without meaningful competition, is significantly higher than 25 to 30 percent, and could total over a billion dollars annually," said the report, which is based on publicly available data.
The United States Federal government is the largest single consumer of information technology in the world. Since 1994, it has spent $2 trillion on IT, while at least 15 percent, or $300 billion, of that figure went on commercial off-the shelf (COTS) IT products including software and cloud technology.
The shift to the cloud presents another opportunity for vendors to increase their grip on government customers. For example, in 2019, Microsoft introduced a new licensing model which made it more expensive to use its products in cloud environments other than its own Azure.
"It is not surprising then that Microsoft has engaged in licensing practices that leverage their vendor-lock in Server/Operating System and Productivity software to increase its cloud market share," the report said.
Microsoft is finding itself in hot water in Europe over certain licensing practises, with the Cloud Infrastructure Service Providers (CISPE) group filing a complaint in November about alleged anti-competitive behaviour.
The US government is itself fighting back. In 2022, it introduced the bipartisan SAMOSA Act, which requires government agencies to account for their COTS software and better understand their software licensing assets, rights, and liabilities.
"The SAMOSA Act will provide valuable data to help the US government identify and diversify out of vendor-lock," the report said. Author Garland has a masters in government procurement law and commonly advises government agencies.
There are other signs that the US government has been trying to increase competition among suppliers. In December, the Department of Defense announced contracts for cloud computing services valued at up to $9 billion to AWS, Google, Microsoft and Oracle after canceling the single supplier JEDI program in July 2021. ®