Appendix D: Acquisition Pilot: Change the Buying Strategy to Government-As-One-Purchaser
Applying Nash Equilibrium to Federal Acquisition of Cloud Email
Several challenges must be overcome in the acquisition cycle in order to comply with EO 13800 and facilitate shared services, such as cloud email. Budgets are constrained by yearly appropriations, and agencies work autonomously, which reduces the Government’s ability to look at its purchasing as a whole. Legacy procurement and security regulations, coupled with lack of top down guidance for the logistics of a Government-wide migration to cloud email challenge cloud adoption.
By creating virtual “street corners” for cloud email providers the Federal Government can use competing market forces to drive Government-wide volume pricing as a lever to speed migration. This will apply Hotelling’s Law of spatial competition, wherein Government’s potential purchasing power will be used to negotiate tiered pricing agreements directly with the providers and result in publicly displayed price points, total number of licenses purchased, and the remaining number of mailboxes that need to be migrated. This volume pricing would serve as the base rate for any license purchased by the Government.
Dashboard Example (Cloud-Based E-mail)*
In this scenario, data would be recorded with the current negotiated pricing tiers, along with any incentive pricing based on other factors such as the company’s quarterly sales cycles.
|Gmail||Quarter/ Price per user/month|
|Tier 1: 1 – 5,000 licenses||Q1-3: $10 per user/month|
|Q4: $9 per user/month|
|Tier 2: 5,000 – 10,000 licenses||Q1-3 $9.50 per user/month|
|Q4: $9.45 per user/month|
|Tier 3: 10,000 – 50,000 licenses||Q 1-4 $ 9.50 per user/month|
*These numbers are fabricated for this example only.
A running total of the licenses purchased would be displayed so that at any time, end users would know the price point. This would be validated with the companies for the official count.
To date (6/29/17) Total Licenses purchased Government-wide: 1,345,000
Pricing Level= Tier 3, Q2 = $9.50 per user/month
Total mailboxes to migrate: 3,000,000
Benefits would include a more constructive and mutually-beneficial ecosystem with private sector companies, better and more transparent pricing for Government agencies, and an increased variety of available secure solutions. This would also lead to more consistent implementation and configurations across the Federal enterprise. Lastly, this would incentivize agencies with smaller budgets to adopt cloud email earlier.
This assessment relies on the following assumptions:
Industry and private sector companies are not only willing to come to the table, but to actually collaborate with the Federal Government in pursuing this new approach to contracting;
Industry must be willing to negotiate fair and reasonable tiered volume pricing that will be made public. Departments, agencies, and industry must agree on metrics and public reporting and tracking of agency adoption of cloud email adoption;
Agencies must also be active in timely reporting of their data, which will be displayed publicly, in order to ensure as specific volumes are reached, discounts are provided; and
The Government has the ability to negotiate a manufacturer’s agreement that will be accepted by agencies.
Why This Works
A common strategy for many chains is to locate near a competitor. For example, you will almost always see a CVS near a Walgreens or a Burger King near a McDonalds. You will see food chains across the street or next to each other in almost any city in the US. The thinking is that if it works for the competitor, it will likely work for you. Studies have shown repeatedly that as chains sprout up in adjacency, volume also goes up. This strategy is commonly known as the Nash Equilibrium, a solution concept of non-cooperative competition involving two or more “players,” where each player knows the equilibrium strategies of the others and no one has anything to gain by changing their own strategy.
Creating the Marketplace with Hotelling’s Law. In simple terms, Hotelling’s Law determines that businesses selling similar products tend to locate as close as possible in order to maintain the maximum amount of market share possible. Creating a public display and accountability to the total Government spend for the different types of cloud email and the number of mailboxes left to be migrated will create this marketplace.
This strategy also takes into account that re-sellers would still be able to sell these licenses under existing GSA Schedules or Solutions for Enterprise-Wide Procurement contracts; however, they would be required to use the current price point, record the sale into the dashboard, and make their re-seller fees transparent to Government as the differentiation in competition. Ultimately, this will save business development and contract negotiation time and effort between the email providers and the re-sellers, which will drive down the overhead fees the Government has to pay.
Services, configurations, and prices all negotiated openly and reported publicly will not only ensure the most competitive rates for Government, but also create an optimal strategy for the vendors themselves. This dis-incentivizes vendors from focusing on the highest possible price point for their services and, instead, refocuses the competition on performance and quality of the offerings as a distinguishing factor.
Pilot to Test the Hypothesis
The steps outlined below would be used to test the theory that this would change the way we buy these services and establish a shared service approach to license purchasing:
Get Industry Buy-in and Feedback. Capitalizing on the recent success of the IT CEO Summit, the Office of American Innovation will call a follow-up summit with interested cloud providers to discuss the proposal. The goal would be to determine whether CSPs would be willing to participate in a pilot of the Manufacturer’s Agreements with the Federal Government. Suggested industry partners to target are Google, Salesforce, Amazon, and Microsoft.
Measure the Market. A prerequisite to all other actions is to obtain an accurate measurement of the market need in terms of agencies that have not yet transitioned to cloud email solutions. While we have clear data on implementation among the CFO Act agencies, currently there is no definitive data source of small and independent agencies adoption of cloud email. In order to negotiate effectively, knowing the size of the market is imperative, therefore we need a data call to all agencies regarding their current email contracts, prices, and number of mailboxes, etc.
Establish Focused Pilots with Partners. ATC and OMB will work with a small group of agencies to establish a pilot program to examine the impact of the process changes being proposed. Additionally, they will lead the creation of a series of support groups that would deploy to agencies to provide technical, acquisition, and migration assistance and report to ATC on the progress of the pilots.
Create a Reporting Mechanism with Agencies and Industry. The Federal Government requires that accurate and up-to-date data around the current state of both cloud and on-premises email adoption be reported by agencies so as to develop a baseline against which agency progress may be tracked. Industry sign-off on transparent reporting of units and volume pricing is essential to the success of this proposal. Without it, this strategy will ultimately fail. This is the foundation for achieving Nash Equilibrium for both the Federal Government and industry.
Metrics of Success
At least one cloud-based email service provider has signed up to negotiate a memorandum of understanding within 90 days of the report being published, which would allow the Government to begin capturing FY 2018 spending on cloud email migrations;
At least two agencies have signed on to pilot the proposed dashboard and provide reporting and acquisition of cloud email licenses under this effort; and
Within 30 days of qualified purchases, agencies or re-sellers will record the sale in the dashboard.