Dark Clouds: Israel Is Splurging on Microsoft and Regulators Are Concerned

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A room housing servers. Israel is splurging on Microsoft's cloud-computing services, despite regulations and a governmental push to create a local alternative
A room housing servers. Israel is splurging on Microsoft's cloud-computing services, despite regulations and a governmental push to create a local alternative in the form of an 'Israeli cloud'Credit: wavebreakmedia / Shutterstock.co

Granted that Microsoft is a world leader when it comes to its operating system and its Office software, but in the field of cloud computing, it is just one of a large number of companies. So why do Israeli government ministries purchase their cloud services almost exclusively  from Microsoft – in violation of the law requiring that such services be awarded through a bidding process and contrary to explicit instructions by regulators.

Government ministries are used to buying Microsoft’s products. All of them rely on the company’s Windows operating system and all government employees use Office software. That’s not unusual. Around the world and in the private sector, Microsoft products clearly dominate when it comes to desktop computing, for the simple reason that there are very few good alternatives.

But when it comes to cloud computing (infrastructure and services that are purchased as needed) the logic changes. Microsoft’s Azure cloud computing service is neither the only supplier nor the largest. There are a large number of competitors, the leading one of which is Amazon Web Services, followed by Google Cloud Platform, Oracle and a series of smaller options. There are also services offered by local providers. (The major players don’t maintain server farms in Israel, meaning that the computer service is provided from abroad, creating lags and information security challenges).

Nevertheless, it is apparent from government budgetary and procurement websites that a number of government ministries have opted for Microsoft’s cloud services in recent years. The services cost the government agencies anywhere from tens of thousands of shekels a month to millions of shekels. And in violation of directives by the Finance Ministry’s government procurement administration, they have been procured without bids. The people at all of these government entities have claimed that the reason their business relationship is with Microsoft is because it “fits the definition of a single supplier.”

The Israeli government contracts with Microsoft and uses its licensed distributors through something called a “maximum price agreement,” which permits any government ministry to buy the company’s products from one of its licensed suppliers, in an almost unlimited fashion – as long as the products are purchased at prices provided in the omnibus agreement. Microsoft’s Azure cloud services, however, are not covered by the agreement. 

Finance ministry regulators recognized the problem back in 2017. That year, the manager of government contracts at the administration, Evyatar Peretz, wrote to all of the computing service directors at the government ministries to explain that “recently there have been growing numbers of complaints about purported procurement of cloud services from Microsoft [Azure], based on maximum prices and without a bidding process. We would like to make it clear that Microsoft’s cloud services are not part of the pricing agreement that was signed between the procurement administration and Microsoft.”

Ronit Atad, Microsoft Israel CEOCredit: Guy Hecht

“Microsoft is not the only company in the cloud computing field,” Peretz noted in his letter. “So there are no grounds to enter into a contract that is exempt from a bidding process. To the extent that you wish to purchase cloud services, you have to issue a public request for bids for the services,” the letter stated. Peretz also sent the letter to the comptrollers at each ministry to bring the issue to their attention.

The government offices that contracted for Microsoft’s cloud services – in violation of policy and without soliciting bids – include the Public Security Ministry (which includes the Israel Police), the Prime Minister’s Office, the Energy Ministry, the Kan public broadcasting corporation and the Enforcement and Collection Authority. Among other government entities that have done the same are the Bank of Israel, the rabbinical court administration, the Interior Ministry, the Civil Service Commission and the Agriculture Ministry.

'Cloud lock-in'

Getting out of a service agreement for cloud services isn’t simple. From the moment that Microsoft’s Azure cloud computing company has their foot in the door, government offices can remain dependent on the company for years. Once the system is installed, switching to another supplier is complicated. The situation has been described as “cloud lock-in.”

‘Microsoft is not the only company in the cloud computing’. A file image of Microsoft's offices Credit: DREW ANGERER - AFP

In response to this article, the Health Ministry, which contracted for services with Azure, acknowledged that it was aware of the procurement administration’s new directive, but said replacing Azure with another supplier did not work out “because transferring the existing data that is currently in the ministry’s account is not possible for technical reasons.”

The police said that they had secured approval from the Finance Ministry’s committee that provides exemptions from the bidding process so that it could obtain “continuity of services.” It said the exemption gave the police approval for a “closed bidding process” so that it could continue to use Azure’s services through October of 2021.

Due to the increased demand for government cloud computing services, the government’s Information and Communication Technology Authority is promoting its Nimbus Project, which will gradually shift the government’s information technology infrastructure to the cloud – at a facility in Israel.

In response to this article, the Finance Ministry said: “Procuring cloud services from Microsoft is not included in the government license agreement and the government ministries are to procure cloud services in accordance with regulations on the requirement for a bidding process. To the extent the ministries have renewed Microsoft services exempt from bids, it is done out of economic considerations to save the heavy cost of migrating to another cloud. Due to the large number of suppliers, the desire to provide the government with an economic benefit and to make use of its size advantage,” a master request for bids has been issued to select a new government cloud service provider.

Microsoft did not provide a response for this article.