Protest challenging the agency’s intention to award a sole-source software reactivation license to the original software developer is denied, where the agency reasonably determined that its large existing inventory of licenses for older versions of the software could be reactivated and standardized to a single version at a significantly lower cost than purchasing new licenses for other similar software, and where the agency reasonably concluded that this cost differential was not likely to be recovered through competition. GAO did find fault with the agency’s characterization of the award as a follow-on contract, as the original licenses had been purchased many years prior from different parties, but concluded this error in the J&A was insufficient to disturb the agency’s decision.
PTC Inc. challenged the Air Force’s intention to award a sole-source contract for product lifecycle management software to Siemens Government Technologies Inc., alleging that the justification and approval supporting the proposed sole-source contract is not consistent with the cited regulatory authority, and is based on a flawed cost analysis.
First, PTC argued that the agency’s J&A is unreasonable because the proposed sole-source contract is not a follow-on contract for the continued provision of highly specialized services. The protester noted that the purported predecessor contracts were not with Siemens but with various resellers of Siemens products, and that all these contracts had concluded more than five years previously. According to the protester, a contract with an entirely different party, proposed multiple years after the expiration of the original contracts, cannot be a follow-on contract for the continued provision of services in the sense contemplated by the FAR.
PTC also argued that labelling the transaction as a procurement of highly specialized services mischaracterized the nature of the purchase. According to the protester, the agency is procuring COTS PLM software, not the service of software license reactivation.
In response, the agency explained that this contract follows a series of contracts for Siemens Teamcenter software, which collectively represent a significant agency investment in that software. According to the agency, because Siemens is the only source for the reactivation services the agency is seeking, the transaction is appropriately characterized as a procurement of highly specialized services. The agency further argued that because it will procure the services from the original source of those services, procurement is appropriately characterized as a follow-on contract.
GAO agreed with the protester’s characterization of the procurement. GAO agreed that the original contracts did not procure the service of reactivating software licenses and that these earlier contracts were with entities other than Siemens. GAO noted the Air Force had not identified any authority supporting its reading of this FAR provision to allow a follow-on contract to be awarded to an entity entirely different from the original contract awardee, nor justifying the significant break in time between the original contracts and the purported follow-on. Under the agency’s interpretation, virtually any subsequent purchase of services from an original equipment manufacturer could be appropriately characterized as a follow-on contract for the continued provision of services, regardless of the original contracting parties, the passage of time, or the fact that the original contracts were for the purchase of goods.
However, GAO still declined to disturb the agency’s decision merely because it based its decision on an inapplicable exception to the requirement for full and open competition. Further, in similar cases, GAO has found that an agency’s reasonable need for standardization or interoperability with existing agency equipment or software can be an independent basis for a sole-source award. Even where an alternative product would meet the agency’s requirements or is cheaper than the standard item, the agency may nonetheless award a sole-source for the standard item, if the costs of repurchasing the existing inventory would not be overcome by the alternative product’s price advantage.
In this case, the Air Force estimated that its previous investment for 59,370 perpetual licenses in various versions of Teamcenter software was worth approximately $100 million. The agency also noted that it wanted to standardize its processes using a single software version throughout the service. The agency’s decision to award a sole-source contract to Siemens was primarily driven by the expected cost duplication of standardizing on a PLM solution other than the one for which the agency already owned a significant quantity of licenses.
In response, the protester argued the agency is not standardizing on software it already owns, but is purchasing new and different software. PTC explained that the unmaintained software licenses older than five years have little to no residual value in its industry, and therefore it is inappropriate to consider the Air Force’s existing software investment as analogous to valuable inventory. Instead, the protester suggested the agency’s prior investments are an irrelevant sunk cost. PTC also noted that some of the software licenses to be swapped out are not PLM, but entirely different applications.
However, GAO disagreed that the Air Force’s existing perpetual licenses have no residual value, finding that the software is still in use across the department. Further, while the licenses are for older versions of the software, the Air Force could elect to continue using it indefinitely at no cost under its perpetual licenses. Further, GAO noted that Siemens offered a dramatic discount from its published GSA schedule pricing for the updated licenses. GAO found the agency reasonably believed it was receiving this discount from Siemens because it owned and was upgrading a significant number of existing software licenses, and that it would not have necessarily received a similar discount for the purchase of new software licenses. Accordingly, GAO concluded that Siemens also views the older licenses as having some residual value.
GAO also rejected the protester’s contention that the Air Force was procuring an entirely new product. First, GAO noted that it also considered the agency’s investments in deploying the software and training personnel as support for the Air Force’s use of standardization as a sole-source justification. By purchasing new licenses from Siemens, the Air Force can avoid costly data migration, reconfiguration, and retraining. Further, the agency is using multiple versions of the software, so standardizing would, by definition, require at least some licenses to be upgraded. GAO found it was reasonable for the agency to standardize on the most current version.
Next, PTC argued that the agency’s cost comparison was flawed and that the agency’s J&A is accordingly unreasonable because the agency cannot credibly show that switching to another solution would result in cost duplication. First, PTC argued that the agency’s price comparison relied on PTC’s GSA schedule pricing for a perpetual license, which it no longer offers to new customers. Instead, PTC offers subscriptions, which the agency did not consider. According to the protester, this reflected a prejudicial lack of market research, because subscription software licenses typically offer lower and more flexible up-front costs than perpetual licenses for the same product. The protester also noted that GSA schedule prices are a ceiling from which significant discounts are often offered.
In response, the agency explained that it compared perpetual license costs because it owned and was proposing to purchase perpetual licenses and wanted to compare equal licenses. During the protest proceedings, the agency also prepared an alternative cost comparison using PTC’s schedule prices for its subscription products. While this revised analysis resulted in an approximately $30 million reduction in the agency’s estimate of the cost of using PTC’s product (for a revised total cost of $72.5 million), the agency found that cost was still roughly three-times the cost of the proposed reactivation through Siemens, not including the costs of switching to PTC’s product, buying additional modules not available on PTC’s GSA schedule contract, and retraining personnel. Finally, the agency noted that its J&A contemplated discounts from GSA schedule pricing, but suggested that any discounts would not be as significant as those offered by Siemens.
As a preliminary matter, GAO noted that a perpetual license and a subscription licenses are not equivalent, despite the protester’s contention. A perpetual license is available to the agency as long as the agency finds it useful, where a subscription expires at the end of its term. Even assuming that a subscription license met the agency’s needs, the Air Force’s analysis identified significant cost duplication that would not be recovered through competition.
Finally, GAO noted the protester did not indicate what discounts it would have offered from its GSA schedule pricing, other than making a blanket statement that it would compete aggressively. GAO found it reasonable for the agency to conclude that it was unlikely to receive a sufficiently significant discount from the GSA schedule prices to eliminate the anticipated cost duplication. While the agency received a steep discount from Siemens, it reasonably believed it was receiving this discount solely by virtue of its large existing inventory of Siemens Teamcenter licenses. GAO also found no specific evidence the agency could expect similar discounts from other vendors.
PTC Inc. is represented by Andrew E. Shipley and Phillip E. Beshara of Wilmer, Cutler, Pickering, Hale, and Dorr, LLP. Siemens Government Technologies Inc. is represented by Jeffery M. Chiow, Stephen L. Bacon, Lucas T. Hanback, and Robert S. Metzger of Rogers, Joseph, O’Donnell, PC. The government is represented by Alexis J. Bernstein and Heather M. Mandelkehr, Department of the Air Force. GAO attorneys Michael Willems and Edward Goldstein participated in the preparation of the decision.
