There's a lot room to grow out there in cloud computing. Microsoft won two massive new contracts this week for its online communication and collaboration services, formerly known as the Business Productivity Online Services (BPOS) and now sold under the Office 365 moniker.

The State of California expects to eventually move 200,000 employees to email and collaboration tools hosted by Microsoft, potentially replacing up to 130 individual email systems throughout the state. New York City is consolidating dozens of Microsoft licenses into one and switching to cloud services under a newly created city-wide IT department. The city says the move will save US$50 million in license fees. The California deal is reportedly worth US$50 million to US$60 million, but it's unclear what that figure means to the overall budget picture for the state.

The California State Office of the Chief Information Officer did not respond by press time with specifics about how long the migration will take or how it will proceed, but statements from the California Strategy IT plan indicate that the move to cloud and a centralized, federated IT system are specific goals, mandated by the 2009 Governor's IT Reorganization Plan put in place by California Governor Arnold Schwarzenegger.

The plan (and the contract) mandate a move by all state agencies to email as a service by 11 June 2011, and early planning is expected to commence by Oct 31, when agencies must decide which of the offered email packages suits them best.

Coming on the heels of a Microsoft deal with the state of Minnesota, and with several large enterprises announcing plans to use Microsoft cloud services, it seems the battle for the online office has turned in Redmond's favor, against its chief competitor, Google. Google has been busy rolling up university customers and local governments (the City of Los Angeles is the largest so far) but hasn't landed customers on this scale.

In fact, Google complained that Microsoft is playing dirty pool because the contract request was written so that Google was unable to compete.

That's a little ironic since CSC, the US$14 billion consulting and system integration firm that is handling the contract for the state, is the same firm that sold Google Apps to LA, so it clearly felt that it has found the right solutions for each customer.

Dave Girouard, president of Google's enterprise group, tried to paint the NYC deal with the same brush, claiming that the city made an end-run around the bidding process and sealed a new deal without competing bids. He said this was an effort by Microsoft to slow the migration to cloud services and would just end up trapping users in Microsoft data formats.

Microsoft was only too happy to dispute that.

"We've made a very strong and concerted commitment to interoperability. If you use Microsoft products, you will be able to get your data out of our products, and that's a clear commitment we've made," said Stuart McKee, national technology officer for the US public sector at Microsoft. He said that Microsoft built data mobility into its BPOS contracts and besides, most Office users were already happy using Microsoft software, so this was an easier move than jumping from Exchange to Gmail, for instance.

But sour grapes aside, does Microsoft have a better pitch for online services than Google? Some firms working with both companies' services think that's the case.

Microsoft has "done a lot with breaking up the functions that go on in their data centers so they can isolate the data stored and used in an automated way," said Russ Deitz, CTO of SafeNet, a data security company that specializes in "data-centric" security models for online services like Google Apps and BPOS. Deitz said that there were significant advantages in Microsoft's array of service levels and security features over Google Apps' one-size-fits-all approach, although he said that it was mostly a matter of catering to conservative mindsets on traditional IT security.

Government IT lags behind the business world in technology implementation, and those organizations are more likely to respond positively to comforting ideas like automated encryption handling and FISMA-certified , federally-approved data centers that Microsoft offers. Deitz thinks that pretty much any service offered by technology experts like Google and Microsoft is a marked step up in basic security, but the real challenge will come in adapting to a user-centric, security model instead of the traditional secured perimeter.

"There's a real need for stronger trust in who it is that is doing things on the network; it's almost like you're going into the city data centers to do some work from home," said Dietz. Administrators will have to be much more diligent about tracking document and email usage and making sure that users are actually who they said they were rather than relying on physical security measures.

And yet, for all of Microsoft's history serving business users, its track record in hosted services is spotty. BPOS suffered some fairly major outages in August and September, and Microsoft-hosted Live Meeting went dark for a time yesterday. Surprise downtime from Microsoft is a very real fear among potential buyers, and other risks are present. Google had its notorious Barksdale incident and several minor outages of its own in recent memory.

Dietz said these are the kinds of loss of control issues that give IT managers the cold robbies, but even in the lethargic government IT space, shifting management and service delivery was becoming more standard, and government customers especially should plan for disaster in ways that might seem like overkill to the enterprise.

After all, a government mandate is to keep things working, not maximize returns, so data loss and outages can't be "written down" and can result in costly legal battles. Overall, the move to cloud was a positive step and was definitely more cost-effective than running individual systems. Dietz said it was clear that cloud services were the way forward especially when budgets are tight, as they look to be for practically every government entity these days: "You're seeing this change for one critical reason, and that's funding. In order to catch up, we're going to spend an enormous amount of money, and the cloud is simply a better investment."