On HMRC, cloud providers, SMEs – and cloud-first government IT

There’s an interesting story doing the rounds this week that highlights some important issues around the UK government’s aim to have a cloud-first policy for IT purchasing.

The original scoop, another good piece from The Register, said that HM Revenue & Customs’ (HMRC) decision to switch some of its cloud estate from a small UK cloud provider, Manchester-based Datacentred, to Amazon Web Services (AWS), sent the SME into administration.

The story was catnip for national newspapers eager to point out the juxtaposition of Amazon’s meagre tax payments to HMRC and the very same department choosing to give the US giant a significant contract at the expense of a plucky British SME.

However, according to a Computer Weekly source with knowledge of the situation, HMRC’s decision has wider implications.

For a start, according to our source, “Datacentred was already dead.”

The last financial results published for the cloud SME tend to back up that claim. In October 2016, DataCentred received a £1m investment from Barclays, the Greater Manchester Authority and others. Its annual revenue increased from £171,000 in 2015 to nearly £1.2m in 2016, but it recorded losses of almost £1.8m in the last financial year.

It’s not unusual for a startup to lose money in its early years, but losing 50% more than it sold is rarely a sign of a healthy future. It seems unlikely HMRC was responsible for annual losses of £1.8m – although its decision to switch to AWS was probably the final straw that led to Datacentred’s demise.

Our source suggested that HMRC moved providers precisely because it saw the financial mess Datacentred was in – “basic risk management” as they put it.

In which case, you could argue that HMRC was wise to move to AWS when it did to avoid a critical cloud-based system being put in jeopardy.

What was the system in question?

As Computer Weekly reported in February last year, Datacentred was using OpenStack to support the roll-out of a multi-channel digital tax platform for HMRC.

The deployment was to play a central role in helping HMRC achieve its goal of giving UK taxpayers access to a fully digital tax system by 2020. The platform uses a microservices architecture with built-in API support. It acts as a bridge between HMRC’s legacy VAT, self-assessment and PAYE systems, and the new range of digital services it is rolling out for people to manage their tax affairs online.

Imagine the public furore if part of the Making Tax Digital system became unavailable or compromised by the collapse of its cloud provider?

AWS didn’t open its London datacentre until December 2016, its first UK cloud region. While the government doesn’t mandate UK hosting for cloud services, except for certain specific datasets, it’s understandable that HMRC would have seen hosting tax data inside the UK as a prerequisite. As such, HMRC wouldn’t have been able to use Amazon when it opted initially to work with Datacentred the previous year.

The reality for startup UK cloud providers is that few will be able to provide the scale that a mega-department like HMRC requires over the long-term.

It’s a difficult Catch-22 for an SME – they won’t achieve scale without the support of large organisations such as government departments, but they can’t deliver the scale needed without over-stretching themselves financially.

The reality of the cloud market, long-term, is that only the global cloud giants will be able to service customers with such large-scale requirements. Smaller cloud providers will find their niche elsewhere.

While that might seem at odds with the government preference for purchasing digital systems from UK SMEs, the likelihood is that SMEs will ultimately benefit from the opportunities provided by departments using cloud for infrastructure and platform as a service (IaaS and PaaS) foundations, with SMEs providing services and software to build digital platforms that run in those cloud environments.

HMRC has also demonstrated the benefits of the cloud-first approach for government. It opted to use an open source solution in Openstack, using a modern microservices architecture rather than an old-school monolithic application, and as such it was able to “lift and shift” that workload to another cloud provider when it needed to.

Should HMRC decide in future that AWS is no longer its best option – whether for financial, technical or customer service reasons – it now has experience of migrating from one cloud provider to another.

Surely that’s in the taxpayers’ best interest?

UPDATE: 26 October 2017

MPs on the Public Accounts Committee (PAC) yesterday questioned HMRC CEO Jon Thompson over the Datacentred/AWS story, parroting the lines used by national newspapers around use of SME suppliers and the demise of the UK cloud provider.

As the transcript below reveals, Thompson said HMRC cut its cloud costs by 50% through switching to AWS, and also reiterated the point made by Computer Weekly’s source that an organisation of HMRC’s size is best supplied by one of the large, hyperscale cloud providers such as AWS or Microsoft Azure.

Meg Hillier (chair of PAC): Your relationship with Amazon and data services, you’ve changed contracts and now working with an Amazon company to hold HMRC data. Can you explain why HMRC did that and whether this flies in the face of the government’s proposal to contract with more small and medium sized enterprises (SMEs)?

Jon Thompson: So I don’t personally think there is anything wrong with HMRC contracting with Amazon Web Services and that’s indeed what we’ve done. If you wind back a bit and think about IT and HMRC, it was not that long ago that we had one enormous deal, if you remember rightly. More than £700m a year [for the Aspire outsourcing contract], and we decided to break that deal up, insource it all and then spin some of that back into the market. What that’s done is provide a range of market opportunities, and we think that’s attracted somewhere around 150 SMEs working with us now that wouldn’t have worked with us before, because we were working through that enormous deal.

Hillier: There are SMEs who lost their business as a result of you going with this [AWS], and why have you gone with a bigger contract on this particular aspect?

Thompson: There are two reasons really. One is… the market has moved on for very large businesses, and we’re a very large business, into what’s called hyperscale cloud. So you’re not just dealing in a cloud environment, you’re dealing with enormous businesses holding significant data. We need resilience in datacentres and we need someone who can hold all that data for us.

Hillier: So AWS is the only type of organisation that can have that level of resilience that HMRC needs?

Thompson: No, there are two. And the price reduction on this particular one was more than 50% for us, so there’s a clear value for money case for us moving down this route of scaling up the way in which data is held. We then come out of the datacentre business so we don’t have physical buildings ourselves, we get much more resilience because it can be held in multiple sites so if one goes down we don’t lose data and we don’t lose services.

Hillier: There is a government mission to increase the value of contracts let to SMEs to 33% of all contracts.

Thompson: I understand that. We are increasing the amount of business in relation to SMEs but in this particular case, an SME was not successful. I understand that you’re looking at the one that’s attracted publicity in relation to the loss as opposed to significant number of contracts that have gone to SMEs after the break-up of one single £700m-a-year deal.

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