The Cabinet Office has axed ITNET from an £83m datacentre hosting contract it only signed last July.
ITNET was the only supplier left at the end of the bidding process following withdrawal by Fujitsu Services and SchlumbergerSema
The Birmingham-based outsourcer said, it is "extremely disappointed to receive this communication in circumstances when it is making good progress in delivering the contract in accordance with milestones revised to reflect significant changes to the customer's requirements".
Ovum Holway analyst Georgina O'Toole suggested, "It looks as though ITNET has failed to show the flexibility required by the customer" in rolling out the datacentre and implementing the technology needed.
ITNET said the first of the three contracted services had been delivered after commissioning of the datacentre in January 2004.
Already, ITNET has spent £15.2m on the fixed assets of the datacentre (for which it has received a pre-payment of £5m), approximately £10m on the implementation of the datacentre, and has made further commitments in relation to software maintenance and other contracts.
Oliver Whitehead, ITNET chairman, said, "Although this development is clearly very disappointing we are committed to making full recovery of the costs we have incurred on this contract. We remain confident of our prospects for growth in the future."
ITNET said that although the outcome of any legal process cannot be predicted with certainty, the contract provides for reimbursement by the customer of expenditure both incurred and committed.
ITNET admitted that the contract loss would hit its operating profits, and the stock market’s immediate response to the news was to slash the company’s share price by 28%.