Assessing the hyperscale squeeze on G-Cloud's SMEs

The latest government spend data suggests public sector IT buyers are increasingly using G-Cloud to procure services from the hyperscale cloud community, prompting concerns about the impact this might have on the SME-friendly framework

Since its launch in March 2012, the G-Cloud procurement framework has found itself lauded by the UK government as a major force to be reckoned with in its austerity-focused efforts to make public sector IT procurement more competitive and open.

One only has to look at how former Cabinet Office Minister, Francis Maude, talked up its potential to put a stop to “the oligopoly of large suppliers” dominating the public sector, in a speech shortly after its launch for proof of that.

It would achieve this by giving the public sector greater visibility of the cloud services on offer from the UK’s bustling SME tech supplier community through its online marketplace, where every supplier – regardless of size – must publish their pricing to ensure buyers get value for money.

As the volume of deals being awarded to SMEs through the framework steadily began to creep up, it seemed Maude’s ambitions for G-Cloud to become an oligopoly-busting tool for good in public sector IT were fast on their way to becoming realised.

Between May 2012 and November 2016, the volume of G-Cloud deals awarded to SMEs increased from 38.8% to 64%. This percentage has continued to creep up further still (to 70%, in fact), according to the most recent G-Cloud spend data. However, while the volume of deals has steadily increased, the value of the deals being awarded to SMEs through G-Cloud has declined by 8 percentage points to 48% between January 2017 and March 2018.

A deeper dive into the data by Lindsay Smith, principal analyst at market watcher GCloudSales.UK, reveals an even starker change in the public sector’s IT sourcing habits of late. “When you look at the year to March 2018 and compare that to the year to March 2017, you see a decline in the amount of business to SMEs, but it does appear that G-Cloud 9 is particularly SME unfriendly,” he says.

For example, during the first 10 months of G-Cloud 8, his analysis reveals that around 68% of sales through the Hosting Lot went to SMEs, but in the 10 months from when G-Cloud 9 went live in May 2017, this figure had dropped to 20%. “That is a massive shift, and very worrying,” he tells Computer Weekly.

The downturn in SME deal values

While G-Cloud still comfortably exceeds the government’s pledge that 33% of all procurement money will go to SMEs, the downturn has not gone unnoticed by members of the G-Cloud supplier ecosystem, including Nicky Stewart, commercial director of G-Cloud-listed Infrastructure as a Service (IaaS) provider UKCloud.

The company is a bone fide G-Cloud success story, having secured £75.9m of public sector spending through the framework to-date, which is more than any other provider within the cloud hosting lot, which encompasses IaaS and Platform as a Service (PaaS) offerings.

As Stewart sees it, the drop is symptomatic of the government’s attention being diverted elsewhere, thanks in no small part to Brexit.

“There are a number of competing policy distractions, not least of which is Brexit, which means that the pace of [public sector] digital transformation is slowing,” she tells Computer Weekly.

“There has been less focus on some of government’s other policies, notably its SME agenda, and less policing of policy compliance as spend controls have weakened.”

The hyperscale challenge

The downturn in SME deal values has coincided with a major expansion of some of the tech world’s biggest cloud providers in the UK, with Amazon Web Services (AWS), Microsoft and IBM all either opening UK datacentres – or at least declaring their intentions too.

Microsoft opened its first UK datacentre in September 2016, with the Ministry of Defence as an anchor tenant, and Amazon Web Services’ (AWS) cut the ribbon on its London region in December 2016. IBM, meanwhile, went public with its plans to draw on the colocation capacity of public sector-focused datacentre firm Ark Data Centres to expand its server farm footprint in November 2016.

At the time of the AWS datacentre opening in December 2016, the cloud services giant had secured a modest £2.93m in spend through the framework since it began. This figure has risen significantly since to £31.5m.

On the back of this, the firm has also risen up the rankings to become one of the top three performing infrastructure as a service (IaaS) providers listed on the framework, and is now snapping at the heels of UKCloud.

Amazon is far from being the only member of the hyperscale cloud pack whose G-Cloud sales figures appear to have been buoyed by its investments in UK datacentres, says Rob Anderson, principal analyst for central government at market watcher GlobalData.

“AWS have certainly done very well over the last couple of years [through G-Cloud], and a fair few others have gone from virtually nothing too,” he says.

Read more about public sector cloud procurement

Indeed, from the start of the framework to August 2016 (the month before its UK datacentre opened), Microsoft secured £8m in G-Cloud spend during that 52 month period.

In the 18 months from September 2016 to March 2018, banked sales of £23.3m through the framework, the Cabinet Office’s Digital Marketplace spend figures indicate.

These data points have prompted some G-Cloud stakeholders to so far as to suggest the framework, far from encouraging SMEs to flourish, may be inadvertently supporting a shift towards big IT companies ruling the public sector IT roost once more.

“There is a real risk the government will repeat the mistakes of the past, and get locked into a duopoly of suppliers,” warns UKCloud’s Stewart.

“This won’t be good for the UK in the long run, it is not good for the nation’s overall resilience, and in 10 or 15 years’ times a new generation of civil servants will be scratching their heads, and hiring expensive consultants to work out how the duopoly can be exited.”

And the fact the uptick in G-Cloud spend for AWS, Microsoft and others appears to be coming at the expense of the framework’s SME suppliers is not helping to allay such fears.

“The biggest one that seems to have lost out is UKCloud,” says Anderson, “because the [amount] of G-Cloud spend put their way between 2016/2017 went down by about £5m,” he says. “You can probably assume some of [the public sector business] they expected to go to them has gone to AWS, but there are other large suppliers (opposed to SMEs) that have gained as well.”

Market skewed by misconceptions

In Stewart’s view the shift in spend towards AWS and the like is being fuelled by misconceptions within the public sector IT buying community that only hyperscalers are capable of delivering public cloud services.

“This belief is [being] perpetuated by the Government Digital Service (GDS) guidance to public cloud, which refers to ‘larger’ suppliers,” she continues.

“A real risk [here] is that government gets locked into homogenous ‘one size fits all’ services that are designed to meet the needs of neither government, or the public it serves.”

The guidance alluded to by Stewart also serves to give the  global tech giants an even bigger advantage over their SME counterparts on G-Cloud, says John Glover, sales and marketing director at G-Cloud-listed collaboration software provider Kahootz.

“The US tech/cloud vendors have a much larger addressable single market to build a business from that they can use to create a launch-pad to go overseas,” he says.

“With Microsoft, Google, Oracle, Amazon, and IBM all being American, their footprint is comprehensive and often difficult for a UK vendor to compete with as they tend to be much smaller in both size and revenue.

“In the cloud, size and volume can matter as the shared cost economies are better for those US suppliers that already have a large client footprint and revenue base,” says Glover.

Trade barriers

There are trade barriers to take into account, adds Glover, that make it harder for UK-based cloud firms to market their wares to the US public sector, while the hyperscalers encounter no such challenges when selling their services in the UK.

“If a successful UK tech suppliers decides to sell in the US the opportunities within the US public sector are much more limited due to restrictive procurement regulations such as the Buy American Act and Trump’s protectionist America First Policy is not going to help either,” says Glover.

“When I spoke to an American Federal Agency, I got the response that they would not be able to buy from us, a UK tech company, unless we were at least 51% American owned. Does that seem fair?”

The whole public sector story

It is worth bearing in mind, counsels Global Data’s Anderson, that only about a third of public sector cloud procurement occurs through G-Cloud, and its growth has begun to slow of late.

“That doesn’t necessarily mean the [public sector’s] move to the cloud has started to drop off, just that organisations are using different methods of procurement,” he adds.

There are also some interdependencies between the large and smaller suppliers within the G-Cloud supplier ecosystem the figures do not show, which may paint a slightly different picture of what is going on.

“It is difficult to get a definitive answer about just how much business is coming the [hyperscalers’] way because Microsoft, IBM and Google sell [their services] through intermediaries to various extents, as does UKCloud,” says Smith.

“For example, when a SaaS company hosted on UKCloud makes a SaaS sale to government that pulls through some UKCloud spend that we don’t see in the G-Cloud figures.”

Supporting business with the public sector

In that type of scenario, the hyperscalers are supporting – rather than thwarting – the ability of SMEs to do business with the public sector, because the use their infrastructure to host their own services.

This is a trend AWS is very much involved in, says Chris Hayman, who heads up the cloud giant’s public sector business in the UK and Ireland. The company partners with thousands of SME-sized, independent software vendors (ISVs) who build products using its infrastructure that are sold into the public sector too.

The company also did a lot of work, in the run up its UK datacentre region going live to help educate the public sector users on cloud security issues, and get them more comfortable with using cloud, which has wide-reaching benefits for the supplier community as a whole, he adds.

So, instead of taking a “us verses them” view of the cloud market, there is an element of a “rising tide lifts all boats”, where the success of AWS in the public sector is concerned, continues Hayman.

“It’s a great success story all round, and we’re bringing the [rising] tide with us to all these conversations. And G-Cloud has been very successful in that,” he says.

The hyperscale link to SME success

There is some credence to what AWS is saying here, says Anderson, as they have played a part in helping normalise the use of cloud within the traditionally risk averse public sector.

“Public sector users have often found barriers to cloud computing in security and data sovereignty, and the fact the big players have – and continue to bring – datacentres to the UK has encouraged them to make use of the cloud for infrastructure and platform more than they have before,” he says.

“They have encouraged the market generally, and it’s really down to how the other suppliers [including SMEs] have responded to that.”

Some SMEs have had the rug pulled out from under them completely, says Anderson, citing the high-profile demise of Salford-based colocation and cloud provider,Datacentred as an example, but that is an exceptional case.

The company, which had accrued £1.8m in sales through G-Cloud, entered administration in August 2017, after its main customer – HMRC – exited its cloud hosting contract with the firm, in preparation for a move over to the AWS platform.

“They were caught out, [because] they built their business around one customer, and with cloud the idea is that you can move between suppliers fairly easily, so it’s a very dangerous thing to do,” says Anderson.

Diversifying customer mix

G-Cloud SMEs can prevent themselves suffering a similar fate by diversifying their customer mix and courting public sector buyers at local government level, seeing as AWS and the like seem to be targeting central government organisations.

Local councils and NHS trusts, for example, may have industry- and location-specific cloud needs that the hyperscalers’ services and support offerings are just too broad to meet that SMEs might be better placed to fill, says Stewart.

This is an approach UKCloud has taken, having previously launched standalone business divisions focused on serving the needs of health and defence sector, for example.

“SMEs can differentiate themselves in a way that the hyperscalers can’t, [and] that can be through discrete market sectors, services tailored to meet the needs of the sector, through high levels of customer service, regulatory and fiscal compliance and any number of other things,” she says.

“The real challenge for SMEs is competing with the hype and very deep pockets of the hyperscalers, [while] making themselves and their services visible and known to buyers.”

This was last published in June 2018

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