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Cloud wars: How the US tech giants opening UK datacentres shook up the public sector market

Five years have passed since Microsoft and Amazon opened their UK datacentre regions, rapidly growing their share of the public sector market to the detriment of several smaller, home-grown cloud providers

December 2021 marks five years since Amazon Web Services (AWS) set its UK datacentre region live, and in that time the US cloud giant has seemingly become the public sector’s go-to cloud provider.

Some of the biggest contracts the firm has accrued to date have occurred in the last couple of years. These include one awarded in November 2020 and valued at £120m with the Home Office, and another worth £94m struck with HM Revenue & Customs (HMRC) in March 2021, according to data shared with Computer Weekly by public sector analyst house Tussell.

But as AWS, and its US rival Microsoft, have both grown their government sales in recent years, their success has come to the detriment of some specialist UK suppliers, which were set up specifically to meet the cloud needs of the public sector.

Most of the public sector deals that AWS wins are secured through the G-Cloud procurement framework, which started life in 2012 with the aim of making it easier for small and medium-sized enterprise (SME) cloud providers to win public sector deals, while loosening the stranglehold that big tech had on government IT.

Its roll-out was overseen by former cabinet minister Lord Maude, who talked up its potential to stop the same handful of big tech suppliers being awarded IT contracts that were too long, too expensive and rarely represented good value for money.

This makes the fact that AWS is now the framework’s biggest supplier, and has been since 2018, such a notable development – if not a particularly surprising one.

Back in the spring of 2016, after both AWS and Microsoft had set out plans to open their first UK-based datacentre regions later in the year, the analyst community warned that there would be a downturn in public sector IT deals being awarded to the smaller, home-grown cloud providers that punted their wares through G-Cloud.

This was based on evidence that some central government departments had deliberately pressed pause on their digital transformation plans until Microsoft’s and Amazon’s UK cloud infrastructures were up and running.

On that point, it is worth noting that when Microsoft’s datacentre went live in September 2016, it did so with the Ministry of Defence as an anchor tenant. Up to that point, Microsoft had won a total of £6.4m in public sector cloud spend through G-Cloud since joining the framework in early 2014.  

Digging into the government’s Digital Marketplace sales data shows that the company had zero spend through G-Cloud during the third quarter of 2016, but – within a year of opening its datacentre – it had accrued a total of £20.7m. To date, Microsoft has made £125.8m through the framework.

A similar trend is true of Amazon, although on a slightly larger scale. Before AWS opened its UK datacentres, it had secured a rather modest £2.93m in public sector cloud spend, whereas now, its running total of deals secured through G-Cloud stands at £277m.

In January 2017, incidentally, the Government Digital Service (GDS) issued guidance that declared public cloud services as being safe to use for the “vast majority of government information and services”, except in instances where data sovereignty is a major consideration.

The following month, the government published an advisory note online that moved to clarify that its cloud-first policy, which had been in place since 2013, meant public sector organisations should be prioritising the use of public cloud services over community, hybrid and private cloud offerings.

“There are circumstances where the other deployment models are appropriate, but the primary benefits for government come when we embrace the public cloud,” the note said

In line with analyst predictions, as Microsoft and Amazon have reaped the financial rewards of their datacentre openings and the UK government’s championing of public cloud services, their success has come at a cost to a number UK-based cloud hosting providers.

SMEs hit hard by US cloud giants

Several high-profile G-Cloud SMEs have either disappeared from the market altogether or seen a marked downturn in the amount of business they secure through the framework since Microsoft and AWS set up their server farms in the UK.

One of the earliest casualties of this trend was Salford-based cloud services provider Datacentred, which secured a total of £1.8m in spend through the framework between the 2015/16 and 2017/18 financial years.

Most of this (£1.79m) came through its dealings with government tax agency HMRC, with the remainder coming from a relatively small contract with the Department for Work and Pensions (DWP).

The company filed for administration in September 2017 after receiving word that its biggest customer, HMRC, was planning to migrate its workloads off the Datacentred platform and into the AWS public cloud.

While its pivot to AWS is cited as a factor in the demise of Datacentred, the firm’s liquidity is known to have been in doubt for some time and is thought to have been a factor in HMRC’s decision to jump ship, as previously detailed by Computer Weekly.

Even so, when quizzed by MPs about its desertion of Datacentred during a Public Accounts Committee (PAC) meeting in October 2017, ex-HMRC CEO Jon Thompson said switching to AWS had allowed the department to cut its cloud costs by 50% and had boosted its business resiliency too.

“We are increasing the amount of business we do in relation to SMEs, but in this particular case, an SME was not successful,” said Thompson.

Bristol-based, not-for-profit, public sector-focused IT provider Eduserv is another example of an SME provider whose business appears to have suffered a downturn in demand in the wake of Microsoft’s and Amazon’s UK datacentres opening up in late 2016.

The Digital Marketplace sales data shows that the spend Eduserv secured through G-Cloud was broadly and steadily rising quarter-by-quarter from the second quarter of 2013-14, when it recorded a spend of just £14,000, until hitting a quarterly peak of £2.5m during Q4 of the 2016-17 financial year.

From that point onwards, the amount of spend it secured through G-Cloud declined rapidly to zero by late 2019, which the company attributed to dampening demand for private cloud services.

At the start of 2018, Eduserv confirmed that it was planning to shutter its “loss-making” private cloud-enabling datacentres in favour of focusing its business on providing public cloud consulting, migration and managed services to public sector clients.

By the end of that year, the company confirmed it had agreed a merger with fellow not-for-profit technology provider Jisc, which would take effect from 1 January 2019 and would eventually result in the Eduserv brand being retired.

But both these examples pale in comparison to the plight of public sector-focused infrastructure-as-a-service (IaaS) provider UKCloud, which was – until 2017 – the third biggest provider of cloud services to the public sector, but has since slipped down the rankings to 14th.

The firm had seen the amount of spend it secured through G-Cloud rise quarter-by-quarter until it hit a peak of £8.1m during the first quarter of 2016/17, before falling to £1.9m during Q3 of 2021/22.

UKCloud’s 2017 financial report showed the firm post a profit of £4.4m during its G-Cloud peak, with the company accounts describing an organisation with confidence that it was well placed to continue picking up public sector clients and contracts with the same zeal as it had in previous years.

The following year, however, UKCloud reported a downturn in profit, revenue and customer usage, with its 2018 accounts attributing this to increased competition from the US cloud giants.

During the 2018/19 financial year, the firm posted a loss of £2.5m before falling deeper into the red to the tune of £17.9m during the 12 months to March 2020, with its 2019/20 accounts also revealing the firm was in need of a £30m investment to continue trading.

Pursuing new sources of funding

The UKCloud board appointed advisers in September 2020 to start pursuing new sources of funding, the accounts confirmed, which the company acknowledged in its financial report might be “difficult or expensive” to obtain.

Computer Weekly understands the company’s 2019/20 accounts were filed nine months late in September 2021. Sources close to UKCloud claim this late filing was what prompted the Cabinet Office to start probing the firm’s finances and begin seeking clarification from departments and other public sector IT providers about how reliant they were on its services.

Multiple independent sources have since told Computer Weekly that the Cabinet Office has been advising public sector users of UKCloud to start seeking alternative hosts for their cloud workloads and applications, with at least one major government department urging suppliers since late October 2021 to jump ship.

Sources claim this course of action is coming from a place of concern about the firm’s ability to carry on trading if a new investor is not found soon.

In a statement to Computer Weekly at the time, the Cabinet Office said it had a duty to monitor the health of all its suppliers and that it “would not be appropriate to comment on speculation about one particular company”.

When asked by Computer Weekly in November 2021 how its search for an investor was progressing, UKCloud said discussions were at a “highly advanced” stage, with the company expecting to close a “significant investment round” in the very near future.

Although UKCloud did not go into detail about the size of this potential investment, sources within the company said its senior leadership team had held an “all-hands” meeting in early August 2021, when it claimed a funding injection of “£40m to £80m” had been secured and was set to be announced “imminently”.

During that meeting, it was also announced that 25 members of staff would be losing their jobs because of the financial pressure the company was under, including individuals working within its marketing organisation, as well as its healthcare-focused division, UKCloud Health.

“During that meeting, we were told that the company is expecting this investment of between £40m and £80m and as soon as that lands, all of the letters about job losses will be rescinded and we’ll keep all of you on, which suggested it would be arriving very soon,” said a former employee who spoke to Computer Weekly on condition of anonymity.

“The senior leadership team was asked for clarification on when it would be arriving, and we just kept being told it would be ‘imminent’, but we can’t give you a concrete date. Notice periods came and went, and there was still no sign of the funding.”

When asked by Computer Weekly for a further update on how its investor search is progressing, the company said it is “in the final stages” of confirming a “substantial investment” that will support its “ambitious growth plans” in 2022.

“UKCloud continues to provide customers with its leading sovereign multicloud offering and accelerate digital transformation across the public sector,” the company said in a statement.

UKCloud vs the US cloud giants

Rob Anderson, principal analyst for the public sector at market watcher GlobalData, said lack of resources is one of the main reasons that SME cloud-hosting firms like UKCloud have been hit so hard by the US cloud giants setting up shop in the UK.  

“The US cloud giants have armies of staff providing ‘feet on the street’ talking to multiple government agencies, as well as having focused government relations executives whose jobs are just to lobby and influence policy and buying decisions,” said Anderson.

On top of this, the economies of scale at which firms like Microsoft and Amazon operate means they can offer compute power and storage at a much lower cost per unit than the other firms offering cloud hosting through the G-Cloud framework.

UKCloud vs Microsoft and AWS

The Digital Marketplace data states that UKCloud has accrued a total of £123m in public sector cloud spend through G-Cloud to date, which puts its performance on a par with Microsoft – in total spend terms. But both firms’ performances are dwarfed by AWS, which has made a similar sum through G-Cloud in one single contract – its £120m deal with the Home Office.

“The deeper pockets of AWS and Microsoft means there is more research and development investment, leading in turn to them being able to offer more services layered on top of the hosting, thereby facilitating simpler and quicker cloud deployment and software development,” said Anderson.

The opening of Microsoft’s and Amazon’s UK-based server farms also unlocked cloud spend within public sector organisations that were previously fearful of relying on cloud providers that would have to store their data outside the UK.  

“These datacentre builds were actively encouraged by Liam Maxwell when he was government chief technology officer,” said Anderson. 

Maxwell left government in November 2018 to take up a public sector-focused directorship at AWS, but back in 2015, he said the government had been working for “three years” to get AWS and Microsoft to invest in the UK because it has always wanted an “effective region-scale datacentre structure” featuring the “major players” of the cloud world.

“It’s got great implications for business, local government and for lots of people who have always found the issue of data sovereignty and data location to be troubling,” Maxwell said at the time.

But what Maxwell, perhaps, did not account for was the impact that inviting the “major players” of the cloud world had in dampening demand for the services of the UK’s home-grown cloud suppliers, said Anderson.

“What’s happened since the likes of Amazon and Microsoft have swung into action is that the smaller suppliers focused on hosting are having their final breath squeezed out of them,” he added.

A dwindling need for sovereign cloud services

The unique selling point of UKCloud is that it was set up specifically to offer “sovereign cloud” infrastructure services to public sector organisations, but once the hyperscalers set up their own UK datacentre regions, this became a far less important point of competitive difference.

That is according to Aaron Booth, founder of cloud consultancy Embue, who served as head of cloud at the UK Home Office for two years until April 2021.

The department had been one of the top three buyers of UKCloud’s services, having signed a £7.3m contract with it in October 2015 and another worth £9.1m in July 2018, which ended in July 2021.

According to Booth, much of the Home Office’s use of UKCloud centred on the department’s immigration platform technology area.

“UKCloud has banked on data sovereignty to be its main driver for business growth but, when looking at the other hyperscalers, the majority of data can stay within the UK,” Booth told Computer Weekly.

“Obviously, this doesn’t take into account the US Patriot Act, but then again, if everything is encrypted at rest, that shouldn’t be an issue.”

One potential weak point on the data sovereignty front for the hyperscalers concerns account information, identity access management and billing data, because it is difficult to ensure that this does not leave the UK, Booth conceded.

“That is such a small element of the overall risk profile, though, and the argument has moved on internally,” he said. “Nobody [in the public sector] is saying no to the hyperscalers just because of this issue.”

Is G-Cloud delivering on its SME objectives? 

The Digital Marketplace dashboard states that 37.93% of the £1.69bn in sales through G-Cloud so far in the 2021/22 financial year was secured by SMEs, which is on a par with how things were during the framework’s launch year, when 38.54% of G-Cloud sales went to SMEs.

During the 2016/17 financial year, which covers the period before and after AWS and Microsoft opened their UK datacentres, the percentage of sales awarded to SMEs through G-Cloud rose to a high of 43.44%, before falling back to launch-year levels now.  

Talking to Computer Weekly at a fringe event during the recent COP26 climate change conference, Lord Maude, the former Cabinet Office minister who oversaw the introduction of G-Cloud, said that in the decade since its launch, some of the framework’s operating principles had not been upheld.

“We did a number of things that enabled SMEs to grow by being able to bid for and win government business, such as introducing a ban on hosting contracts that were more than two years in duration,” he said.

“Some of the effects of that, while the letter has been followed, the spirit has not. Parts of government have accepted very low bids for the first two-year contract and then found themselves locked into one provider’s proprietary stack and the cost of changing has been prohibitive. So that’s been frustrating.”

That sentiment is shared by several former UKCloud employees, who spoke to Computer Weekly on condition of anonymity, describing its sovereign cloud services as a much easier sell to the public sector in the days before the hyperscalers moved into the UK.

“Nine years ago when the business started, it was, quite frankly, like shooting fish in a barrel,” the source said. “It was: if you want to put workloads and applications in the cloud, go to UKCloud because they were the only show in town.”

Another ex-employee, who had visibility across both the central government-focused UKCloud as well as UKCloud Health while at the firm, backed this view. “At that time, you wouldn’t need to pick up the phone to sell UKCloud to anyone – prospects came to us,” said the ex-employee.

Among the early adopters of UKCloud was GDS, which published a blog post in September 2012 announcing the firm – then known as Skyscape Cloud Services – as its first cloud-hosting provider.

Tussell’s contract data suggests that the last contract GDS signed with UKCloud was awarded in March 2018 and was worth £1.3m, but the department is now renowned for being a heavy AWS user.

GDS signed a £20m, two-year cloud-hosting deal with Amazon earlier this year, for example, which is the largest and longest contract it has signed with the firm to date.

Also, the GDS Way website, which is a resource that techies working for GDS and the Cabinet Office can use to find out what tools and services they should use when carrying out work for the departments, states that AWS is the preferred cloud-hosting environment.

Other departments are also known to have wound down their reliance on UKCloud in recent years, but – in addition to existing clients jumping ship – the firm has also missed out on contracts for which its senior leadership team claim UKCloud should have been a shoo-in.

UKCloud CEO and co-founder Simon Hansford has repeatedly raised concerns through the press and on social media about home-grown SME cloud providers getting overlooked when public sector organisations are awarding IT contracts.

The most recent such statement occurred in response to the news about a contract that AWS secured with the intelligence agency GCHQ earlier this year, which the Financial Times unearthed details about in October 2021.

Because of the nature of the client involved, details of the contract were never intended to be made public, but it is understood that it centres on AWS providing a highly secure cloud environment to GCHQ that will also be used by its sister organisations, MI5 and MI6, with scope to open up this capability to other government departments during joint operations.

In response, Hansford sent out a statement to the press outlining his concerns that “this deal represents another lurch away from supporting the UK’s own cloud industry”.

Missed opportunity

He added: “Granting this contract to a foreign entity represents a missed opportunity to foster a national capability and the UK desperately needs the security, job creation and strategic importance of a sovereign cloud able to host our nation’s most sensitive data.”

Hansford’s motivation for speaking out could perhaps be traced back to the fact that the firm has previously invested £25m in building a cloud platform, known as UKCloudX, which is designed specifically to host highly sensitive data and workloads for public sector organisations within the defence industry.

In the Financial Times report, it stated that GCHQ initially wanted to commission a UK cloud provider to host its data, but was unable to source one with the required scale or capabilities.

“If AWS want to bring a new service to market, they’ll throw four million quid at it and hundreds of people at the problem and deliver it by next Tuesday,” a source with knowledge of UKCloudX told Computer Weekly. “UKCloud couldn’t compete with that, nor should they be trying to.”

Instead of trying to compete with the hyperscalers, the company should have been looking for ways to align and partner with them to win deals once the pace of sales it was picking up through G-Cloud started to slow, the source added.

On this point, Computer Weekly is aware of at least two abortive attempts made to pivot UKCloud’s business towards forming alliances with the hyperscalers to open up opportunities for its services to be integrated with those offered by the major public cloud providers.

The idea was that UKCloud’s sovereign cloud capabilities would provide the likes of Microsoft and Amazon with a dedicated “government cloud” environment to store sensitive data on behalf of their clients.

A source with knowledge of the project said: “There was a deal on the table from Microsoft that we took months putting together, where UKCloud would have essentially been a ‘UK gov cloud’ offshoot for the Microsoft Azure public cloud platform, and it was a good fit because we had already begun implementing Azure Stack at UKCloud by that time.

“Microsoft was looking to align with someone to deliver this, because they weren’t going to come and build their own government cloud in the UK.”

A soft launch roundtable for the endeavour took place at Microsoft’s 2017 Future Decoded tech showcase event in London, with representatives from both UKCloud and Microsoft participating, but the proposed technology tie-up between the two firms never came to fruition, several sources confirmed to Computer Weekly.

Read more about public sector cloud

“We negotiated a position which I think would have secured UKCloud’s future and would have secured a unique position for the company in this country, but it never got off the ground,” said the source.

As for why that was, the individuals involved in these projects all cited the senior leadership team’s “disdain for” and “negative preoccupation with” the US cloud giants, particularly where AWS was concerned.  

“They are so caught up in that ‘anti-AWS sentiment’ that they haven’t moved with the market or gone where the technology is, and this reputation develops [around them] that they won’t engage and work nicely with others or make attempts to partner with the right people,” one source said.

As previously mentioned, UKCloud’s Hansford has repeatedly spoken out in the national press over his concerns about how much government business is being handed to Microsoft and Amazon, including an article in The Times back in November 2017 in which he claimed the situation could end up costing taxpayers “many millions of pounds”.

In early November 2021, Hansford was quoted in the Telegraph calling for competition regulators to start scrutinising the “increasing dominance” that a “single foreign provider” has on the market, in a story about concerns being raised about ministerial departments becoming over-reliant on AWS in the wake of the GCHQ deal.

In a follow-up post, promoting the Telegraph article on his personal LinkedIn page, Hansford lambasted the government for failing to follow “other leading nations” that are investing in building a “national capability to support their own industry” before going on to claim: “The UK shall never be able to truly derive maximum value from the power of data without this.”

Computer Weekly has also seen copies of briefing notes UKCloud sent to GDS and the Cabinet Office, calling on the government to do more to loosen the grip AWS has on the public sector by revising its public cloud-first policy so that it champions a multicloud deployment model.

The note also suggests imposing limits so that “no department spends more than 30% of its cloud spend with a single provider”.

Computer Weekly put to UKCloud the claims that its preoccupation with the US cloud giants is proving detrimental to its business, but the company did not directly respond to the question.

“UKCloud’s policy is not to comment on our customers or comments by former employees,” the company said in a statement. “The government must seize the opportunity to foster a national capability and help build a vibrant domestic cloud sector that can deliver the promised high-wage, high-skilled jobs of the future.”

Home-grown market has taken a pummeling

While it is fair to say that the UK’s home-grown cloud-hosting market has taken a pummeling since AWS and Microsoft moved in on their territory, both firms are supporting the growth of a domestic cloud market in other ways, said GlobalData’s Anderson.

“Microsoft’s channel model, and to a lesser extent AWS’s, has spawned a lot of software-as-a-service providers by giving them relatively cheap infrastructure to develop and host their own solutions for government,” he said. “This has led to a huge increase in the number of home-grown application providers gaining revenue and market share in the sector.”

According to figures shared by AWS, it claims that more than 150 G-Cloud-listed technology providers have secured £1.3bn in government contracts while using its services.

“Government departments using AWS are not only enjoying cost savings of up to 60%, but are also supporting a vast ecosystem of smaller companies across the UK that offer products and services that complement and help customers take full advantage of AWS,” said AWS in a statement to Computer Weekly.

“Amazon recognises that its status as a supplier to the public sector is a privilege which has to continually be re-earned through the quality of our services and the value for money that we bring for UK taxpayers. We know they will only remain customers for as long as we are able to deliver on both of those things.”

As things stand, UKCloud is still trying to finalise the funding needed to keep it going, and it remains to be seen what impact the Cabinet Office warning public sector users not to use its services will have on the firm as this funding remains in limbo.

Whatever the outcome is for UKCloud, Bill Mew, who previously worked for the firm as strategist and evangelist, said there still a clear demand for a UK-based sovereign cloud service provider.

“US cloud entities are all subject to the Cloud Act in the US, which puts the data of UK citizens at risk of mass surveillance,” he said.

“At some point, it will need to be recognised that in certain areas, data privacy really matters and there are datasets that the government holds, like criminal records, health records, the financial records at HMRC, where UK citizens would not be happy knowing that data [when stored in a US giant’s cloud] is not protected from mass surveillance.”

Mew added: “In the highest levels of government, it is recognised that the UK may need its own cloud, and we may see them actually looking for someone to provide that or maybe they’ll build it themselves. The farce here is that UKCloud existed all along with that exact capability.” 

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