Cabinet Office slammed after advising users to ditch UKCloud as further investment nears

The Cabinet Office is coming under fire after advising public sector users of a UK specialist cloud provider to find alternative suppliers, over fears about the company’s financial security.

Computer Weekly has seen evidence that at least one major government department has told suppliers whose software is hosted by UKCloud that they must move to a different hosting provider.

Multiple independent sources have told Computer Weekly that the edict originated from the Cabinet Office, which has warned that all public sector customers of UKCloud – an SME that specialises in public sector cloud – should seek alternative suppliers.

One source told Computer Weekly that departments and their suppliers are being instructed to migrate from UKCloud for business continuity reasons because the company could cease trading in January 2022. However, a source close to UKCloud described this suggestion as “categorically false”.

It is claimed that the Cabinet Office has spent weeks seeking clarification from government departments and IT suppliers about how reliant they are on UKCloud’s services.

Now at least one department is known to have been instructing suppliers since late October to start making preparations to leave UKCloud as a result.

Computer Weekly asked the Cabinet Office to confirm or deny that it has been advising public sector users and IT suppliers against continuing to rely on UKCloud’s services, because of concerns about the firm’s financial situation.

In response, a Cabinet Office spokesperson said: “We monitor the financial health of all our suppliers. It would not be appropriate to comment on speculation about one particular company.”

On this point, Computer Weekly is aware that the Cabinet Office has been in regular contact with UKCloud about its financial situation, as the firm has sought to reassure the department about its business resilience and future growth prospects.

UKCloud is one of a handful of cloud providers that have preferential pricing deals in place with the Cabinet Office via its procurement arm, which is intended to incentivise public sector buyers to use its services by offering them discounted pricing on its products and services.

The source of the Cabinet Office’s concerns about the future of UKCloud are thought to be linked to a Companies House filing dated September 2021, which confirmed that the company is in need of £30m in additional funding to continue trading and deliver on its investment strategy.

The document confirms that the UKCloud board appointed advisers 14 months ago, in September 2020, to pursue investors on its behalf.

“The company requires additional funding in order to execute its investment plan, which may be difficult or expensive to obtain,” the document states.

Computer Weekly contacted UKCloud for an update on how its search for an investor is progressing and was told by a company spokesperson that the “fundraising discussions” are at a “highly advanced” stage, with the company expecting to close “a significant investment round” in the very near future.

“UKCloud is a successful, resilient business,” the spokesperson said. “We are a leading cloud computing provider, with strong revenues, ambitious targets and a proven track record of enabling and accelerating digital transformation across the public sector.

“This investment will help position UKCloud to exploit the strong appetite for cloud computing transformation in the UK and abroad.”

The uncertainty over the firm’s solvency may have rattled the Cabinet Office, but suppliers and sources close to UKCloud have taken issue with the department’s instructions to ditch the company, claiming it could force the firm out of business prematurely.

“The Cabinet Office’s behaviour in this matter is utterly reprehensible,” said a source close to UKCloud. “It’s hard to see what is gained by actively undermining a successful British company in this way.”

This sentiment is shared by several sources within UKCloud’s 300-strong partner and reseller community.

“If 90% of your customer base is public sector, then the Cabinet Office is effectively making it a foregone conclusion [they will fold] by forcing all of their paying clients to leave,” said a source from one of those suppliers.

Another supplier source said that, based on the discussions they have been privy to in government, “[UKCloud’s] potential funding issue has become a statement of that they will cease trading”, and they have been told they have no choice but to switch to another supplier.

“We’ve been told we can’t use UKCloud any more. There is no arguing against it because a decision has been made,” the supplier added.

The situation marks a considerable reversal in fortune for the company, which was, until 2017, the third-biggest provider of cloud services to the public sector, based on the government’s own G-Cloud sales data.

Meanwhile, data detailing every contract UKCloud clinched between 2014 and 2016, compiled by public sector market watcher Tussell, shows that the firm secured multimillion-pound contracts with several major government agencies, totalling £12.2m, during this period.

This includes a contract valued at £7.3m with the Home Office in 2015 and another worth £1.33m with the Driver and Vehicle Licensing Agency (DVLA) in 2015.  This period also saw it clinch several deals, totalling £2.28m, with the Ministry of Justice (MoJ).

According to UKCloud’s 2017 financial report, which saw it post a profit of £4.4m, it seemed the company was confident there would be more contracts of this size coming its way in years to come.

“UKCloud will benefit significantly from the upcoming wave of large legacy hosting contracts that are due for renewal in the coming years by working closely with the partner ecosystem and incumbent vendors,” the report said.

But the following year, UKCloud reported a downturn in profit, revenue and customer usage amid increased competition for public sector contracts from US cloud giants Amazon Web Services (AWS) and Microsoft following the opening of their respective UK datacentre regions in late 2016.

In anticipation of the US cloud giants ramping up their presence in the UK, market watchers warned at the time that homegrown SME providers, such as UKCloud, would find it harder to secure public sector contracts, particularly when it comes to competing on cost.

As reported by Computer Weekly in spring 2016, it was also suggested that “certain major buyers” within the public sector were purposely delaying their digital transformation plans until Amazon, Microsoft, Oracle and others had completed the construction of their UK-based server farms.

Some former UKCloud customers have shifted their allegiance to the hyperscale cloud providers, but the firm’s fortunes have also been affected in other ways by the changing behaviour of public sector IT buyers, said another source.

“UKCloud do an awful lot of the heavy work at proof-of-concept stage in UK government, only to have the actual contract for delivery – which can run into hundreds of millions of pounds – wrested away and given to a hyperscale cloud provider,” said the source.

The company has sought to fight back against these competitive threats by investing heavily in recent years in building out vertical-specific cloud platforms for public sector users in the healthcare, life sciences, policing and defence sectors, while also increasing its headcount against a backdrop of widening losses.

During the 2018/2019 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.

The company’s accounts attributed its downbeat financial performance to “reductions in usage by a small number of customers”.