Did the government kill off the Oligopoly or just send it back to the (US) cloud?
The advent of the G-Cloud and a stricter procurement policy sought to break up the original Oligopoly a decade ago. But do the same rules apply to Oligopoly 2.0?
This is a complex story to tackle. One that comes with a weighted history, lots of anecdotal evidence, vested interests, a quickly changing socio-political-economic backdrop and plenty of grey area. However, we at diginomica/government believe that it’s one that’s worth attempting to tackle, at the very least, given what’s at stake (particularly in Brexit Britain).
And what is at stake is the competitiveness of the technology market in the UK, an understanding of where our country’s data will reside over the coming decades, a strategic plan for how we as a country position ourselves internationally, and whether or not the government can play a role in supporting UK SMEs.
The sum of it is that I have been hearing from a variety of sources - mostly on the UK cloud provider side - whom are becoming increasingly frustrated with government buyers for ‘handing over’ public sector contracts (and data) to both Amazon Web Services (AWS) and Microsoft Azure. And to some extent, Google Cloud Platform.
These sources argue that this is happening at an increased pace and that the two American technology giants are effectively forming an Oligopoly within the supplier base to government. If you look at publicly available data, this does appear to be a trend since 2017.
Knowing the background to this, it becomes easier to understand why these UK SMEs are particularly frustrated. Over the past decade or so the government has been very vocal about introducing new mechanisms to diversify the supplier base and break up the old Oligopoly (1.0) of outsourcers, SIs and consultancy firms.
Procurement frameworks such as G-Cloud, stricter ‘red lines’, and ambitious SME spend targets were all introduced a number of years ago and have since been touted by politicians and senior civil servants as a way of supporting UK business and breaking up the stranglehold of larger suppliers in Whitehall.
However, the data, and the perception of those working in industry and in government, is that this isn’t being followed through with any significant spend (at least, not in the way that it used to be) in comparison to the money being spent with AWS, as well as Microsoft and GCP.
Now, at this point I fully expect readers to be thinking - but government isn’t special? This is happening everywhere? And you’d be right. Almost any organisation I speak to nowadays is thinking about how they can shift to AWS, MSFT or GCP (Oligopoly 2.0). So, should we be surprised that government is following suit?
Well, there are a couple of arguments that suggest that it’s worth considering that government could be doing things differently. These ultimately come down to the ‘fairness’ of the market and whether or not the government has a responsibility to carve out specific UK markets, despite what’s happening in the private sector, given its scale and buying power. These include:
When it was clear there was an Oligopoly ten years ago, the government *did* intervene, as it was thought that the lack of competition wasn’t good for buyers. Why not this time around?
Is it good for the government to be handing over a significant chunk of the country’s data to three US-based companies (even though they have UK data centres), who may well exercise control in ways that we aren’t yet aware of?
There is a view that AWS - and more broadly US tech companies in general - aren’t paying their fair share of tax. In fact, AWS was fined a significant sum by the European Commission over its tax practices, which according to the British government’s own procurement rules, could technically mean it gets excluded from bidding for business (but will likely never happen). Would it not make more sense for the government to fund UK biz that don’t have access to the same complex tax structures of the US giants and will likely end up paying more to HMRC?
There has been a revolving door of civil servants and AWS employees taking up roles at each other’s respective organisations, raising eyebrows when government business is then awarded to AWS. For example: the UK’s National Technology Advisor, Liam Maxwell, took up a post at AWS; the Home Office’s former CDO, Norman Driskell, also took up a senior job at AWS; and AWS senior UK leaders also hold positions on government Boards. Most of these appointments happened in 2017, a year after AWS opened a data centre in the UK and public sector spend began to increase (correlation does not imply causation though, folks).
The government should be thinking about more than cost and scale when they procure with a cloud provider. Some vendors and sources argue that the government should too be taking into account ‘social value’ (i.e. promoting UK business).
What side of the fence do you sit on?
I’ve spent the past two weeks collating information from sources - some on the record, some off the record - to get a better understanding of how this might, or how it should, play out. And I think it’s fair to say that opinion is pretty divided between two camps (although, there is one general consensus about what could be done - more on that later).
As noted above, AWS and MSFT are dominating in the private sector, so is it realistic for the government to strike a different path on its own? Or given the government’s scale and buying power, and it’s imperative to protect British citizens and business first and foremost, should it be looking to tackle Oligopoly 2.0?
UKCloud, one of the largest UK SME IaaS success stories, believes that the government does have a role to play in supporting SME business. CEO Simon Hansford said:
Historically, the government has stepped in to address the issue of big businesses dominating the public sector market and giving SMEs more of a chance - G-Cloud and the formation of GDS, in particular, opened the market to many thousands of additional companies. It's important for the Government to play a part in levelling the playing field, as ultimately SMEs are the lifeblood of the UK economy.
Paul Shetler, a vocal digital government observer, former CDO at the Ministry of Justice (MoJ), and former a CDO for the Australian government, said that whilst AWS and Azure are undeniably valuable, the government should be intervening.
AWS and Azure are both useful - we used AWS heavily when I was at DTO (Australian Government) - but their basic offerings are still highly proprietary and neither of them are operated by British firms. Government procurement, partially just because of its sheer scale, is by its nature capable of driving the development of new sectors and new firms.
Right now, the British government is choosing to spend its money on offerings from foreign companies that ultimately are governed by foreign law. When I was at MoJ there were also British secure cloud offerings that we used for hosting some of our exemplars’ more sensitive data and processes. For both security reasons as well as those to do with industrial policy I’d think HMG would be - should be - interested in supporting development of British offerings in the space that AWS and Azure operate within.
As highlighted above, there are also arguments that social value should be a consideration when buying technology in the public sector. In fact, David Lidlington, who was (until recently) Minister for the Cabinet Office, said that to ensure that the government has a competitive supply base, the Social Value Act should be applied and evaluated in all large procurements and that corporate behaviour should be taken into account.
This is perhaps even more pertinent post-Brexit, as the UK will have to find a role for itself on a global stage as a nation separate from the EU. One source told me that this idea of ‘social value’ is largely being ignored by buyers, but that it should be explicitly applied to all contracts, which should go some way to levelling the playing field (as the source argued that the tax practices of the US giants, coupled with the arguments for supporting British business, would play against the large American IaaS providers).
Chris Farthing, founder of Advice Cloud, a company specialising in G-Cloud procurement, also believes that the government has a role to play in continuing to support UK SME - and that taxation issues should be considered. He said:
Personally I don’t think the landscape at the infrastructure level has really ever changed. Nearly all the kit/software used by Private/Public sector was produced by US firms. The issue with the Oligopoly was that very little “services” related business was distributed amongst the supply chain. GDS has been instrumental in breaking that up.
The main aim therefore should be to continue to ensure that there is no lock out for the innovative SaaS & services providers whilst supporting infrastructure SMEs such as UK Cloud to continue their excellent work. Also what needs to be addressed is the Digital taxation issue to ensure that these organisations continue to contribute to the countries that they are doing business with in the form of fair and equal tax payments.
Is Oligopoly 2.0 actually helping SMEs?
However, it’s only fair to point out that not all in the industry view AWS, or the other larger players, as inhibitors to getting government business. Some have seen AWS in particular as a useful platform to supporting and growing their own business. For example Denis Kaminskiy, Director and Co-founder of cloud provider specialist, Arcus Global, believes that the platform can give smaller companies in the UK the scale that they need, but that a better job needs to be done of educating the market that partners of AWS, and others, are valuable. He said:
Both AWS and MSFT are actually creating opportunities for SMEs rather than shutting them down. If you offer true value to customers through expertise, managed services for example, then AWS and the like can create amazing possibilities, given that they can allow you to apply your value to massive infrastructure scale. It only becomes a problem when government departments (some of which absolutely do) insist on working with the more established vendors directly and prevent their SME partners from applying for business.
While the procurement landscape can at times seem complex and skewed towards the larger, more dominant suppliers (even with the presence of the G-cloud framework), it’s important to note the value of joining up with them in order to strengthen your business. Rather than feeling dominated, many SMEs feel emboldened by the presence of companies like AWS. We certainly do.
James Herbert, director at notbinary, a company that specialises in delivering cloud services to the public sector, also sent me a very compelling blog on his views on how the government can better support SMEs and the impact of the Oligopoly 2.0. Firstly, he argues that the likes of AWS, MSFT and GCP are leaders in the public cloud market for a reason - they have scale, resource, network effects and capital. These are hard things to acquire or replicate and the UK cannot afford to be in the slow lane using sub-optimal infrastructure, he argues.
In addition, Herbert argues that the likes of AWS should not be grouped into the same bracket as the Oligopoly of the past, as the Oligopoly 2.0 can bring value to UK SME partners. He said:
The three cloud companies are a story of “Towers versus Town Squares”. The Towers represent top down hierarchical business models. The Squares are a more open, flatter model of commerce where the cut to the middle person is more proportionate to the value they add than in the Tower arrangement. In our world, technology services to government, the owner of the Tower sucks the value out of the actors that actually add value to government services and their users.
On the rare occasion we have worked with the original oligopoly this is exactly what has happened. They hoover up IP, shave margins and generally control everything that happens even when they have little expertise or knowledge on the matter at hand. This is not the same experience we have of working, in our case, with AWS. They invest millions in supporting their partners and many successful UK businesses are being created from providing value added services and products on top of their platform.
These new businesses are increasingly exporting their know how, services and products overseas.”
On balance, more can be done…
Whilst we are not likely to come to a definite conclusion about the benefits or cons of Oligopoly 2.0 anytime soon, there should be a consensus around the Crown Commercial Service, the Government Digital Service and the British Government more broadly doing more to support SME business.
I’d highly recommend anyone reading this to go and check out the research carried out by Lindsay Smith, an avid analyst G-Cloud analyst, who consistently provides useful data and analysis of how the Digital Marketplace is performing and the impact on changes to buyers and suppliers.
Smith notes that whilst 90% of the suppliers on G-Cloud are SMEs, 70% of those SMEs are not selling anything. Smith has also learned that the Crown Commercial Service is considering how it can better support SMEs and he is looking for feedback, criticism and advice on how this can be done.
It’s also worth noting that the spend on the Digital Marketplace is now up to £2.25 billion p/a - of which the Crown Commercial Service receives 0.75% management charge (around £16/17 million p/a). What is CCS doing with this money to support UK SMEs? That’s an important question that needs asking, with transparency needed around the execution.
The supply-side has to be a success looking at the size of the pie, but that pie is not feeding this stubborn majority. Help is at hand, Crown Commercial Service (CCS) are aware of the issue and developing a strategy to tackle it.
If you are on the marketplace, big or small, supplier, buyer or intermediary, here is an opportunity to comment, criticise or add your ideas as to how we can achieve a step-change in SME success.
Comment from those in question
We asked AWS, MSFT, GCP and the Cabinet Office for comment on their views on the current situation, and it’s only fair that we put the responses of those that got back to us here.
A Cabinet Office spokesperson said:
Our procurement decisions are based on getting value for the taxpayer and the best quality services.
But we are committed to helping smaller suppliers win more work in cloud services, including through initiatives such as our G-Cloud framework which is made up mostly of SMEs.
An AWS spokesperson, said:
Government departments using AWS are not only enjoying cost saving of up to 60% but 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. Public sector organisations in the UK use the UK branch of AWS Europe which registers its sales in the UK and pays all applicable taxes, due on its profits, directly to HMRC.
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.
Mark Palmer, head of Public Sector UKI at GCP, said:
Every organisation should have the option to choose the best cloud solutions for their unique needs and this is why Google Cloud supports a multi-cloud approach. Government agencies want to avoid vendor lock-in and remain nimble - to do this they need to be able to work with all different types of cloud providers - from the global hyperscale providers to local cloud vendors.
As a team we are in regular conversations with the UK Government on how to make a multi-cloud environment work for them - it's not about who they choose for their workloads, it's all about what is the best combination of technology to meet their requirements.
Microsoft was given time to comment, but did not respond before the publication deadline. I will add their comments if/when they come through.
This is an incredibly hard discussion to have. The frustration felt by many in the SME community is easy to understand. A decade ago the government was promising to do everything it could to level the playing field with large vendors. And for a few years was making great progress. British companies were formed, SMEs grew and careers were made. To then see that business is all of a sudden being handed to US tech giants, feels like a kick in the teeth. Couple that with eyebrow raising career moves from within the Civil Service and what feels like unfair tax practices, and you’ve got a recipe for a great deal of resentment. And, as noted above, the government has responsibilities and priorities that differ from the private sector - are they taking these seriously?
However, it’s worth recognising that this isn’t a homogenous viewpoint. Some other companies have benefited from the scale of the US vendors and are themselves growing off the back of this. And as such, there’s likely a balance that needs to be struck.
What’s clear though is that the government - particularly the Crown Commercial Service and the Government Digital Service - could be doing a lot more. Where is the education around what the government *does* want from UK SMEs? Where is the clear strategy? Direction? Leadership? We are seeing little evidence of that, which I think is the main concern. If UK SME felt that there was some real commitment to UK business, and a better understanding of what that business should be, I don’t think we’d be in this situation. Please provide me feedback for CCS/GDS and I will pass it on to Lindsay Smith and/or the government departments directly.
As a side note - thank you to everyone that contributed to this. Apologies if you didn’t feature in the article itself, but your information was valuable nonetheless