IT growth slumps to ten-year low

Last year was the worst on record for the UK’s software and IT services companies. The bursting of the internet bubble left the sector with a nasty hangover.

Last year was the worst on record for the UK’s software and IT services companies.

The annual Ovum Holway report – widely respected as an industry barometer – highlights how the end of the pre-Y2K spending boom and the bursting of the internet bubble left the sector with a nasty hangover.

Revenue growth rates for software and services companies slumped from their record high of 25% in 1998 to just 9.5% last year.

This is the first time growth has been less than 10% since the recession of the early 1990s, and it is expected to remain depressed in 2001 before staging a modest recovery next year.

In the meantime, the tough climate for IT companies could benefit some end users by creating a buyer’s market, as suppliers offer good deals to keep their businesses ticking over until things improve.

The report shows how the dramatic fall in revenues has taken a heavy toll on profits. The overall profitability of the software and services sector fell by a record 86%, and 40% of UK companies reported losses.

And to complete the gloomy picture, City investors wiped £80bn off the value of the 220 listed companies in the sector.

Richard Holway, author of the Ovum Holway report, said the astonishing turnaround in fortunes was ‘the most turbulent period ever’ for the UK’s software and IT services industry.

The report identifies the biggest losers as ‘the new e-consultancies with crazy names’ which are rapidly being abandoned by disillusioned clients.

The beneficiaries were the sector’s big hitters such as IBM and EDS, who were seen by IT customers as a safe haven and picked up business lost by the new arrivals. They also enjoyed extra revenue from outsourcing, which is increasingly used by companies as a way of reducing their IT costs.

IBM edged out EDS to become the UK’s biggest supplier of software and IT services, according to the report.

Holway said: ‘The companies doing best in this difficult environment are those with long-term customer relationships, high recurring revenues, forward order books and experienced management who have seen these downturns before.’

According to Holway, the outlook is brightest for companies that are ‘proud to be both boring and profitable – two attributes which clearly went out of fashion in 1999/2000.’