Almost 7,000 UK IT companies are in distress, with public spending cuts signalling a bleak outlook for local service providers, according to a report out today.
Business rescue specialist Begbies Traynor released its latest Red Flag update, which claims that UK firms are battling £69.5bn of liabilities, up a worrying 26 per cent from the £55bn in the first quarter of 2010.
Drilling into the IT sector, the number of firms experiencing significant or critical financial problems actually dropped by 16 per cent in Q2 2010 to 6,906, compared to the same quarter a year ago.
But the firm claimed the actual number of IT firms experiencing financial distress remains "historically high". This is compounded by the planned government spending cuts, it said.
Nick Hood, partner at Begbies Traynor, said: “Following the government’s recent announcement of a freeze on all new IT spending over £1m and a review of the costs of all existing contracts under way, the IT sector faces a period of great uncertainty.
“One feature of cost cutting in the public sector is a migration of work to large, specialist IT contractors who can offer significant economies of scale compared to stressed central and local government departments, which are being forced to make substantial savings.”
He added: “This gain for major listed and international IT contractors will mean great pain for many small, local service providers, who may see long‐established business relationships damaged or destroyed and their survival threatened. There is a growing risk that, even if the UK avoids a potential double‐dip recession, it could develop a twin-track economy, with public sector-dependent industries such as IT facing higher levels of financial distress than sectors which are less directly linked to government spending cuts.”
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