UK IT firms feeling the crunch

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The latest figures on distressed UK businesses have found more than seven times as many IT companies are experiencing ‘critical problems’ in 2008 compared to last year.

Business rescue, recovery and restructuring specialist, Begbies Traynor compiled its research by monitoring adverse actions and other corporate distress signals. It categorises “Red Flag” companies with ‘critical problems’ as those likely to enter into a formal insolvency procedure within 12 months.

The third quarter of 2008 “Red Flag Alert” statistics showed substantial year-on-year increases in ‘critical problems’ across all sectors, with IT (up 627 per cent) second only to hire and rental services (up 643 per cent on the same quarter of 2007) and just ahead of manufacturing (up 622 per cent).

IT emerged as one of the worst affected industries, partly because of its increasingly severe difficulties, by also registering a 42 per cent increase in numbers over just the second quarter of this year.

Nick Hood, a Begbies Traynor partner said: “Our latest Red Flag Alert statistics reveal that September was the worst month yet for UK businesses, with the IT industry facing particularly tough times.”

He said the effects of recent market volatility and ongoing credit crunch conditions suggested that businesses are reducing IT spend and deferring or cancelling new IT projects and their related software and hardware purchases. He added that consumers also are slower to spend on discretionary items like home computers.

But Hood also had a stark warning if these failing IT businesses were to survive.

“There’s evidence of many IT companies being in denial of a deterioration in trading and being slow to take cost-cutting action,” he said. “This only shores up problems for the future and may make them more vulnerable to acquisition by larger, more established IT players, further feeding the recent wave of IT industry consolidation.”

But he had an equally gloomy outlook: “We expect to see an even further increase in ‘critical’ businesses as distress escalates between now and the end of the year.”

Hood advised companies to look at streamlining business processes to save money, as well as that cash would be vital, “so cash generation and conservation should be top priorities”.

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