The latest company insolvency figures from the Insolvency Service show a falling number of company failures in the wider economy, but rising corporate insolvencies in the IT industry. This stark contrast in the fortunes of IT consultancies and the wider economy has left industry insiders to seek an explanation why the IT sector is bucking the trend.
The figures show that the number of IT consultant’s to file one or more insolvency notices in the second quarter of 2015, from April to June, was up 14.3 percent on the same period last year. This increase took the number of second quarter insolvencies from 189 in 2014, to 216 in 2015. This also represents a slight increase on the first three months of this year, up from 212.
This considerable year-on-year rise for IT consultancies is set against a backdrop of rising insolvencies in the sector. Information and communications companies have seen a 4.9 percent increase in company failures. There were 526 company insolvencies in the second quarter of 2014; this rose to 552 in the three months to July 2015.
What are the reasons for the rise in failures?
The second quarter rise in IT company failures of 4.9 percent represents a relatively small increase of 26 on the year-on-year figures, to 552. However, more worrying is the breakdown in these figures, which shows a sharp 14.3 percent rise in IT consultancy failures when compared to the same period last year.
Industry insiders believe the dramatic rise in IT consultancy insolvency closures can be attributed to the age-old problem small companies often face after an economic slump. As the market picks up, small providers make the mistake of over-promising on larger contracts to capitalise on the upturn. However, when this comes at the cost of the company’s margins, it is cashflow that suffers. These are the competitive pressures that often take their toll on the outsourcing market.
The IT services market still looks rosy
Despite the worrying insolvency figures, the IT services industry is actually looking in better health than it has for years. One positive factor is the reversal of the trend of British companies outsourcing their IT requirements to companies in India. UK companies are increasingly choosing to bring their IT services back onshore as the costs in India continue to rise. The result is a big reduction in the sustainable cost savings offshore companies once offered.
There has also been growth in the media, communications, financial services and healthcare sector, the result of which has been increased spend on software development and applications for mobile devices.
The state of the information and communications sector
Thanks to this rise in demand for new products, the number of software companies that filed an insolvency notice in the second quarter of 2015 fell slightly year-on-year, from 51 to 48. There were also falls in the number of information and communications companies entering administration or receivership, and those forced to close after receiving winding-up petitions. However, it was not all good news in the sector, with an increase in winding-up orders and more liquidators being appointed than in the same period last year.
The result in the information and communications industry as a whole was an overall rise in corporate insolvencies year-on-year, despite a fall in company failures of 6.6 percent across the UK economy.
Commenting on the latest insolvency figures, Phillip Sykes, vice-president of the insolvency trade body R3, said: “Corporate insolvencies continue their long, slow decline from their peak in the recession. Record low interest rates and creditor forbearance have given businesses an easier time than might have historically been expected after a recession.”
IT Consultant insolvency has always been an issue for as long as I can remember and they often have challenges specific to their business process. If you are an IT Consultant and concerned about corporation tax liabilities and or overdrawn loan account then call 08000 746 757 to speak to someone who can provide free no nonsense effective advice.