fazon - Fotolia

Consultancies hit amid rise in IT company insolvencies

Rising insolvencies among IT companies contrasts with a fall in the rate of company failures in the wider economy

IT consultancies have been hit by an increased level of insolvencies as the wider IT sector suffers an increased number of company collapses.

The latest figures from the Exaro Insolvency Index show that the number of IT consultancies that filed one or more insolvency notices in the second quarter of 2015 was up by 14.3% compared with the same period in 2014. It went from 189 to 216 companies.

The figure of 216 companies for the second quarter of the year is only slightly higher than the 212 for the first three months of 2015.

The year-on-year rise comes against a backdrop of an equivalent increase of 4.9% in insolvencies among information and communications companies. There were 552 such companies in insolvency in the three months to July 2015, against 526 for the second quarter of 2014.  

The sector’s rising insolvency levels contrasts with the wider economy, which is seeing a fall in the rate of company failures this year.

Steve Stokes, partner at restructuring and advisory firm FRP Advisory, said: “Behind the overall rise of 4.9% in IT company failures year-on-year in the second quarter – a small increase of 26 in absolute numbers to 552 – is the more telling breakdown that shows a sharp 14.3% rise to 216 failures in IT consultancy firms.

“Some of these failures can be attributed to the perennial risks of smaller providers over-promising on larger contracts that have been won as the economy picks up. Where the margins simply do not add up for sustainable cashflow, the overall picture points to the competitive pressures on the outsourcing market.”

But Stokes said IT consultancies in the UK stand to gain from a reversal in the trend to outsource such work to India. “UK companies are increasingly looking to bring IT services back onshore, which a few years ago would have been sub-contracted to India,” he said.

“With rising costs in India and even China, offshoring is no longer offering the clear-cut sustainable cost savings over in-house IT support.

“The outlook for the IT services market overall may be rosy, thanks to the rebound in growth in financial services, healthcare, communications and media, reflected in increased spend on software development and mobile-based devices.”

The number of software companies that filed an insolvency notice fell very slightly year-on-year in the second quarter of 2015, going from 51 to 48.

The Exaro Insolvency Index, the most comprehensive survey of company failures in the UK, shows that there were falls in the number of information and communications companies that entered administration or receivership, as well as winding-up petitions.

However, there were rises in orders or resolutions to wind up, along with appointments of liquidators. The changes are shown in the graph below.

The rise in insolvencies across information and communications companies contrasts with an equivalent fall of 6.6% across the whole UK economy.

Andrew Tate, vice-president of R3, also known as the Association of Business Recovery Professionals, said: “Insolvency levels are back down to where they were before the financial crisis, as growth continues to be stable.”

However, the IT figures are disappointing for the sector after the first quarter saw a year-on-year decrease in insolvency levels by 5.3%.

In addition, the figure of 552 information and communications companies in insolvency in the second quarter was up by a shade under 6% from 521 in first three months of the year.

The Exaro Insolvency Index draws on insolvency notices in the London, Belfast and Edinburgh Gazettes, along with information from Companies House. In the source data, a small proportion of the insolvencies is not ascribed to a specific sector.

Read more on Managing IT and business issues