The software and IT services sector has slumped three per cent to a £22bn market this year, and is likely to be flat in the coming 12 months, according to the latest predictions from analyst Ovum Holway.

Last year was the worst ever for the UK's software and IT services suppliers, and this year has followed the gloomy trend.

Anthony Miller, research director at Ovum Holway, told vnunet.com that there was no reason to revise predictions made in June this year of a further slump in revenues.

"The UK market for software and IT services is shrinking but not as much as last year. But we're reasonably confident that revenues will be flat next year."

Consulting and systems integration are expected to remain depressed, but there are pockets of hope and activity.

Outsourcing and business process outsourcing (BPO) have been the only sectors bucking the trend. Without outsourcing, the industry would be in an even worst state.

"BPO will be the fastest growing piece of the industry, but it's still at a very early stage. We will see that ramp up, but the aim of the exercise for customers is still to cut costs," said Miller.

But a recovery is on the cards, and growth will return - eventually. Ovum Holway forecasts flat revenues for 2004 and a growth rate remaining below that of gross domestic product until 2006 at least.

The analyst is also predicting widespread consolidation across the sector, particularly among software companies, and not just at the large end of the scale.

"The only way to substantial growth is to take market share from your competitors - acquire or enter new markets," said Miller.

"It does create uncertainty for customers, who are hedging their bets and looking for safe havens and suppliers that are likely to stay the course."

John Higgins, director general of Intellect, told vnunet.com: "As IT becomes more commoditised, there is an increased pressure from the board for return on investment, and adding to this is the hangover from the dotcom boom and bust hype.

"People are not prepared to keep up with the Joneses anymore; they will not invest in the next big thing."