The UK software industry is in a strong position, but could suffer in the current economic climate, according to a report commissioned by Microsoft.

The study, which was carried out in association with Intellect and the British Computer Society, shows that the overall trend in the UK is a downward slide, albeit from a relatively strong position. Key challenges for the industry to overcome include helping small software businesses and encouraging students.

The study warns that smaller software companies are likely to face stiffer competition from abroad, particularly Germany, and pointed to widening gaps in the UK’s knowledge economy.

The report also makes a number of recommendations for both government and industry that it said could help the sector ride out the economic storm.

It recommends that when governments procure technology they should use local, small businesses. To make it easier for small firms to compete, it recommended that contract terms are altered.

"Government procurement processes need to favour small business. Where possible, government should move away from large, multi-year systems development projects to more streamlined and simpler programmes that small businesses can compete for," it said.

Other recommendations concern students, who should be incentivised to study and improve their IT skills.

Gordon Frazer, managing director, Microsoft UK, said, “We work with 36,000 Microsoft partner companies in the UK. On average these software businesses have fewer than five staff and turnover of about £1m a year. Together, they employ 32 per cent of people in our sector and display high levels of innovation. These companies are vital to the overall health of the UK software sector.”

Charles Ward, chief operating officer at Intellect, added, “At a headline level, the [UK] market growth has been consistently above European average. But being a relatively attractive market for software does not necessarily equate to a healthy industry: software is a footloose industry and work will go to where the best conditions prevail.

“The UK has the fastest-growing market for broadband access, and the most extensive availability. What we lack is widespread deployment of fibre that can provide internet speeds of up to 100mbit/s or plans for the equivalent wirelessly. This report highlights how important long-term investment in underlying communications infrastructure is and why we can’t afford to neglect it.”