Innovation in the UK software industry is in danger of being stifled as small software houses continue to experience under-funding and an escalation in wage bills in relation to employee productivity.
As a result, average growth rates have dropped from 25 per cent three or four years ago to only five per cent in 1995, according to a report, entitled 'Trends in the financial position of UK software producers: 1995 update', undertaken by Oxford University's Templeton College.
Tony Rands, the report?s author, said: ?The problem is that, while many of the smaller companies have innovative ideas, it is the bigger companies that have bigger growth. Between 1993 and 1994, the percentage of organisations experiencing growth was much higher than in 1995, when most failed to move from the small into the medium or large category.?
This situation was caused by a number of factors, he added. There was still inadequate funding for start-ups, which generally could raise enough money to develop a product, but not enough to build a market for it.
Most were too small to qualify for venture capital, but found banks reluctant to invest because they did not understand the market. This meant it was difficult to grow beyond a certain point.
The situation was made worse by escalating wage costs in relation to productivity per employee, which rose 18 per cent and 13 per cent respectively last year. Wage bills now accounted for 38 pence in every pound the firm earned, compared with 28.5 pence in 1987.
This meant that if firms wanted to retain margin for re-investment in their business, they had to cut costs elsewhere in areas such as purchasing capital goods. If the situation continued in this vein, organisations could be forced to re-evaluate employment practices, with a likely swing back to sub-contracting, Rands said.
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