2008 saw the first fall in the UK software and IT services market in five years.
Last year, revenues in the sector fell about one percent year-on-year to £39bn and will continue to drop until 2011, according to a report by analysts TechMarketView and Pierre Audoin Consultants.
The report predicts a further two percent decline this year and a further one percent fall in 2010.
Antony Miller, managing partner at TechMarketView, said the slump may be even more severe than predicted.
"If anything, I think that the forecast for a two percent drop this year is optimistic — I would not be surprised if this is downgraded later this year," he said.
As the downturn bites, medium-sized companies are likely to suffer most.
"In the current market anything that smells of discretionary IT spend gets put on hold; so project services dries up, application development falls off and CIOs stop buying new software licences," Miller said.
"It is those companies that are not big enough to be considered one of the larger players and too large to be offering niche specialist skills that it is going to hit hardest," he added.
The forecast is brighter in the longer term, with the report forecasting that by 2012, the UK software and IT services market will have grown three percent compared to its 2008 levels.
Outsourcing is expected to be the fastest growing area in the sector — increasing by about five percent over the same timescale.
Software as a service is also expected to do well, with the market increasing in size by about eight per cent, as chief information officers look to replace the large capital spend of buying new software with smaller regular service payments.