The UK's position at the top of the European software industry is under threat according to a report commissioned by Microsoft in partnership with Intellect and the British Computer Society.
The report, Developing the Future, is the third in an annual series and this year, for the first time, it includes a "software barometer" which shows the overall trend across the software industry. The barometer indicates that the overall trend is downwards and, the report said, three challenges could "derail the sector's future success".
The report said that the smallest software companies, "micro-software companies" as it calls them, are disappearing. It also shows that the software industry in other countries, especially Germany, are catching up with the UK quickly. And it shows that the software industry knowledge gap (the difference between the skills needed and the skills available) is not closing.
The report set out three recommendations for the UK to approach the issue.
First, the "Government procurement processes need to favour small business" the report said.
"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.
Second, long term investment is needed in the IP network infrastructure, the report said, and it points out that the infrastructure is "a key factor in economic growth, if we are to avoid falling behind other major economic powers".
Finally, the report said that that "internships" (in other words, sponsored training in IT skills) should be encouraged with incentives for students, universities and businesses in order to "bridge the gap between the skills students acquire at university and those industry needs".
Gordon Frazer, managing director of Microsoft UK, the company paying for the report, said that the economic pressure everyone is now facing made it even more important that these issues were addressed.
"We work with 36,000 Microsoft partner companies in the UK," Frazer said. "[Small IT companies] are vital to the overall health of the UK software sector."