UK IT firms set off profit alarms

Delays in contract negotiations have caused profit warnings to triple this year for UK software and computer services companies, according to new figures from Ernst & Young.

Although the number of companies that issued warnings is relatively low (12 out of 178), only four companies were forced to notify shareholders of a drop in profits this time last year.

James Bennet, technology director at Ernst & Young, told ZDNet UK sister site silicon.com that delays in contracts and projects are the reason for the sudden rise. "It is taking much longer than expected for companies to sign contracts. These delays could be where a customer comes to the end of a contract and tries to renegotiate at the end of a vendor's quarter," he said.

"And there's revenue recognition — if I sell £100 of services over three years, you might pay for it immediately but can't recognise the revenue until it's delivered."

The software and IT services sector is also the sector that issued most warnings the quarter covering the first three months of 2006. Twelve IT services companies issued warnings out of 85 companies across all sectors. All but one of the IT companies that warned shareholders has a turnover below £200m.

Bennet added: "For smaller companies dependent on fewer big deals this is an issue and a delay in just one or two deals is all it takes for forecasts to be missed."

The E&Y findings show that the overall economy is not to blame for the missed targets — more important are problems with internal controls and reporting procedures.