Science: Overseas profits made in the UK: In the first of a major series, Lynne Curry looks at how the UK's booming software industry is losing out to takeovers and talent poachers

Laurence Holt's long, low TVR sports car, hand-built in Blackpool, stands on the bricked forecourt outside his Hammersmith office, an architect-designed mews-type development with views over Ravenscourt Park, protected by an electronic gate.

Holt, 29, is dressed from head to foot in black, the same colour as the narrow-finned blinds in his office; most of the other staff favour Levi's jeans. There are 28 of them, and simple maths on the company's income reveals that each is expected to earn an average of pounds 50,000 in fees this year.

Holt's company is Quidnunc, consultants in information technology (IT) and suppliers of bespoke software. He founded the business in 1987 in a room of a Bloomsbury flat and now this southernised Mancunian is one of the sharp young things of British software.

Rich and successful, he reflects his industry - hi-tech, high fees and high salaries. In offices predominantly scattered around the motorway suburbs of the South-east, millions of pounds are being generated. Yet there are disappointments in this industry: so much British talent and innovation has ended up delivering its profits abroad.

Barely 30 years old, the British software scene has had a quiet, virtually invisible growth in the public perception. Plain modern buildings, with names that puzzle the common man - not least because of the industry's marked fondness for initials and acronyms - could never be as evident as the working pits, manufacturing plants and factories that constituted the last generation of workplaces.

Yet in 1992, bespoke software earned pounds 560m for Britain. Although 'off the shelf' software products brought in pounds 1.7bn, the bespoke sector is significant and growing. Turnkey solutions, which are fixed-priced contracts between hardware manufacturers and software suppliers, earned another pounds 778m, and systems integration brought in pounds 675m.

In total, the UK software and computing services market, which encompasses everything from tailored design to IT consultancy and outsourcing, was worth pounds 6.1bn and by 1996 is predicted to grow to pounds 9bn. Software products are expected to grow by 12.3 per cent a year between now and then.

Behind the flat fascias of these office blocks, which are more white T-shirt than white-collar, British brains in techno-towns such as Slough, Reading, Harlow and Stevenage work on products which can net their employers thousands of pounds per employee. In 1992, Macro 4 headed the league of profits before tax, when each employee earned it more than pounds 44,000. Micro Focus, a Newbury company with 160 employees, was in second place: each of its employees brought in pounds 38,400 before tax. Average staff costs in 1992 were pounds 25,600 per employee and the average salary of the highest paid director was pounds 76,200.

But while the UK is widely respected for its intellectual capability, it seems adept at letting its profits go abroad. When small, successful companies have grown big they have frequently been taken over. Some of the most prominent British managers are doing good jobs - but in other countries.

In world terms, Britain is well down the league, representing about 8 per cent of the global computing services market. A British company makes its first appearance in the world ranks at number 29, and Germany and France are ahead of Britain in the European league. Since 1985, when two-thirds of the top 10 suppliers to the UK computing services market were owned in the UK, ownership has switched dramatically. Only 23 per cent of these companies remained UK- owned in 1992, with the US owning 42 per cent, France 17 per cent and Japan 18 per cent.

The transfer of ownership has evoked dismay among industry commentators. Richard Holway, publisher of the annual Holway Report, said the shift lent new meaning to the frequently used term 'restructuring': 'When applied to the UK computing services industry in the last six years, the word could take on the same meaning as in the sentence 'My car has been restructured by a foreign juggernaut'.'

Neither has the industry provided the panacea in terms of jobs which was hoped for. In the Holway database of more than 1,000 companies, employee numbers fell by 9,000 between 1990 and 1992 to 110,000. The only conclusion that can be drawn is that the growing incomes and profits are being earned by, and distributed among, fewer beneficiaries, many of whom are abroad. The UK can, however, lay claim to a bustling community of small companies that are making healthy livings from software. The Computing Services Association, which represents more than 360 organisations, shows staff numbers at some firms as low as five. High-flyers are more likely to number their staff in hundreds (only a handful in thousands), while the companies with the biggest payrolls are UK subsidiaries of American firms.

Banking and finance are the biggest consumers of software, swallowing more than a quarter of the money spent in the UK. Systems evolved here for everything from pensions funds to dealing house systems go all over the world. The British companies BIS, creator of the Midas banking system, and ACT are among the prominent ones.

Increasing private involvement in local and central government is expected to accelerate spending on software over the next two years, pushing it to pounds 2.2bn. Public utilities and retail and distribution are predicted to grow by more than 9 per cent. More than pounds 1bn is currently spent in both sectors.

Next week: The financial sector, expected to be worth pounds 3bn by 1996.

(Photograph omitted)

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