A Microsoft for us

UK investors are scared of the computer business. A new initiative aims to change that, says Michael Cross

AN INITIATIVE funded by the Government this month sets out to tackle a fundamental flaw in the UK information technology industry.

Although Britain excels at writing computer software and starting up companies to sell it, it is poor at creating global giants. No UK company comes anywhere near Microsoft or Oracle in supplying mainstream multipurpose software - the IT industry's biggest money maker.

On 24 February Barbara Roche, the minister for small firms, will launch an organisation which could help fledgling companies through the most critical stage of their development.

The Software Business Network will be run by an industry trade body, the Computing Services and Software Association (CSSA), with funding from the Department of Trade and Industry of nearly pounds 1m for three years. The idea is to help companies make the transition from start-up to medium size.

"A lot of companies get to a certain stage and wither and die, or just stagnate," says Andew Mathew, project manager. The network will put small companies in touch with larger partner firms and individual mentors, who might be experts in management, marketing and finance. It will also serve as an introduction agency to "serial entrepreneurs" known as business angels - individual investors who can support a small company before it is able to raise City funding.

The network's launch is one sign of growing unease at the way the City looks at software companies. The City feels that IT stocks, especially software, are hard to value - and investors are nervous about such things. "The problem is that with these fast-growing businesses, the business models are unusual," says Bill Passmore, chairman of privately-held Maxima Group, which owns companies specialising in software for manufacturing and healthcare. Maxima has sales of pounds 25m and 250 employees. Mr Passmore does not rule out a flotation if the climate is right.

Ian Spence, an analyst with IT investment specialist Granville, agrees that the City's record has been poor. "The one thing we lack in this country is proper seed corn finance. While the climate is slowly changing, many investors still suffer 'personal techno fear'." Mr Mathew says there is fault on both sides: business plans presented to venture capitalists are too often naive.

One of the Software Business Network's jobs will be to make

small companies more attractive to mainstream finance. If it succeeds, it will be a remarkable reversal. The story of Britain's computer industry is an all-too-familiar tale of innovation followed by stagnation. An early lead in building computer hardware was lost to the US and then Japan. The UK's last maker of mainframe computers, ICL, was acquired by Fujitsu in 1990.

By then, the action had long moved to desktop machines. But no British pioneer, such as Sir Clive Sinclair, became a giant. More surprising was the lack of global success in general-purpose software - the operating systems and "shrinkwrapped" programs from which Microsoft's Bill Gates made his billions. "We missed out," says Rob Wirszycz, director general of the CSSA. The killer, Mr Wirszcycz says, was the size of the US market, which means that a consumer product can rapidly sell millions rapidly and fund further development.

Britain has many successes in niche areas and computer services. About 40 per cent of the world's leisure software is authored here. The pneumatic Lara Croft, star of the best-selling Tomb Raider game, was created by Core Design of Derby.

Core, now part of Eidos, celebrates its 10th birthday this year. It began with eight people and now has 65. Jeremy Smith, managing director, started the firm with pounds 16,000 "borrowed from my wife" to support bank lending. He says the culture is changing: "The City is beginning to realise that a half-written computer game has a value."

Britain does have some computing multinationals. "BT looks increasingly like an IT stock," says Mr Wirszycz. Another high-profile performer is Misys, best known for supplying systems for banks and the first home-grown software company to make the FT-SE 100. However, the CSSA's 600 member companies, with combined 1996 revenues of pounds 11bn, are mainly very small.

The area where the UK does shine is services. Mr Wirszycz predicts two years of "total unreality" for share prices of firms such as Logica, which designs and implements systems for other companies. The driver is outsourcing - the business of running other firms' computers and the associated consultancy. "We are Europe's consultants," said Mr Wirszycz.

Analysts say service companies get a much easier ride from the City than software developers. "They're easier to understand," said Mr Spence.

British industry now has a chance in the IT industry's third wave. After hardware and software, the next big market is likely to be netware: products that manage, organise and protect information on networks.

The tools for this new world are more likely to come from Seattle than Slough, but there are signs that the climate in the UK is changing. From next January the London Stock Exchange will list a separate IT index of 27 computing software and services firms, most of which today languish in the "support services" category. The idea is to raise the profile of these stocks.

Mr Spence suggests two firms to watch - AIT, which sells systems allowing people who deal with customers to call up information from many databases, and Sherwood, which has developed a management system for insurance companies.

British firms could also do well in Internet security and healthcare software. New systems which can intelligently mine the vast amounts of information in medical records are on the way.