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Competition for skilled developers is putting firms under pressure and could potentially stifle the growth of the North West technology sector, according to research by the insolvency and restructuring trade body R3 in conjunction with Manchester Digital.

They say that the skills shortage is creating wage inflation. In some cases, firms have had to close because they were unable to replace key staff members, while others are outsourcing work overseas.

Figures from R3 show that the technology sector in the North West has the highest risk of failure of any of the major sectors which it monitors, except for transport.

Almost one in three IT and tech firms (32%) in the region is considered at above-average risk of failure during the next 12 months, equivalent to 5,867 firms. The sector is also one of the fastest growing, with the number of active businesses has increased by 12% in the last six months to reach 18,280.

Katie Gallagher, managing director of Manchester Digital, says that bigger companies have resorted to offering higher salaries to attract skilled developers. “We know of cases where small firms have shut down because they have lost a key member of staff and are unable to replace them. They can’t afford to match what the bigger firms can offer.

“The public sector has been slow to respond to the skills shortage. As a result, 26% of our members said they outsourced work overseas last year and that, compounded with the uncertainty over Brexit, means that we could lose some companies as they choose to relocate outside the UK altogether.”

Paul Barber (pictured), the North West chair of R3 and a partner at Begbies Traynor, says: “The technology sector tends to be risky by nature as it is focused on innovation. However, it is clear that the skills shortage is threatening much business by creating wage inflation and pushing up costs.

“Companies will need to ensure they have sufficient margins to maintain profitability or enough investment to bring development projects to completion. Either way, they need to keep strict control of budgets and seek professional help at an early stage if problems arise.”

R3’s insolvency risk tracker is compiled using Bureau van Dijk’s ‘Fame’ database and measures companies’ balances sheets, director track records and other information to work out their likelihood of survival over the next 12 months.