Navigating the Storm: Challenges and Solutions for Poland's Software Outsourcing Industry

Poland's software outsourcing industry, once hailed as a beacon of growth and innovation (with 607k engineers on the market as of now, 20% more than in France as an example!), finds itself at a crossroads. A perfect storm of economic factors, expressed in R&D budgets being cut by 40%, has led to mass layoffs starting abroad and coming to Poland. What followed is an absence of junior and a decline in mid-developer positions, alongside an unprecedented surge in job applications (average number of applicants per position in 2022 was 17, whereas in 2023 it rose to 40, especially in Frontend with a growth from 23 to 113). The landscape has shifted dramatically, challenging the traditional value proposition of Polish software houses, which, in the last 15+ years, thrived mostly on candidate scarcity. However, amidst these challenges lie opportunities for reinvention and growth.

Background:

The software outsourcing sector in Poland has been significantly impacted by recent economic downturns, with ICT industry offers decreasing by as much as 43% in the first half of 2023, according to inhire.io , a sector job website. This crisis stems largely from abroad, as the Polish IT industry heavily relies on orders from international markets. While own-international corporations' programming centers continue to thrive, nearly 80% of domestic software companies are vulnerable to global trends.

Challenges:

The crisis has led to drastic measures, including mass layoffs or salary cuts of up to 50% for programmers, as reported by Gazeta Wyborcza. Employers are facing pressure to tighten budgets, with companies worldwide becoming increasingly budget-conscious. Wojciech Mach , president of recruiter GFT Poland, highlights a significant cooling in the global IT industry, with decision-making processes becoming more prolonged and meticulous (from ~4 weeks to 3-6 months to sign a client).

Additionally, there is another issue with the increase in wages among developers and hence reduced competitiveness of Polish resources in Europe. Poland was traditionally seen as a cost-effective option compared to Western countries, but the wage gap has been steadily narrowing over the years. According to a report by Kodilla , IT has been leading the increase in remuneration in the country, with an average increase of 100% total - over the last 8 years. Nowadays, the wage rates between Poland and Western countries are very close. However, there is an awakening awaiting the industry. With the market slowdown, only the most valuable employees can expect to receive significant increase (but the meaning of "valuable" is changing). As Pawe? Pustelnik , a member of the board of SoDA - Software Development Association Poland and managing director at Future Processing , stated, "the market is normalizing.”

Moreover, the emergence of chat-based AI, such as ChatGPT, Figma, and GitHub Copilot, and its effect on the effectiveness of developers cannot be ignored. While these AI tools can accelerate software development by 20-30%, they also pose a threat to traditional programming roles. Gazeta Wyborcza predicts that AI will render some programming tasks obsolete, leading to a shift in demand towards narrow specializations.

Proposed steps to reinvent the value offering for Software Development Companies:

1. Diversification of Service Offerings: Software houses must pivot from offering simple FTEs to providing specialized solutions tailored to specific technologies and industries. By investing in niche expertise, companies can adapt to evolving client demands and differentiate themselves in a competitive market. It is crucial to understand the meaning of a solution and its delivery process. This shift requires a deep understanding of client needs and the ability to offer value beyond billable developers and steaming from the core organizational capabilities.

2. Strategic Partnerships and Alliances: Collaboration with complementary technology providers can enhance companies' capabilities and foster innovation. By leveraging external expertise, software houses can stay ahead of the curve and address clients' evolving needs effectively, offering a one-stop-shop for an increased number of specializations and technologies.

3. Market Positioning and Branding: Rebranding as solution-focused partners rather than mere service providers can differentiate software houses in a crowded market. Emphasizing domain expertise, successful case studies, and thought leadership can enhance companies' credibility and attract discerning clients.

4. Customer-Centric Approach across the Whole Company: Shifting the focus from FTE to delivering tangible business outcomes can drive value for clients and foster long-term partnerships. Understanding clients' pain points and aligning solutions with their strategic objectives is essential for sustained success. This approach requires alignment across all departments of the company to ensure a seamless client satisfaction journey.

Conclusion:

The challenges facing Poland's software outsourcing industry are formidable, but not insurmountable. By embracing change, investing in specialization, and adopting a customer-centric approach, software houses can navigate the storm and emerge stronger than ever. It's time to pivot from a reliance on traditional models to becoming innovative solution providers in an ever-evolving digital landscape. This shift can be seen as market normalization, where only the best will thrive while others may shrink (in size and %margin) or be acquired.

At the same time – fear not! Body leasing as revenue generator is here to stay! Yet, it cannot be seen as the main value factor to acquire new clients anymore.

To be followed with articles:

1. "Evolving Towards Solutions: A Blueprint for Software Houses in Poland"

This article will explore the concept of a solutions-based approach for software houses, detailing steps to prepare and implement this strategic shift.

2. "Cultural Shift: Transforming Your Organization for Success in the Modern Market"

This piece will delve into the necessity of a mindset shift within software companies, emphasizing the need for alignment across all departments to adapt to changing market dynamics.

3. "Harnessing AI Across the Organization: Strategies for Software Houses"

Focusing on the integration of AI technologies, this article will discuss how software houses can leverage AI tools across various departments, fostering collaboration and efficiency.

4. "Sales Strategy 2024 and Beyond: Key Do's and Don'ts for Software Houses"

This article will provide practical insights into crafting and executing effective sales strategies for software houses, incorporating examples of tools, KPIs, and best practices.