5-6% Growth For Leading Software Product Engineering Service Providers in FY24/ CY23

The software product engineering sector delivered good growth in the last couple of years. Will this growth continue this year in this macro environment?  What is the growth outlook of the software product engineering services market in FY24/ CY23?

Leading software product engineering service providers are likely to grow revenue by 5-6% in FY24/ CY23.

 We analyzed the growth guidance and prospects of all leading global software product engineering service providers who declare their financial results and found revenue growth estimates ranging from a decline of 3% to a growth of 24%.  

In our analysis, the weighted average growth of these leading firms will be about 5-6% in FY24/ CY23. The growth of other software product engineering service providers should be in a similar range. A couple of points.

•  Size Matters. Bigger software product engineering service providers such as EPAM and Thoughtworks are showing more decline in growth than smaller software product engineering service providers such as CI&T and Happiest Minds.
• Location Matters. India and Latin-America-based software product engineering service providers are showing more growth than US and Europe-based software product engineering service providers.

Why is growth slowing down for global software product engineering service providers in CY23 / FY24?

This is because of a combination of many factors coming together.

• Mega growth followed by slowdown: Software product engineering witnessed mega growth when the pandemic started as the world started going digital. Software product engineering is the plumbing or underlying foundation for digital initiatives, be it platform engineering, cloud engineering, data engineering, etc. In hindsight, it was a medium-term pandemic-driven hyper-growth that was not sustainable. As digital growth is slowing down, so is software product engineering growth prospects.
• Headwinds in a few verticals:  Few specific verticals, such as  BFSI, hi-tech, and retail, are facing headwinds because of overall macro and sector-specific challenges, and it is reflected in sales numbers across IT service providers. Software product engineering service providers are also facing similar headwinds.
• Client preference of insourcing: Many clients, especially in the hi-tech sector, are right-sizing themselves and doing layoffs. One strategy few of these clients are adopting is to shift some of the outsourcing work in-house to minimize layoffs. This is impacting software product engineering service providers' business in the short term. 
• Slow ramp-ups: Many times, projects and deals have been signed up, but ramp-us are slow because of macro or company-specific concerns. Though this is assured business in the medium term, it creates short-term growth challenges.
• Supply-side competition: In the early days, few specialized service providers dominated the software product engineering services landscape. In fact, they created a separate category differentiating themselves from IT or application service development and maintenance work. When the world recognized the importance of software product engineering in the digital push, almost all major IT service providers, both large ones and mid-tiers, have either launched or repackaged their offerings to software product engineering. Many such mid-tier software product engineering service providers are backed by Private Equity and have huge growth and value-creation aspiration. While the market growth rate is slowing down from its peak, the competition has increased significantly in software product engineering.

Is the game over for software product engineering service providers?

"Only when the tide goes out do you discover who's been swimming naked" ~ Warren Buffet

Far from it; in fact, the real game has begun now. What is over is the recent purple patch of hyper-growth of software product engineering service providers. These service providers were in the right place at the right time with their capabilities when software product engineering took off.

In the medium and long term, there will be good demand for software product engineering services as digital adoption is far from over. But there is good growth in supply too, and software product engineering service providers will face hyper-competition. Now growth will be less market-driven and more driven by service providers' strategy and execution.

Bottom Line: This is a developing situation, and the software product engineering service provider outlook is changing every few days with more news coming out from customers. Three things are clear. First, software product engineering growth this year will be significantly lower than last year. Second, there will be huge variations in the growth rates of software product engineering service providers. Third many software product engineering service providers will realize that tailwind is not a strategy. We will keep you posted!