Geopolitical Instability & Economic Uncertainty – How Software Outsourcing in Europe Will Weather Multiple Storms
The post-COVID economic gains have tapered off as the world braces for a difficult fourth quarter in 2022 and an unpredictable first quarter in 2023. Though geopolitical and economic turbulence will continue to dominate CEOs’ agendas across industries and shape the software outsourcing market in Europe, a few key takeaways from 2022 give insights into how to grow software development teams while managing costs over the coming months.
Look for an environment shaped by international engagement
The economic and non-monetary benefits of European Union (EU) membership are significant. Research indicates that the single market, which guarantees the free movement of goods and people and enables people to live, work, study, shop, travel and retire anywhere in the EU, has increased employment opportunities and driven growth. The European Parliament, in evaluating the impact of an expanded single market between 1990 and 2020, attributes 3.6 million new jobs to the expansion of the single market. But the impact is far more reaching, as the average EU citizen gains €840 more per year as a result of being a part of the single market.
Of course, the benefits of the EU extend much further than income and employment matters. Membership comes with rewards, but also obligations. EU countries, and the businesses operating within their borders, are required to follow legislative requirements, including regulations (binding legislative acts which must be applied in every EU jurisdiction), directives (acts which establish a goal countries should achieve), decisions (binding only to those it addresses, for example a specific country or company) and non-binding recommendations and opinions. This helps create a level playing field and stability across borders and markets.
Following the collapse of the Soviet Union and the dissolution of the Warsaw Pact, the North Atlantic Treaty Organization (NATO) needed to reappraise its role going forward, with many speculating that NATO’s relevancy had diminished. Clearly the Russian invasion of Ukraine has not only reversed that sentiment but led to a resurgence of NATO. A NATO member since 1999, Poland contributes to, and benefits from, an international alliance that provides disaster relief, delivers humanitarian aid and encourages scientific collaboration through the NATO Science for Peace and Security Program.
Given the aforementioned Russian aggression, perhaps the most talked about benefit of NATO membership is the guarantee of collective defense, enshrined in Article 5 of NATO’s founding document, the Washington Treaty. That’s because NATO’s policy of collective defense means an attack on one member is considered an attack on all members. If a member state invokes Article 5, all other member states will come to its aid.
In its 73 years of existence, Article 5 has only ever been invoked once, by the United States, in response to the September 11, 2001, terrorist attacks. The war in Ukraine has triggered a re-evaluation of NATO capabilities and strategies. At the end of June 2022, American President Joe Biden announced that the US military would establish a permanent military base in Poland, the first on NATO’s eastern flank. This would be in addition to the NATO battlegroup already based in Poland, comprised of Croatian, Romanian and British soldiers, under the leadership of the United States.
Safety has an understandably significant impact on a business environment. American and European organizations feel comfortable working with Polish companies, in part because of the international ties that bind Poles with other nations, including its membership of the EU, NATO, Euro-Atlantic Partnership Council, Organization for Security and Cooperation in Europe (OSCE), International Monetary Fund (IMF), World Bank, World Trade Organization (WTO) and the Organization of American States.
As an active member of these organizations, Poland has demonstrated that it’s a reliable partner and an integral part of western civilization. A similar culture and outlook help explain why so many countries, particularly the United States, have invested in Poland. The American Chamber of Commerce celebrated 30 years of investment in Poland in 2020, and the financial commitment made by US interests demonstrated the faith and confidence in doing business in Poland. In 2020, the active assets held by American investors in Poland reached over $54 billion USD.
Focus on value for money, not just cutting costs
Research released in September 2022 by Eurostat, the statistical office of the European Union reports that “the euro area annual inflation rate was 9.1% in August 2022, up from 8.9% in July. A year earlier, the rate was 3.0%. European Union inflation was 10.1% in August 2022, up from 9.8% in July. A year earlier, the rate was 3.2%.”
Europe is not alone in experiencing the pains of inflation. The World Bank reports that in 15 out of the 34 countries classified as advanced economies by the International Monetary Fund’s World Economic Outlook, the 12-month inflation through December 2021 was above 5%. In a global economy, inflation is an omnipresent concern for developed and developing countries alike.
Inflation is forcing companies to tighten budgets, leading to cutbacks and layoffs across the tech industry. Crunchbase News reports that as of mid-September, more than 42,000 workers in the US tech sector have been laid off in mass job cuts in 2022. In the face of rising costs, companies are restructuring budgets and investing money where it will most likely generate revenue. Primarily, this means investing in product development that will speed up delivery and achieve short-term revenue and growth goals.
The latest research shows that nearly 8 out of 10 global CEOs expect a recession in their primary region of operations within the next 12 to 18 months. Rising software development costs and reduced investment are driving companies to search for more cost-effective options. As a result, global outsourcing is on the rise, despite cutbacks and layoffs, because it fulfils the demand for innovation and development without breaking the bank. Accelerance’s Global Software Outsourcing Trends and Rates Guide clearly shows the financial advantage of enterprise-grade offshore partners, whose hourly rates range from $35 to $75 USD, compared to in-house rates between $75 and $125 USD.
Of course, lower wages are attractive for CFOs trying to balance the books, but it is important to remember the adage: “you get what you pay for.” It is difficult to fully measure, both quantitatively and qualitatively, the total value a software outsourcing partner delivers, but there are factors to look out for. These include lead times, speed of delivery, time to market, number of active days, demonstrable experience with a range of technologies, a track record of innovation and a willingness to push back against your assumptions. The last point can’t be underestimated – the difference between a software outsourcer that mindlessly says ‘yes’ and a true partner that fights for the most value is immense.
The value received from money invested takes many forms. The explicit gain is the software that drives the product or service being developed. The implicit profit is the knowledge sharing that takes place between an external, dedicated development team and a company’s in-house staff. External experts can share real-world insights regarding tools, technologies and methods that, once absorbed by a client’s team, will deliver value long after a project has ended. The skillsets and knowledge shared will enhance a client’s internal capabilities and increase capacity.
For CTOs looking to not just survive an economic downturn, but emerge from it in a stronger position, the aim should not be to simply reduce costs. The ultimate goal should be to achieve to deliver value earlier in the development process. This can be done by creating the capacity to produce a product faster, and at a higher level of quality, which in turn will generate more money for a company. In this way, software development will no longer be a cost, but rather a revenue-generating advantage. Additionally, the right software partner will deliver peace of mind.
Navigating through the current geopolitical crises is not easy, but it is manageable. Companies aiming to ramp up scalability, speed up software delivery and create new revenue streams in a flagging economy can find an elite, cost-effective software development partner in Europe, provided they know what to look for. Referring to case studies, consulting industry observers like Clutch and seeking out client reviews are all useful ways for gauging whether an outsourcing partner has technical proficiency and matches your organization’s culture. Cutting costs, leveraging top talent and maximizing value may seem, intuitively, like contradictory goals. But all of them can be achieved when working with a software development company that focuses on product engineering that generates real-world value. To find out how our teams smoothly integrate into companies, autonomously handle all stages of software development life cycles and quickly ramp up delivery processes, fill out the contact form.