The Future of Software Outsourcing: Trends and Predictions for 2024 and Beyond

With growing consensus that the US is in for a soft landing in 2024, we can expect the outsourcing market to absorb pent-up demand as shelved IT projects are given the green light.

It may not feel like it for mortgage holders and shoppers still grappling with high interest rates and lingering inflation, but there may be light at the end of the tunnel. 

Bank of America earlier this month removed its prediction for a mild recession in 2024, replacing it with a ‘soft landing’, something the bank acknowledged has been rare in the post-war period.

That doesn’t mean a swift drop in interest rates and cheaper prices in the supermarket aisles and at the gas pump. But it suggests we will avoid the recession and spiking unemployment that has usually accompanied an economic downturn in the post war period.

Not out of the woods yet

“Growth in economic activity over the past three quarters has averaged 2.3%, the unemployment rate has remained near all-time lows, and wage and price pressures are moving in the right direction, albeit gradually. Cyclically sensitive sectors have shown signs of stabilization,” Claudio Irigoyen, Bank of America’s Head of Global Economics, wrote in an update.

“A lot still has to go right. We are assuming that Fed policy has gotten its stance largely correct,” he added.

Of particular interest to businesses is the rebound in labor supply in 2023, which was “sharp” and “unexpected” according to Bank of America, which puts that down to increased immigration and women returning to the workforce. 

That rebound means there are more candidates for vacant positions while at the same time, companies around the world have slowed their hiring as they tighten the belt - job listings were down 23% in July 2023, year on year, according to LinkedIn.

“This cooling trend indicates a potential shift in the balance of power, favoring employers and suggesting a reduced influence for workers in the job market. Consequently, this development is expected to contribute to a slowdown in wage pressures, as employers have a relatively larger pool of applicants to choose from,” Rand Ghayad, LinkedIn’s Head of Economics and Global Labor Markets, wrote last week.

What it means for you

This is all positive news: a normalization of the labor market, monetary policy appearing to do its job to curtail inflation without crashing the economy, and modest GDP growth next year as we put the pain of 2022 - 2023 behind us.

For companies taking advantage of software outsourcing partnerships, that means the 20-30% year-on-year increases in hourly rates for certain developer roles are definitely behind us. Development partners are still operating in a tight labor market for skilled developers, but the scramble to recruit teams has eased. That goes for finding in-house developers too.

The crazy salaries, sign-on bonuses and offers of remote work just to secure half decent developers, are a fading memory for now. It offers organizations a chance to rebalance their outsourcing arrangements, leaning on partners for the specialized expertise, innovative development processes, and cost efficiencies they can’t achieve with in-house developers.

Here are five trends likely to shape software outsourcing in 2024, based on the direction of travel in the global economy and developments in tech…

1. AI everything: Early 2023 will go down as an inflection point for artificial intelligence as generative AI came to everything from search engines to Microsoft’s humble PowerPoint. Our partners have been developing AI systems and employing machine learning for decades, but the power of large language models has truly captivated the business world and our recent partner survey revealed that many of them are developing and deploying AI systems for customers, as well as internally.

   We are finally seeing the potential for AI-driven organizations with resulting productivity gains and improved customer service. AI tools like Github Copilot are also allowing software developers to cut down on mundane coding tasks, freeing them up to have more valuable input into software projects. In 2024, AI and automation will result in measurable improvements for businesses, but require a dedicated focus on data platforms, analytics and business intelligence to make the most of it.

2. Servicing pent up demand: IT spending has remained steady in 2023, but there’s no denying that many digital transformation and modernization projects have been scaled back or shelved completely. It’s a trend across the private and public sector, enterprises and small businesses. But as confidence returns, businesses will look to invest again in areas that give them a competitive advantage. 

   For any modern organization, that means refreshing apps, platforms and digital services. It means that businesses and software development partners alike need to plan carefully for 2024, timing investments carefully and accounting for variations in industry sectors as some areas of the economy recover faster than others.

3. Nearshore is hot: The shocks of recent years, from the pandemic’s various impacts on the labor market to supply chain disruptions exacerbated by the war in Ukraine, led to heightened interest in nearshore offshoring destinations. That has led to tremendous growth in markets like Mexico, Costa Rica, Colombia, and Brazil, outsourcing destinations that offer US firms partners in a convenient time zone, just a reasonable plane hop away. That’s pushed up demand for skilled developers in those countries, which has had a corresponding impact on developer rates. We can expect nearshore development to cool down slightly, but remain in high demand in 2024.

4. A focus on delivery: The grip on the purse strings is always a bit tighter in fiscally constrained times, and so it is in software development projects too. Customers are seeking budget certainty and partners who can live up to their delivery commitments. There’s a renewed focus on quality as business leaders demand real bang for buck from the tech investments they are making. 

   There’s less of a ‘throw it at the wall and see what sticks’ approach to investing in new technologies. A return to business fundamentals is actually a positive force for everyone concerned and is serving to lift performance across the outsourcing industry. Expect that discipline to characterize IT projects in 2024.

5. European uncertainty lingers: The war in Ukraine seriously disrupted that country’s thriving outsourcing sector in 2022, and took Russia and Belarus off the table as outsourcing destinations for US companies. The impact will continue to be felt in 2024 as the war drags on and potentially intensifies over the winter as Russian forces target Ukraine’s energy infrastructure. While many businesses have pulled their outsourced development work closer to home, seeking out partners in Latin America, cost pressure there is seeing Asia an increasingly attractive outsourcing destination mopping up demand that would previously have been served in Eastern Europe.

Accelerance can help you prepare for recovery by matching you with a trusted software outsourcing partner that understands your needs and delivers to your timeframe. Get in touch with one of our advisors to find out more.