Part #1 of 2022 IT nearshoring predictions – Increase in demand and IT talent shortage

Timo Railo
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Home > Blog > Part #1 of 2022 IT nearshoring predictions – Increase in demand and IT talent shortage

Summary of what you will find in this part #1:

    1. Increase in IT nearshoring and offshoring demand continues to grow
    2. Talent shortage is the biggest problem for the IT industry at the moment
    3. Changing personal motivation of developers and other IT professionals
    4. 20 ideas for mitigating some of the resulting problems
      • a. Surviving the salary inflation
        b. Tackling churn and recruitment challenges
        c. Addressing talent motivation problems
        d. Professional skills development
        e. More efficient sourcing

Summary for part #2 (coming very soon):

    1. Impact of the increased vendor leverage
    2. Nearshoring IT vendors are moving away from being subcontractors
    3. In-sourcing and better technical know-how of customers

Summary for part #3 (also not far away):

    1. Increased dishonesty in dealings
    2. Transformation of the IT project manager’s role
    3. Macroeconomics
    4. Summary

 

I’ve worked in IT since 1991 and in software nearshoring and offshoring since 2013, and I can confidently say that 2021 was the craziest year I’ve ever seen. The biggest reason for this has been Covid-19 which has accelerated companies’ plans of digital transformation, in some cases leapfrogging the inevitable changes by ten years. This jump combined with an understanding of how distributed work can be set up to succeed has pushed the companies to look at the IT supply market with a more global perspective. All these drivers have created an unprecedented tech talent shortage and price equalization worldwide.

At East, we’ve been extrapolating some of the current trends to see how 2022 is shaping up for the IT nearshoring industry. Like an exhibitionist of the mind, I felt it to be my civic duty to share some of these thoughts and observations. I’ve also collected some ideas on how to mitigate the resulting problems from the changes, ideas targeted at both IT providers and clients.

Despite all the challenges, outsourced tech talent is no longer just an option, it has become a necessity for many.
 

1. IT nearshoring and offshoring demand continues to grow

Let’s start with the most obvious — IT investments show no signs of slowing down. Thanks to Covid-19 lessons on the viability of distributed remote working, demand for nearshoring and offshoring outsourcing grows even faster than the overall IT market. The main hinderance for growth is the lack of qualified technical talent.

According to Spiceworks Ziff Davis’ State of IT 2022 report, 53% of businesses expect their IT budgets to grow over the next 12 months. Big enterprises with over 500 employees plan to spend 21% of their tech budgets on managed services — which involve outsourcing IT functions to a third party. The increase in planned investments is huge for just one year.

There is quite little data still about 2021, but as an example, one of the big IT nearshoring countries Ukraine has reported a whopping 36% growth in IT market.
 

Market pulls towards team augmentation

A heated market means that software companies are keener to work only on a time-and-material basis and what we’ve seen at East is that fewer providers are interested in offering fixed-price projects.

There is also a bit of a dualistic development, where some of the bigger IT providers in the Balkans have their ambitions set to transform the business towards being full solutions providers. Same time many of the smaller and medium-sized vendors that have worked with different models move towards “body leasing”. This happens often despite the pretty talk about how the company is focused on providing end-to-end value-adding partnerships to its clients. The body shopping model is simpler, less risky, and more profitable for the providers.

On the other side of the equation, clients see the ever-growing importance of having critical technical know-how and ownership inside the organization building a stronger preference towards in-sourcing. Many bigger IT providers in the Nordics have been going through a big transformation from being mainly solutions providers to human resource shops. This is why we predict some commercial and strategic challenges for some of the bigger players on the nearshoring markets over the next two years.
 

2. Talent shortage is the biggest problem for the IT industry’s growth

Serious lack of tech talent has really culminated during 2021, increasing the work required to find developer talent and to form well-working teams. I’ve been very happy to see that more IT vendors start mentorship and junior training programs and recruit trainees. In Bulgaria, we have several commercial training companies like Software University and Telerik Academy providing high-quality IT training for a large number of people looking to get into IT. This is all very much needed, but unfortunately doesn’t solve the problem — demand grows faster than the talent pool, thus slowing growth.
 

Exploring new markets in search for talent and cost advantages

Many companies have started also looking for completely new market areas, both in smaller cities and other countries to augment the talent pool. Bridging the culture brings its own challenges and operating on an unknown market is a learning experience. I’ve personally had experiences on markets like Georgia and Armenia, and I must say “the going’s been wilder” at times.
 

Salary inflation on double digits in 2022

IT talents salary inflation and a worldwide compensation balancing based on skills rather than geographical location continues. And there is very little we can do about it.
 

In Poland in just over one year, software developer salaries have increased significantly. The data interpreted in the table is based on a Statista survey measuring Polish average maximum wages in IT by the programming language in 2020 and 2021. 20 000 PLN (zł) equals 4 406 EUR. The growth in the average maximum wages between the years 2020 and 2021, including all the technologies listed, is 16.95%.

 

3. New market situation affects the personal motivation and opportunities of the technical talent

 

Desire for more flexible working arrangements

We also see some of the senior talent seeking more flexible working arrangements, dropping off from the payroll of vendor companies. This easily leads to more chaining in sourcing and increased costs. Much of this senior talent is also no longer training junior talent when they are more disconnected from vendor companies. The percentage of talent “jumping off” is still small, but the trend is clear, and I expect 2022 or 2023 to be the year when we see over 50% growth in this trend.

Spiceworks Ziff Davis’ State of IT 2022 report shows that one quarter of the IT workforce expects to look for a new role, change jobs, or switch careers in 2022.

According to Stack overflow’s 2021 survey, the percentage of professional developers saying they were independent contractors, freelancers, or self-employed increased from 9.5% in 2020 to 11.2% in 2021 — indicating potential job insecurity or a shift to more flexible work arrangements.

 

Professional IT service companies continue losing talent to product companies

Some developers are getting burned out with project-based work, where the working environment, colleagues, and clients come with changing demands and expectations.

Building a product can seem more attractive, the grass being greener on the other side. Product companies and heavily funded startups entering traditional nearshoring markets are often able to provide better compensation, enable more opportunities for professional development, and better offer stronger and more unified team culture. And stock options are never a bad selling point either.

Product companies also tend to retain their talent better, making it harder to attract talent back to software development services companies.
 

4. How to mitigate the resulting problems from the changing IT market situation?

 

6 pointers for fighting the increasing cost inflation

You can’t prevent the market’s salary inflation, but you can try to mitigate the resulting problems. Here are six key points for that:

    1. Employer branding – Building a strong employer branding and reputation helps to attract and retain talent, enabling stronger growth and profitability.
    2. Employee value-add – Fight employee churn by increasing employee value-add, especially in the form of training and mentoring.
    3. Simply developing less and decreasing novelty of IT projects – More careful analysis of the true business needs and scope of the work, answering the question “is this project truly needed” and evaluating whether something can be implemented with a smaller scope.
    4. Looking beyond bespoke software – Make sure that ready or semi-ready software solutions are properly considered and evaluated. Evaluate about adjusting business processes to match software and not the other way around.
    5. Vendor business and service model development – For vendors to move beyond the time-and-material model towards more results-oriented billing based on ready-made software and more structured re-usability of existing code. In short, vendors should seek to get more profit out of each worked hour.
    6. Expansion to new countries and cities – We can already see that bigger Bulgarian companies have established more offices in other Balkan countries. Some are pushing further east. And globally India’s price level and problems with staff turnover are increasing the attractiveness of the Philippines, Vietnam, China, etc. Culturally Balkans are not that far from the Nordics, but moving further east can become too much of a cultural bridging challenge.

    With high demand for many tech roles, companies are under pressure to pay higher salaries to obtain the tech talent they need. HR tech groups data from 2021 shows that new hires are coming in with higher salaries than existing incumbents. According to the survey, 31% of the incumbents reported as software developers were new hires.

 

5 pointers for tackling IT talent churn and improving recruitment

When IT talent is in short supply opportunism and a short fuse in the face of friction leads to talent jumping jobs easier and finding opportunities as freelancers. Also, if 15 to 20% of your staff are recruiters (I’m not kidding about the percentages) then it might be time to look at adding other ways instead of just increasing outbound numbers. Companies with a great reputation have a much easier time also in their recruitment efforts. Just to illustrate — who would not be honored to be approached by Google?

How to mitigate IT talent churn and develop recruiting?

    1. Company culture – Invest in a strong company culture that is more inclusive and humane, and focuses strongly on learning and value beyond salary — make the sense of belonging part of the organization’s core culture.
    2. Competitive compensation – Make sure the compensation follows the market trend — talent should not need to ask for raises.
    3. Career planning – Focus on career planning, counseling, and better-planned project rotation.
    4. Up-skilling tech recruiters – Developers have very little patience when someone is approaching them with a particular set of technical needs without understanding technology, so make sure that your IT recruiters have basic knowledge of technologies. It is also not a bad idea to put your tech recruiters on traditional sales courses.
    5. Simplifying recruitment process – Recruitment should be as much about selling the company and work as it is about evaluation. And part of this is streamlining the process and being very transparent about what to expect. Realistic expectations both ways lead to long-term relationships.

 

4 pointers for addressing the decreasing talent motivation

There is no going around it, salary and the fear of losing it are very strong motivators. When you take this element away, there is a lot that is needed to replace it. Fear of losing one’s salary is an element that has been removed from the equation for most high-value IT employees.

You can’t pour motivation in people, but there are structural things you can do to increase the overall level of motivation:

    1. Project and client rotation – Make sure the talent is not kept in a place where they stop learning or are unhappy. Find the right balance between menial and learning-oriented tasks and make this part of each project’s continuous evaluation.
    2. Organizational culture improvements – Increase overall transparency, foster a culture that rewards all contributions, not only the most technically novel achievements. Increase the influence of all staff members in decision-making and planning.
    3. Reward advancement – Monetary bonuses and recognition on profitable projects and innovations that increase profitability and team members’ well-being.
    4. Career planning assistance – Provide counseling that is non-vested, ie. not provided by the direct manager.

 

4 pointers on how to take care of the IT talents professional skills development

Unfortunately, when you don’t have to be highly skilled to get and keep a job it can decrease the motivation to develop professional skills for some people. This and the fact that more people enter the industry without passion for software leads to a growing skill gap between developers. I’ve personally always hated the “junior”, “mid-level”, “senior” and “superstar” classification and we can see in practise, that it is a very bad way to measure expertise and productivity.

How to make sure tech talents’ professional know-how is not lacking behind?

    1. Training – Both mandatory and voluntary training.
    2. Personal level project objectives – Make sure that each project has a clear learning element that is also signed off by the client.
    3. Mentoring programs – Junior developers rarely become great developers without a strong mentor. Mentoring is a good learning experience for both the mentored and the mentor.
    4. Reward upskilling – Monetary bonuses for completed training and certifications.

 

4 pointers for sourcing from multiple software development companies

The shortage of IT talent causes development teams to be formed more often from several vendors because one vendor simply does not have needed talents available in the required time schedule. This leads to situations where the IT team members have different cultural backgrounds – both in terms of locality and ways of working. We at East are forming more teams where people come from different companies simply because of talent shortage. This often requires more facilitation especially in the early parts of cooperation.

How to outsource IT talent better when you acknowledge the changing world?

    1. For vendors: build a larger network – Building a local network and embracing competition as potential cooperation for vendors.
    2. Transparency – Strive for transparency in all dealings.
    3. Standardization and organization – Standardize more of the working models, contracts, and processes in order to be able to act fast.
    4. Use sourcing partners – Consider using partners such as East to help with the sourcing and increase nearshoring ventures’ success rates.

Hey, we are only getting started here. Stay tuned for part #2 of this series. Follow me or East on LinkedIn to get notified when the next part is out. We’ll be publishing all three parts soon. And please do leave comments on LinkedIn, would love to know especially what points I missed!

I’m a creative builder with over 25 years of experience in the IT industry. I understand the customer’s real needs and their operating environments, which allows me to find and connect the most technically and culturally most suitable experts with companies that need the best IT talent.

I currently aid Nordic companies to source talent from Bulgaria and set up processes to improve the efficiency and success rate of IT offshoring and nearshoring ventures. I’ve gained my experience in Bulgaria by living in the country for years and working with Bulgarian IT talents over a decade.