A Supply-Demand Conundrum That Needs Engineering

THE COWEN INSIGHT

Pervasive enterprise digital transformation exacerbates a shortage of global talent needed for next-gen application development initiatives. Our deep dive supply-demand analysis (& digital engineering primer) projects a ~5.3MM developer gap by 2026, yielding elevated wages & med-term pricing power for DE services; this increasingly favors public & private firms w/ brand recognition & scale.

HIGH DEMAND & DEVELOPER SCARCITY

A global supply-demand imbalance for software developers is a key issue among corporates & investors, and it’s apt to persist as enterprise digital transformation endeavors become more pervasive. While talent constraints are well publicized, we dive below the surface to offer investors data & insights across both established & emerging talent hubs, and we believe this is the most comprehensive analysis available in the market today.

Higher-valued developer scarcity reinforces demand durability for digital engineering (DE) services vendors, though structural growth views remain an active bull vs. bear debate. While near-term macro concerns yield pockets of client pressure, we see ample demand supporting medium-term expansion at higher structural levels and believe premium valuations across the group are durable. In our view, the winners will have established operating scale across multiple regions, leverage active co-curricula programs to cultivate sustained talent pipelines, and utilize more distributed operating models and innovative developer productivity initiatives.

The requisite skills to enable next-gen application development (ADM) are in short supply, and our analysis suggests that the gap may widen to ~5.3MM developers by 2026, setting up an environment where elevated wages and commensurate pricing power for high-value services will remain over the medium term. This is particularly true in DE services.

OUR UNIQUE PRIMER ON THE DE SERVICES INDUSTRY

Our full report is unique in that it captures key supply & demand drivers for software developers, including a data-driven proprietary analysis across the population by industry and region. It also serves as a primer for the DE services industry, a high-growth component of the broader IT Services market.

We lay out the demand drivers for these technology skills, juxtaposed with major supply-side dynamics, including a deep dive into key nearshore & offshore delivery regions. Country-specific profiles cover software developer populations, STEM graduate data, average IT salaries, and English proficiency rankings, among other relevant information. We also explore developer mix across key industry groupings (IT Services, Independent Software Vendors (ISVs), and All Other Industries), with an emphasis on skill-sets amenable to DE services.

DE services spend is estimated to be in the hundreds of billions of dollars and growing well in excess of the broader IT Services market (20%+ in DE versus a single-digit pace for the overall market). Robust demand is supported by nascent enterprise digital transformation penetration. The market remains highly fragmented, which favors providers with brand recognition and global scale, which should support pricing leverage, a key lever to offsetting elevated wages, enabling margin stability while traditional players face compressing profitability.

WHAT TO WATCH

The developer shortage will remain pervasive in the coming years, notwithstanding the war in Ukraine, which has had major implications on global supply dynamics, further constraining talent and driving a reorientation of delivery footprints in real-time. Countries are increasingly leaning into subsidies, education programs, public/private partnerships, etc., to further develop the local skillset to effectively compete as capable resource pools and capture the associated economic prospects. The “Celtic Tiger” period in Ireland is a prime example of successful policy that fostered education reform and foreign direct investment to attract multi-national technology companies, creating a virtuous cycle to further develop the talent gap. How respective global workforce diversification evolves and the utilization of distributed operating models will increasingly separate the winner & losers among vendors.

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