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February 2018

Software Product Development

Sectorwatch

Custom software development, or software outsourcing, has grown dramatically since companies started shifting work to low-cost third parties in the mid-1980s. This rapid expansion was largely driven by the open-source movement in the 1990s which provided developers a bevy of tools (languages, frameworks, etc.) to work with. To frame the industry’s recent growth, the broader software industry grew at a 10% CAGR between 2011–2015 from $430b to $620b, while the custom-built software industry grew at a 33% CAGR from $43b to $136b over the same period according to Forrester. Today the custom software market is estimated to be $130b to $140b (depending upon the source), and we believe the market is poised to continue its over-sized growth.

Industry Trends:

• Current revenue growth rate is less than the average of the last 3 years, indicating that the market may be flattening or declining
• Current gross profit margin is less than the average of the last 3 years gross profit margins, indicating customer pricing power
• Current EBITDA margin is less than the average of the last 3 years EBITDA margins, which may signal further consolidation