Shifting tides – Market consolidation of the Finnish software consulting market

The software consulting market in Finland is experiencing a major transformation, fueled by strategic decisions from large companies and changes in the economic landscape. This consolidation is reshaping the industry, presenting both challenges and opportunities for firms operating in this space.

Simplified vendor engagement

In recent years, large companies in Finland have increasingly reduced the number of software consultancy vendors they engage with. This trend is driven by the desire to streamline operations, minimise administrative overhead, and cut costs.

Rather than managing numerous frame agreements with various consultancies, these companies prefer to work with a few trusted main vendors. This approach simplifies vendor management and enhances the client companies' bargaining power, allowing them to negotiate better rates.

Navigating the evolving landscape of IT consultancies

The selected main vendors often subcontract work to smaller consultancies when they lack the necessary workforce or expertise internally. This subcontracting model allows larger vendors to maintain a flexible and scalable workforce while meeting their clients' diverse needs.

Although subcontracting between consultancies has been common for a long time, market consolidation is putting smaller consultancies in a more precarious position. Those without specialised expertise or a strong client portfolio find it increasingly difficult to compete independently and are often relegated to subcontractor roles.

Moreover, clearer distinctions are emerging between IT consultancies that solve complex business problems and talent-driven companies that supply highly skilled IT experts to augment their clients' in-house teams.

From talent shortage to project shortage

At the beginning of the decade, the Finnish software consulting market saw the rise of numerous new talent-focused companies. Often founded by industry veterans or ambitious entrepreneurs, these firms capitalised on the high demand for software development services. However, market dynamics have shifted dramatically since then. The early post-pandemic boom in digital development projects has given way to a more challenging environment.

Since 2022, new investments have decreased, leading to a shortage of new projects. This reversal has significantly impacted the market. During the height of the digital development surge, generalist software developers were in high demand, and companies hired consultants aggressively to meet their digital transformation goals.

But with the reduction in new investments, the demand for these generalist talents has decreased, leaving many consultancies that once thrived on providing generalist developers now struggling to secure new projects.

Market shifts and survival strategies

As a result of decreased demand, there is now more talent available in the market. This has allowed companies to hire generalist talent more easily, further reducing reliance on external consultancies. Consequently, many consultancies face a surplus of talent without corresponding project opportunities, leading to financial strain and operational challenges.

We have already seen announcements of layoffs in several larger IT consulting companies over the past year due to the market adjustments. The situation is even worse for small consultancies that cannot differentiate themselves with specialised expertise. Consultants have a low barrier to changing jobs if their current employer cannot provide interesting projects, which could result in smaller consultancies disappearing or going out of business.

Given these market conditions, the likelihood of mergers and acquisitions (M&A) is high. Larger consultancies, aiming to expand their capabilities and client portfolios, are likely to acquire smaller companies. These acquisitions enable acquiring companies to gain specialised expertise or niche capabilities, enhancing their service offerings. For smaller consultancies, being acquired can provide financial stability and access to larger client bases. This trend has already begun, and we believe it is only the beginning.

Carving out a niche in IT

The Finnish software consulting market is undergoing significant changes. The trend among large companies to opt for fewer, trusted vendors is leading to market consolidation. While this poses challenges for smaller consultancies, particularly those lacking specialised expertise, it also creates opportunities for strategic acquisitions and partnerships. As the market responds to shifting economic conditions, companies that can adapt and carve out their niche will be well-positioned to flourish in this dynamic environment.

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Jaakko Taskisalo - CEO

Jaakko Taskisalo