S3Corp. Tech Blog

Vietnam’s software industry has evolved into a formidable force in global IT outsourcing, with growth fueled by strong demand from overseas markets. While the domestic market has faced challenges, the international sector continues to expand, positioning Vietnam as a major hub for software development and digital services.

Growth in International Markets Offsets Domestic Slowdown

In recent years, Vietnam’s software sector has witnessed a significant deceleration in its domestic growth due to economic challenges and restricted budgets for state and business IT services. However, the international demand for Vietnam software outsourcing remains robust. Between 2011 and 2015, the Vietnam Software Development Association (VINASA) reported that despite a decline in domestic growth, the overall industry maintained a steady annual growth rate of 10-15%, buoyed by foreign outsourcing contracts. Although this is lower than the explosive 30-40% growth seen from 2006 to 2010, it remains well above Vietnam’s GDP growth rate.

The revenue trajectory reflects this shift: the software industry’s revenue climbed from $1.06 billion in 2010 to $1.6 billion in 2015. Similarly, revenue from digital content and IT services surged past $1.6 billion by 2015, taking the combined IT sector revenue to $3 billion—an increase of 50% over five years. Importantly, VINASA highlighted that the Vietnamese value-add in these revenues is exceptionally high, estimated at 90-95%, indicating the domestic expertise and intellectual capital underpinning these exports.

Surging Demand from Global Markets

Vietnam’s growth in IT outsourcing is driven by strong international demand, particularly from Japan, the United States, and Europe. Japan has emerged as a key partner, making Vietnam a top choice for software outsourcing. According to a Japanese IT promotion agency, Vietnam became Japan’s second-largest outsourcing destination in 2013, after China. The growth in this partnership is part of an overarching trend that has seen Vietnam cement its position in the top 10 global destinations for software outsourcing, as noted in a 2016 report by Gartner.

In the United States and Europe, Vietnam software outsourcing companies have achieved an annual growth rate of 20-30%. This is largely due to their competitive pricing, high-quality output, and adaptability in a rapidly evolving tech landscape. Gartner and Global Services-Tholons further underscored Vietnam’s rising prominence by ranking Hanoi and Ho Chi Minh City in the top 20 of the 100 most attractive global outsourcing destinations from 2010 to 2015. This recognition emphasizes Vietnam’s appeal as a reliable and cost-effective outsourcing hub capable of delivering high-quality software solutions.

Challenges Facing the Domestic IT Sector

Despite robust growth abroad, the domestic market for Vietnam’s software industry has encountered hurdles. VINASA reports that domestic IT firms, which cater primarily to state agencies and businesses, have experienced decreased demand as both sectors scaled back on IT spending in response to economic pressures. Budget constraints among clients have reduced spending on IT projects, slowing the adoption of new technologies across industries.

Policy issues related to procurement have also hindered growth in the domestic market. Complex regulations and outdated procurement processes make it challenging for local IT companies to secure contracts with government agencies, limiting their revenue streams and growth opportunities within Vietnam.

Vietnam’s Rising Status in the Global Outsourcing

Vietnam’s ascent as a leading outsourcing destination is well-documented. Global consulting firm Gartner consistently ranks Vietnam among the top 10 countries for software outsourcing services, citing its cost advantages and skilled workforce. Furthermore, the collaboration with Japan and steady growth in the U.S. and European markets have solidified Vietnam’s reputation as a preferred outsourcing partner. This reputation is bolstered by recognition from industry reports, with both Hanoi and Ho Chi Minh City regularly featuring in top outsourcing destinations lists.

Workforce Shortages: A Major Obstacle for Future Growth

Despite the promising growth trajectory, Vietnam’s software industry faces a significant challenge: a shortage of skilled IT professionals. The industry is poised to demand 400,000 IT workers between 2016 and 2020. However, Vietnam’s educational institutions can only supply 250,000 graduates over this period, resulting in a shortfall of 150,000 skilled professionals.

This talent gap poses a risk to Vietnam’s long-term growth in the software outsourcing sector. If unaddressed, it could lead to increased labor costs and reduced competitiveness, potentially dampening the interest of foreign clients seeking cost-effective solutions. Currently, the labor force in Vietnam’s software and digital content industry has been growing at a rate of 10% per year, driven largely by a young and motivated workforce eager to engage in high-tech fields. However, to sustain growth, Vietnam Software development will need to bolster its educational and training programs, attract foreign IT talent, and incentivize more students to pursue careers in software development and related fields.

A Vision for Sustainable Growth

Looking forward, Vietnam’s software industry is positioned for continued growth if it can address its talent shortage and domestic market challenges. The government and private sector must collaborate to create a pipeline of skilled workers who can meet the demands of both local and international markets. This could involve partnerships between universities and industry players, internships, coding boot camps, and the development of industry certifications to enhance the technical skills of graduates.

Additionally, policy reforms in procurement and a more supportive regulatory framework could stimulate domestic IT spending, creating a more balanced growth trajectory that doesn’t rely solely on foreign markets. Encouraging investment in research and development (R&D) and fostering innovation within the domestic industry would also make Vietnam’s software sector more resilient and adaptable in the face of global market changes.

Conclusion: A Dynamic Future for Vietnam’s Software Industry

Vietnam’s software outsourcing sector has become a cornerstone of the nation’s economy, demonstrating resilience and adaptability amid challenging domestic conditions. With continued investment in education, policy reform, and innovation, Vietnam’s software industry can overcome its workforce constraints and continue to compete on the global stage.

In a landscape where cost-effective, high-quality IT services are in demand, Vietnam’s software outsourcing capabilities position it as a formidable player in the global IT industry. By building a strong foundation through policy support, talent development, and domestic market expansion, Vietnam can secure its place as a leader in global software outsourcing for years to come.