The Polish software house market is joining forces.

Software houses, or companies that develop software for clients, are a Polish export in the IT sector. This is confirmed by data from Clutch, which is the most important ranking service, including for software development companies. Its database contains 843 software houses from Poland, while only 430 are from Germany and 95 from Czechia. These companies operate globally – supporting both the Polish and foreign markets with their services. The key features of Polish software houses are not only their attractive prices due to lower labor costs, but also their extraordinary programming proficiency, many years of experience, and the ability to solve problems flexibly.

Software companies in Poland have coped well with the effects of the economic freeze during Covid-19. According to the latest report by the IT Services Employers’ Association (SoDA) “The impact of Covid-19 on the Software House industry in Poland”, managers of Polish software houses are optimistic. The assessment concerns both liquidity and financial results of companies from this sector and the operational sphere of the whole industry. Managers also signal new trends; such as the acceleration of digital transformation among customers and more frequent experiments with marketing tools. Still, the market absorbs and needs new employees. Software houses have also decided to increase marketing budgets.

“Despite initial concerns, in the second quarter of 2020, companies said they increased revenue by an average of 20%, compared to a projected profitability of 15%. Additionally, more than a quarter of companies reported strong revenue growth – up to 30%, and some exceeded the 100% year-over-year growth ceiling.” – write the authors of the report.

Despite such good results and positive sentiments, after over 30 years the industry is starting to reach the wall measured by the potential of organic growth.  The roadblocks to the industry’s development, as identified by experts, are: fragmentation, these are often companies consisting of several people, as well as problems with hiring new employees, both developers and management staff. The solution most frequently applied by the most mature software houses is consolidation, which makes it possible to scale these businesses the fastest.

At this time, some of the most mature software houses in Poland are seeing their opportunity for dynamic growth in consolidation. The report: “Does Poland have a chance of becoming the IT hub of Europe” by the Citi Handlowy Foundation, in collaboration with SoDA, indicates that, in terms of path of growth, 20% of companies choose the strategy of scaling through acquisition. The trend of growth through acquisition is confirmed by Adam Demusiak, partner at PwC, head of the Mergers and Takeovers Team, who predicts further consolidation of the industry and greater interest of private equity funds in this market sector in a comment given in the above report: „Consolidation on the software house market seems unavoidable. The market is very fragmented and highly competitive at this time. Despite having very good teams and strong skills, a significant number of smaller entities achieve results at the profitability threshold. What is more, it is difficult for smaller entities to invest in building good marketing and sales teams, and they base their revenue on a narrow group of 2 – 3 critical clients, which increases business risk. I expect that, in the medium-term, i.e. 3–5 years, some of the largest entities will remain on the market, which will be characterized by higher profitability and better diversification of the client portfolio.

The report indicates two leaders in the market consolidation trend, who publicly communicate takeovers and the intent to continue their M&A strategy: Netguru and TenderHut. As the report states, besides implementing a dynamic growth strategy involving the acquisition of smaller IT companies both in Poland and abroad. Recently, TenderHut Group announced into Strategy Paper that it has identified 36 entities that could become acquisition targets. 33 of these entities operate on the Polish market, while the remaining 3 operates outside Poland. The company also that sustainable inclusion in the consolidation trends in the IT industry and sustaining high growth rates in individual business segments in the years 2021-2025 are important elements of the development strategy.

Why consolidate since everything is so good? 

With regard to the problems standing in the way of further growth, mentioned above, most consolidations in Poland have an acqui-hiring model, meaning takeover through acquisition of talent. The value of such transactions is typically relatively low, however the scale of this phenomenon has been growing in recent years.

„Consolidation through the acquisition of smaller companies not only makes it possible to take over well-knit coding teams, but also, and above all really, upper management who will become part of the organization’s senior management.” – explains Robert Strzelecki, CEO of TenderHut Group. This method of recruitment is more effective because the managers of smaller organizations know the challenges facing software houses at the minutest of levels: “In a small organization, they have to do everything: from customer service, all the way to issuing invoices and debt collection. They understand that cash flow is important. Managers acquired in this way also provide more value in that they know what works and supports growth and what doesn’t work and could cause problems” – Strzelecki adds.

Small software houses often achieve enormous success by developing very advanced projects. This happens thanks to experienced, tightly knit teams. But the operational part of the company becomes a problem when one needs to take care of basic things like HR, marketing and debt collection, says Piotr Nowak, head of Olsoft, a company acquired by TenderHut: “A larger organization can do more. It can manage its resources and allocate tasks to people who are specialized in specific fields better and more easily. It also has all the resources smaller companies lack. I’m not just talking about accounting teams or the secretary’s office here, but also about human resources management, marketing and PR. In terms of organizational culture, this was an enormous leap in quality for us”.

Announcing the recent merger with TenderHut, Maciej Kotok, CEO of Evertop from Silesia, explained the decision in this way: “Joining the group was an important decision for us. By merging with TenderHut, we became a member of a large organization overnight, an organization that can execute global projects on the scale we always had in mind. Simply put, a big organization can do more”.

Besides the process of acquisition and merging of organizations into a single organism taking place on the market, one can also see that this is a path to expanding qualifications. The apparent trend shows that teams of analysts and IT architects, UI/UX designers and researchers are acquired in this way. Software testers, cybersecurity specialists and business analysts also make up a large group.

The most important acquisitions by software houses in recent years:

Asseco Poland: in Q1 2021, as a group on the European market, it took over Things Solver, which is concerned with software in the field of artifical intelligence and machine learning, and Vebspot, which renders services as a web portal where registered users can purchase products, local services and travel services. In turn, on the Israeli market, the company acquired ITSoft, which renders services in the field of outsourcing R&D workers, and Kol Hamas, which is a supplier of payroll, accounting and tax services.

Ailleron finalized the sale of shares in Software Mind. They were taken over by a financial investor – Enterprise Investors. The entire services segment of Ailleron – Enterprise Services was transferred to Software Mind. The value of the separated part of the business was valued at PLN 150 mln (PLN 221 mln after contribution of assets).

Oaktree Capital and Cornerstone Partners consolidate the market through Avenga Group

With the takeover of IT Kontrakt in June 2017, through cooperation between Oaktree Capital Management and Cornerstone Partners, Avenga Group was founded. The group specializes in comprehensive IT outsourcing services for clients in Western Europe, Scandinavia and the United States. The organization carried out a series of acquisitions: Solibrain (Poland), Sevenval (Germany) and CoreValue (USA/Ukraine).

TenderHut: a player active on the consolidations market, who recently took over Evertop, thus expanding its reach of operations in Poland to the Silesian region. The company’s managers joined the senior management of the companies making up the IT group. TenderHut had previously acquired a series of other smaller companies, such as QBurst Poland, which served as the development arm of QBurst Technologies, headquarters in India, Javeo, Order of Code and Olsoft. After merging, the heads of these organizations took on key roles on the boards of TenderHut’s subsidiaries.

Netguru – numerous takeovers, but of smaller teams

Netguru – in recent this years, this software house has been taking over entire teams, strengthening its technological skills. The company’s most important transactions include acquisitions of teams from Vorm, Bitcraft and 7ninjas.

Written by Robert Strzelecki, Chief Executive Officer at TenderHut.