Emergent Markets: Software Development

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Software Development

Software development market incorporates activities such as software design, development, implementation and support. Software development has been the core driver behind the rapid transformation of several industry verticals, enabling smart processes and solutions.

Introduction

This is one of the 16 market profiles produced as part of the Economic Market’s foresight study commissioned by the North East LEP. It provides an overview of the future growth prospects for the Software Development market globally, a summary of the enterprise base serving the market in the North East and relevant regional assets, and an analysis of how the continued convergence of global trends will affect future market development.

These markets were selected as those most likely to present opportunities for future regional growth in the North East LEP. This was done based on a trends analysis conducted by Frost and Sullivan, which identified 37 high impact trends driving continued change and growth in these markets globally. A shortlist of markets from this trends analysis was then cross-referenced against the current North East position by Cambridge Econometrics. This analysis identified the most significant opportunities for the North East LEP.

Each of these profiles also uses findings from the Data City platform to quantify the number of firms serving the Software Development market in the North East. This platform links companies house data to companies’ websites and uses the website text and machine learning to classify firms into Real Time Industrial Classification Codes, which can allow analysis of markets often too emergent to be precisely measured in SIC codes. The data from this platform has been triangulated against ONS data to consider a variety of perspectives on the market.

More detail about the methodology can be found here for the 16 market profiles.

Description and global outlook

Market drivers

In 2020, the software market slowed down due to the impact of the Covid-19 pandemic on demand. With the global economy recovering, and the increasing emphasis on digital and software solutions across several industries, the market is expected to make an early recovery. The US is the largest software market owing to the presence of supporting a high skilled workforce and large scale adoption of software solutions by several industries. In Europe, Germany, the UK and France are among the largest markets owing to their large domestic demand.

The post-COVID economy is expected to be driven by adoption of digitisation and automation across several industries from manufacturing to healthcare. This would offer sustainable demand in the long-term across cloud migration, industry wide transformation projects, automation solutions, data analytics and cyber security. Key challenges for the market include the lack of the skilled workforce, and the increasing cost of talent due to low supply.

Scale and scope of global market

The overall market for software solutions was estimated to be US$ 532 billion globally (2020), which was led by enterprise solutions accounting for close to 40% of the market. Other key sub-segments were system infrastructure software, application development software and productivity software. The market is predicted to grow at rate of CAGR 7.8% for the period of 2021-2025 following the post-pandemic recovery.

Within the UK, software solutions is an important employer for high skilled jobs and revenue contribution, despite shortages of skilled workforce. APAC (Asia-Pacific) as a region is the fastest growing market, especially in enterprise solutions. Some of leading global companies in the software solutions market are Accenture, Tata Consultancy, Google, Amazon, Oracle, SAP, Salesforce, IBM, MindTree, DCSL GuideSmiths, Hyperlink InfoSystem, Intellectsoft, and HeadChannel.

Capital flows and FDI

Funding for ICT and Data ventures (VC and PE-based) rose by 183% between 2019 and 2020. This is expected to be higher in 2021, partly as a result of the COVID pandemic, but also buoyed by the increasing numbers of innovative startups and growth companies in the market across the UK. This represented 42.6% of all VC and PE investments made across the nation over the period.

As with other markets, the regional breakdown of this capital liquidity does not favour the North East, with an aggregated 1.1% of all investments made in the North East region. There appears to be significant regional differences in either availability of private capital, or the readiness of regionalised ventures to attract such investment.

Further exploration into the barriers to private capital flows into the region, and how public-sector initiatives can support the crowding-in of such capital, is suggested.

North East presence and capabilities

Regional overview

According to North East LEP1, the North East has the 2nd fastest (to London) growing IT and Digital sector in UK, comprising 28,000 IT and digital employees, 51,000 students in STEM subjects across region’s 5 universities and 50 specialist gaming companies. Also the location for the Sage HQ – FTSE 100 listed company. The North East has established strengths in software development, programming, service centres and gaming. There is a rapidly growing North East FinTech sector, MedTech, GovTech, Connected Construction expertise; and AI / VR / Augmented Reality technical expertise.

North East Satellite Applications Centre of Excellence

North East Satellite Applications Centre of Excellence is based in NETPark, County Durham. Delivered by Sunderland Software City, Digital Catapult North East Tees Valley (NETV) supports businesses from across the region to encourage the growth and adoption of advanced digital technologies. University specialisms include Computing at Durham University, Northumbria University’s BIM Academy, and the Faculty of Computer Science at the University of Sunderland.

Rapidly developing data centre and connectivity role

The North East LEP area has a rapidly developing data centre and connectivity role. Stellium Data Centres is the UK’s only cable landing station for the new North Sea Connect cable and the UK’s newest Internet Exchange Point. Can transfer data at 30 terabits per second. The Stellium campus comprises 12 IT halls within three separate data centres of Tier 3 standard

Key business and industry networks include:

Sunderland Software City
Digital City
Digital Union
Dynamo
VRTGO
Labs/Proto Lab
Thinking Digital.

STEM skills in the North East

The North East LEP area has a strong and diverse university sector, with over 85,000 students studying at four universities: Durham University; Newcastle University; Northumbria University and University of Sunderland. In 2018/19 there were 31,475 enrolments in the four universities in the North East LEP area.

It has been a priority of the North East LEP to increase the enrolment in STEM qualifications. Overall, the change in total graduates between 2014/15 and 2018/19 and who studied a STEM related subject has been roughly in line with the UK average at around 10%. However, some subjects have experienced a much faster increase in graduates, most notably in computer science, where the number of graduates increased by over 40% in the space of four academic years, compared to 19% in the UK as a whole.

According to the North East LEP local skills report, 3.5% of employment in the area was in digital occupations, comprising 42,700 people - a smaller proportion than England as a whole (4.4%). However employment in these occupations has grown faster in the North East LEP area between 2015 and 2020 than nationally (Growth of 24% in the North East LEP area compared to 18% nationally). Notable occupations at the three digit level that grew faster than England excluding London between 2015 and 2020 were Information Technology and Telecommunications Professionals (grew by 39% in the North East compared to 19% in England excluding London) and Research and development managers (140% growth vs 27%).

Analysis of GVA and employment by SIC sectors

The table below summarises the findings from socio-economic data and economic forecasts, presenting headline findings for the IT Services industry. This is the SIC classification industry where Cambridge Econometrics forecasts are available that is most relevant to software development.

The IT Services industry employs 24,400 in the North East, with a similar share of regional employment to nationally. The sector, is highly productive, and has experienced a steep increase in employment and GVA. The outlook is forecast for a further increase in jobs and GVA growth.

The Data City findings

The Data City provides company data based on an AI-driven taxonomy search of terms and content on company websites. This is then connected to companies house data for each company – and allows an aggregate analysis for new industry and market definitions. The data captures the number of business branches in the North East LEP area.

According to the Data City, there were 20 active firms in software development with a location in the North East LEP area in June 2022, accouting for about 1.2% of the firms in the sector nationally.

Location quotients

Within the North East LEP area Newcastle upon Tyne and North Tyneside were the local authorities with the largest number of software development firms, and North Tyneside was the only local authority with at least a moderate positive location quotient. All the other local authorities had location quotients below 1 meaning they had a lower concentration of software development firms than the national average.

Out of regions locations

The locations data from the Data City suggests that the North East LEP software development sector is relatively self-contained. Only 25% of firms with a location in the North East LEP area had at least one location outside the wider North East region. This was only slightly more than the 14% of firms nationally with a location in more than one NUTS region.
Over 10% of North East LEP firms had locations in London, the South West, Yorkshire and the Humber and Scotland. Compared with all UK firms in this sector the North East LEP had a strong link to Scotland and moderately strong links to Yorkshire and the Humber and the South West.

Sector crossover

One of the innovative features of the Data City methodology is that it allows firms to be classified in multiple sectors. The platform does so through real time industry classifications (RTICs), which are constantly evolving classifications generated by an AI from companies’ websites. Firms can be classified under multiple RTICs at any one time.
This means the data can be used to demonstrate interdependencies where sectors overlap. In terms of the North East LEP software development market, there were five RTICs in which over 10% of North East LEP firms also operated in. These were agency market, software as a service, e-commerce, data infrastructure and advanced manufacturing. Compared to software development firms nationally the North East LEP had a much stronger degree of overlap with e-commerce, which suggests that the North East LEP may have a specialisation in this area within software development.

Subsectors

The Data City methodology also includes individual subsectors within the RTIC taxonomy which allows detailed analysis of the North East LEP’s focus within the software development sector. Overall, in the UK software development firms operated in 206 different sub RTICs, of which firms in the North East LEP operated in 12.
Compared to nationally firms in the North East LEP area had a very strong focus on E-commerce platforms and Augmented and Virtual reality within advanced manufacturing. They also had a moderate specialisation in E-commerce platforms, data infrastructure software, digital transformation and Saas Development.

Locations map

As implied by the location quotients software development firms in the North East LEP are mostly located in Newcastle and North Tyneside. They are especially clustered near the quayside in Newcastle and surrounding Cobalt business park in North Tyneside.

Regional prospects

A critical part of this study is to shortlist which emergent markets represent “hot prospects” for the North East economy in the future. Using the findings from the study, and the assessment framework below, Software Development is rated as a market with:

Established status in the North East
International scope in terms of firm activities and ownership
Small presence in the North East, with 1.2% of all firms in this market having a North East LEP location (compared to 2% of firms in all markets)

Existing regional specialisms

Strong: high location quotient; high employment and company presence

Firms

Significant: established firm presence, good start-up and SME activity and presence

Value chain cluster

Moderate: 1 to 3 major firms and/or start-ups and SME presence

Innovation / technology

Moderate scale of R&D activity, with national leadership

Skills and human capital

Directly relevant: foundation and specific skills, with infrastructure and provision

Local institutions

Relevant institutions

Local assets

Relevant minor assets: of regional significance

Click here to download the assessment framework.

Strategic commentary

Software development and associated capabilities around platform development, data architecture and cloud computing, have become fundamental to the success of the digital economy. As such, all markets reviewed in this study are in some way enabled by software development, with the clearest relationships around markets such as IoT, Fintech, Immersive technologies, and Autonomous Vehicles. Innovative platforms are in high-demand and this demand is expected to grow as the complexity of data produced and consumed across the nation’s digital landscape grows.

The opportunity therefore for the North East is twofold. First to potentially capture a greater share of the growing global software development market and second to effectively use new software to grow markets where the North East has a clear regional specialisation. The challenge is to create a competitive suite of regional capabilities in an a very competitive national and international market.

One approach may be to nurture a specialisation in the application of software in the other markets highlighted above, such as Fintech and Immersive technologies, where the North East is already competitive. This could create a broader software development specialism based on that integration. Another approach may to be focus on the markets where software development does have some of its own dependencies, such as Cybersecurity, Data analytics, and Cloud computing, and seek to develop a competitive advantage in providing core functionality within the Software development market.

Introduction