For over a decade and a half, two constants have defined Bulgaria: persistent corruption issues and the IT sector's vocal struggle with personnel shortages amidst robust growth. This year, however, could mark the beginning of a new era.
Dubbed the "economic oasis," Bulgaria's IT industry, boasting over 20% annual growth since the financial crisis, contributing nearly 5% to the GDP, is now facing a period of instability. Despite a likely increase in overall business revenue in 2024, the industry is bracing for a pseudo-recession, marked by slower growth, layoffs at certain companies, hiring freezes at others, expensive financing, and halted wage hikes. The sector, employing over 58,000 people and escalating from less than 1 billion levs in 2011 to 8 billion levs last year, faces its first major challenge.
The anticipated software sector apocalypse has been delayed, despite significant layoffs globally. Current indicators show a steep decline in job postings and wage increases. Mid-2023 marked a shift in industry expectations, largely due to economic concerns in Western markets.
Current data does not indicate massive layoffs in top companies. VMware's layoffs are an exception, stemming from Broadcom's acquisition rather than sector-wide trends. Companies like Scale Focus, Kodix, and DIGITALL (formerly Bulpros) saw a reduction of about 100 employees each by late 2023. Conversely, firms like SAP, Paysafe, Musala Soft, Dreamix, and KPMG IT Services continued hiring.
Optimists believe that any layoffs will result in talent redistribution rather than a decrease in overall employment. However, this may be overly optimistic, as a decline in large company staffing and a consistent hiring reduction are already evident.
Georgi Ivanov, CEO of Noble Hire, notes a 50% decrease in open positions compared to last year. He observes similar trends in other strong markets like Poland, with high salaries becoming increasingly challenging to sustain.
Where is it all coming from?
The sector's current issues stem from two key factors. First, the post-financial crisis growth was fueled by central banks' "free money" policies, with near-zero interest rates and increased money printing during the pandemic. While Bulgarian companies didn't have direct access to this cheap financing, their Western clients did, driving unprecedented growth.
Now, as money becomes more expensive due to rate hikes that began in 2022, the effects are being felt, especially since mid-2023. For a generation of entrepreneurs accustomed only to growth, this is a significant shift.
The second issue concerns unsustainable wage increases. Factors such as a chronic personnel shortage, pandemic-driven digital demand, and migration influx from Ukraine, Russia, and Belarus have inflated wages, with averages exceeding 5,000 levs, a steep rise from 3,000 levs in 2015.
Recently, companies have been more cautious, reducing or planning to cut positions for minimally experienced individuals, who were eagerly hired in the past few years. One junior developer, for example, was let go despite excellent reviews, reflecting a broader trend of cost-cutting.
Industry managers note a "silent release," where employees leave without being replaced, leading to a decrease in job advertisements and a reduced willingness of employees to switch jobs. For smaller companies, maintaining idle staff is particularly detrimental.
The increase in local service company prices, now comparable to Western European rates, poses challenges for companies despite benefiting employees. The industry is adapting to these changes, with expectations of more efficient operations and possibly leveraging artificial intelligence, which may delay some hiring as companies anticipate automation capabilities.
Iliya Krastev, chairman of AIBEST, remains optimistic, anticipating a slight increase in sector employment this year and potential for significant growth in 2025, driven by improved efficiency and adaptation to new challenges.
Value for money or not
The cumulative effect of the significant increase in wages in the sector, coupled with the high demand and limited supply, as well as the influx of tens of thousands of new specialists in recent years, could lead to a minor existential crisis for the industry. Until the middle of the last decade, Bulgaria was marketed as both an affordable and high-quality IT destination. Western investors seemed to agree with Bulgaria's self-assessment, as during that time, companies like VMware, SAP, Paysafe, Atos, Progress, Uber, and others, arrived. More importantly, they stayed. While Western investors from other sectors were leaving one after another, this simply wasn't the case in the software sector.
At one point, Bulgaria ceased to be a low-cost destination. Although wages were still lower than those in Germany, the UK, and the USA, other, cheaper outsourcing destinations emerged, like India, Pakistan, and Vietnam. However, Bulgarian companies maintained their quality.
Now, due to the 'spoiling' of the sector in recent years, even this quality is under scrutiny. A manager, who wished to remain anonymous, commented to "Capital" that "we keep saying Bulgaria is a quality destination, but this hasn't been the case for several years." According to him, the high demand has led to even those software engineers who are 'just going through the motions' receiving high salaries and guaranteed employment.
This is particularly true for outsourcing companies working on a client's project. In these companies' model, the client effectively hires a team of employees and pays their salaries. As the "Capital" source explains: "They know they'll be paid for eight hours on a project, regardless of whether they exert themselves or not. Until recently, these people were untouchable, as there was no strict control over them, and even if removed, the demand was so high that they could always go elsewhere."
Unlike all other sectors of the economy, the software industry is truly global. What happens in the USA or Germany has an immediate impact on Bulgaria or India. Therefore, Bulgaria needs to be not only a quality destination but significantly better than countries with much larger populations, which would be intuitively more attractive for companies and large projects.
This is also, to some extent, a generational issue. The more experienced in the industry believe that young programmers are spoiled because they are entering an already established sector. Many of today's software company managers are former programmers who worked almost nonstop in the early years of the millennium for what are now considered nominal wages. Some of them feel that few of the current specialists know how to build and maintain a competitive company, especially after the profession became financially attractive and began to attract people who aren't necessarily technology enthusiasts (so-called geeks).
For now, these concerns are limited, and they are rarely discussed, not least to avoid damaging Bulgaria's image. The hope is that a more challenging year, like the one anticipated, will calm the labor market and allow companies to deliberately stimulate their better employees, instead of uniformly raising everyone's wages, a practice that became common in many companies during the recent business boom. After all, if Bulgaria is neither cheap nor quality, then what is it?
The optimistic view is that these are short-term and situational problems, while the overall picture remains positive: the global demand for technological solutions continues to grow, and Bulgaria already has a well-developed IT sector with deep connections and a strong CV. The prediction of companies from BASSCOM is that by 2025, more than 14,000 additional people will be hired in the sector. Many of the concerns may also turn out to be greatly exaggerated, and if the global economy starts moving in the right direction again, they may even be forgotten. However, going through at least one hangover before the next party always has a good educational effect.
For over a decade and a half, two constants have defined Bulgaria: persistent corruption issues and the IT sector's vocal struggle with personnel shortages amidst robust growth. This year, however, could mark the beginning of a new era.
Dubbed the "economic oasis," Bulgaria's IT industry, boasting over 20% annual growth since the financial crisis, contributing nearly 5% to the GDP, is now facing a period of instability. Despite a likely increase in overall business revenue in 2024, the industry is bracing for a pseudo-recession, marked by slower growth, layoffs at certain companies, hiring freezes at others, expensive financing, and halted wage hikes. The sector, employing over 58,000 people and escalating from less than 1 billion levs in 2011 to 8 billion levs last year, faces its first major challenge.
