Why Software Development Firms Face Challenges in Generating New Revenue

Brian Shea
Jul 29
3 min read

Over the past decade, software development firms roared forward—first fueled by pre‑COVID digital transformation, then accelerated by clients’ urgent need to pivot during the pandemic. But now, new pressures threaten to stall growth for many.

1. Oversupply of Talent & Offshoring Commoditization

The global offshore software development market surged to over $132 billion in 2022, projected to reach $151.9 billion by 2025, a reflection of widespread adoption of outsourcing strategies across North America, Europe, and beyond.

Offshore arrangements commonly reduce costs by 40–70% and accelerate time‑to‑market by 25–40%, making offshoring the default rather than strategic differentiation.

As a result, talent is no longer a scarce resource but a global commodity, pricing power has shifted offshore, compressing rates and profit margins for mid‑market firms.

2. Price Pressure from Big Tech and Corporates

During peak growth, firms like Amazon and Google outbid the market for top engineers via scale‑tipped comp programs, now, they’re also widely embracing offshoring to control costs.

Smaller mid‑market firms cannot compete, whether for hiring or client pricing. As enterprise demand shifts to larger global partners or internal teams, middle‑tier firms are squeezed.

3. GTM Stagnation, Consolidation & Firm Failures

Many mid‑market firms continue relying on transactional RFPs, legacy referrals, and transactional pricing models, they haven't invested in vertical specialization or executive‑level selling playbooks.

Meanwhile, industry consolidation is accelerating. Large firms and private equity groups are acquiring or merging mid‑market providers to achieve scale and escape margin erosion. Some firms have simply shuttered, unable to modernize or carve a niche, though many smaller mid‑tiers now survive only as platforms or staff-augmentation providers.

4. AI’s Disruption to the Software Lifecycle

AI now generates around 41% of all code, with an estimated 256 billion lines authored in 2024 alone At Google, over 25% of new code is AI‑generated; at Microsoft, that figure reaches 30% and climbing.

Despite perceived speed gains, a METR study found experienced developers using AI tools were actually 19–20% slower than without them, due to review overhead, context mismatches, and correction time.

Surveys show development teams report 30% improvement in code‑writing and testing tasks, equating to ~15% net productivity gain across total workload, but these gains vary by experience level and discipline.

In open‑source communities, tools like GitHub Copilot drive a ~6.5% boost in project performance, but also increase integration complexity, acceptance rates of AI suggestions hover around 30%, rising over time.

A 2025 cohort of Y Combinator startups revealed that 25% of their codebases are now 95% AI-generated, a striking signal that even early-stage companies are riding the AI wave.

What’s at Stake for Lower/Mid‑Market Firms?

The combined effect is:

Talent commoditization—no more margin guardrails or premium pricing.
Mid‑market firms stuck in dated GTM models, unable to shift from time‑and‑materials and product‑led to outcome‑based value models.
AI-based tool chains eroding simple development arbitrage, reducing the need for external providers.

Many of these firms, sometimes backed by PE money, may have overpaid for acquisitions under growth assumptions that no longer hold in a software economy increasingly normalized around AI‑assisted development and low-cost global delivery.

Lucrum Partners’ Perspective: Reset, Reframe, Reinvigorate

To thrive in the current dynamic, mid‑market services firms must:

Evolve into business impact businesses, offering IP‑based offerings rather than product-led or pure labor.
Adopt vertical strategy and executive account alignment, moving beyond tactical bids to strategic, C‑suite conversations.
Modernize sales by enabling executive‑level, outcomes‑driven selling, positioning as trusted advisors, not vendors.

This triple reset aligns mid‑market firms with the shift toward specialization, high‑impact business value delivery, and the strategic integration of AI, not just labor arbitrage.

Final Thought

Market demand hasn’t evaporated, but the playbook has. Firms that stayed stuck in legacy GTM, failed to productize, or neglected to embed AI into their core value equation are now facing serious headwinds. Resetting strategy, modernizing GTM, and embracing AI as an enabler, not a threat, is critical.

Lucrum Partners helps firms make that shift, turning potential disruption into opportunity.