Vietnam IT software and services industry offers high growth potential

The IT industry in Southeast Asia is at an inflection point, poised for a next phase of growth. The market is at the cusp of the next phase of growth in software and services spending. Overall, the market in Southeast Asia is estimated to grow at 9 per cent compound annual growth rate (CAGR) to $54 billion by 2028.

Market growth is expected to be driven by the increased adoption of mobility solutions, a surge in data proliferation led by scalability mobility and 5G deployment, increased focus on big data and analytics, a growing number of enterprises driving digital transformation, and the rapid adoption of cloud computing, the Internet of Things, and automation.

Ahmad Ridhwan Azizan, partner expert at Roland Berger Southeast Asia(left) and Truong Bui, partner and general manager at Roland Berger Vietnam

Vietnam expected to be among fastest-growing markets

Vietnam’s IT software and services market also stands to benefit from similar growth drivers as other markets in the region. In addition, the Vietnamese government has also been proactive in promoting the development of the sector through supportive policies and funding initiatives, including the National Digital Transformation Plan.

Vietnam’s IT software and services market was estimated to be worth around $8 billion in 2023, of which IT services accounted for $6.3 billion and IT software $1.7 billion.

The growth outlook for the industry in Vietnam is positive, with IT software and services forecast to grow at approximately 17 per cent annually between 2023 and 2026 to reach around $13 billion by 2026. IT software is expected to grow faster than IT services within the same period. At nearly double the average growth rate of Southeast Asia as a whole, this makes Vietnam one of the fastest growing markets in the region and a potential hotspot for investments.

Within the IT services segment, IT outsourcing and BPO accounted for more than 60 per cent of total market value in 2023. Vietnam is rapidly becoming a central hub for IT and business process outsourcing, attracting clients from various countries including Japan, South Korea, Singapore, Australia, the US, and the UK. Overall, the country ranked sixth on the Global Services Location Index in 2023, gaining recognition as one of the top destinations for offshore development centre setup.

Various players exist within the current IT and business processing outsourcing ecosystem in Vietnam, with over 60,000 ICT enterprises, including large local ICT and technology champions. These include FPT and CMC with broad IT service offerings, global MNCs/IT services providers who have established delivery centres in Vietnam, local mid-scaled private outsourcing companies with a strong focus on serving international markets such as Nashtech and KMS, and a large number of local IT service companies who mainly serve domestic IT outsourcing needs.

Vietnam is well-positioned to enhance and grow it’s positioning and proposition as a key outsourcing hub due to several factors.

First, Vietnam has favourable business conditions with strong economic growth, a stable political outlook, and conducive policies to support IT service exports such as tax incentives and 100 per cent foreign-ownership for software outsourcing companies.

Second, Vietnam has an educated and skilled IT workforce of over 500,000 software developers and one million ICT professionals with expertise in various programming languages and technologies, including emerging technologies such as AI and blockchain.

Third, it offers competitive cost advantages compared to other outsourcing destinations. Fourth, Vietnam’s strategic geographical location with proximity to major markets in Asia-Pacific such as Japan, China, and the rest of Southeast Asia positions it as a potentially attractive “nearshore” location. Additionally, Vietnam has significantly improved in key areas such as English proficiency and soft-skills – which have previously been impeding factors for the sector.

Due to these factors, the growth of IT and business process outsourcing is forecast to continue to grow strongly at 19 per cent and 11 per cent annually between 2023-2026.

The industry is also poised to move up the value-chain – with an opportunity to move from a primarily value-for-money offshore development body shop to capturing more value-adding activities such as end-to-end digital transformation support and solutions.

Small, but fast-growing Software-as-a-Service market

The IT software market in Vietnam is expected to nearly double to reach $3 billion in 2026 from around $1.7 billion in 2023, driven by digital transformation initiatives, increasing technology and digital adoption by enterprises, and growing awareness and appreciation of the benefits of advanced software solutions. Software-as-a-Service (SaaS) is currently a relatively small portion of this market, but is expected to amount to over $500 million on the back of >20 per cent market growth.

Rising digitalisation has redefined many aspects of the technology landscape, with cloud-based software, especially, being a driving force in continued productivity and resilience. Increased focus on digital governance is driving companies to invest in systems and solutions to improve data management, improve reporting/compliance and enhance efficiencies.

This is particularly true for small- and medium-sized enterprises (SMEs) as they become more digital. SME end-users represent the fastest growing and largest customer segment for SaaS, representing around 60 per cent of the total market and providing tremendous growth potential due to the large, mainly under-penetrated base and growing demand for relevant SaaS solutions.

SMEs currently account for nearly 90 per cent of operating enterprises in Vietnam – with only from 20 to 30 per cent of them currently using SaaS solutions (versus 70-80 per cent in more developed markets). Recent changes are already driving higher demand for (cheaper) cloud-based, SaaS solutions by SMEs – for example, mandatory implementation of e-invoices boosting adoption of accounting and finance SaaS solutions.

Key trends expected to drive direction of the SaaS market

As local players strive to compete with global peers, we expect a few trends to play out in the SaaS market. There will be a higher focus on interoperability rather than integration as businesses look to invest in unified cloud platforms. Deep-tech capabilities will become increasingly critical with new technologies increasingly available as cloud-based solutions.

Also, SaaS providers will increasingly adjust and localise their products, services, go-to-market and delivery models to win and differentiate from global providers. Furthermore, SaaS providers will need to increase investments and efforts into data privacy and security.

The Vietnamese market is at the cusp of the next phase of growth, players in the industry will need to evaluate their solutions, operating models, and capital to ensure they are positioned to capture the wave. This will provide opportunities for investors to look for assets that are poised for growth. Additionally, the Vietnamese and overall Southeast Asian markets are still sub-scale.

Potential scale play in both SaaS and IT services segments through the development of strong regional platforms is an opportunity that could be tapped by players within the market. To capture these opportunities, continued government support to develop the sector is critical and existing players in the ecosystem need to transform into agile, efficient, and innovative entities that are global-ready.

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