What Is the Market Size of Offshore Development? Latest Trends, Key Reasons for Its Popularity, and Tips for Success

When it comes to system development, offshore development is often one of the most commonly considered approaches.

If you’re considering offshore development, you might be wondering how large the current market has become.

You may have heard that "the offshore development market is growing." But what exactly are the latest trends?

In this article, we’ll focus on the market size of offshore development. We’ll also explore the reasons why it has gained attention in recent years and share some tips for successful implementation.

If you're thinking about using offshore development, be sure to check this out.

Akira Shimazoe

CEO of Solashi Japan LLC. Engaged in the development and operation of internal systems at Suntory. Founded Yper Inc., serving as CTO and CPO, contributing to product launch and growth.

What is Offshore Development?

Offshore development refers to the practice of outsourcing software, applications, or web system development to overseas development companies.

In addition to development, operations and maintenance are sometimes also outsourced. Below, we’ll explain the differences from nearshore development, the purpose of offshore development, and its history.

Difference from Nearshore Development

Nearshore development is another option often considered alongside offshore development.

Nearshore development refers to outsourcing work to development companies located in regional cities or nearby areas within Japan. Offshore and nearshore development each have their own distinct features.

The main benefit of offshore development is that it offers lower development costs.

By outsourcing to companies in developing countries where labor costs are lower, it’s possible to reduce development expenses compared to domestic providers.

In some outsourcing countries, there’s also a large pool of talented engineers, making it easier to secure resources.

Nearshore development, being conducted within Japan, allows for smoother communication in Japanese with domestic engineers.

Additionally, there’s no time difference, unlike with overseas outsourcing. This allows for real-time meetings and immediate response to urgent issues.

Related article: What is Nearshore Development? Differences from Offshore Development, Pros and Cons

Purpose of Offshore Development

One of the most common reasons for choosing offshore development is cost reduction. However, securing development resources has increasingly become the main objective in recent years.

The "Offshore Development White Paper (2023 Edition)" reports on survey results regarding the reasons companies consider offshore development.

The most common response was "shortage of development resources". Previously, cost reduction was the top reason. However, due to recent labor cost increases and the depreciation of the yen, the cost advantages have become less pronounced.

Meanwhile, offshore development is increasingly being selected as a way to solve the shortage of in-house engineers. That said, depending on the outsourcing country, cost savings may still be possible.

If utilized effectively, offshore development allows you to secure highly skilled engineering resources and proceed with development at a lower cost.

Source: Offshore Development White Paper (2023 Edition) │ offshore-kaihatsu.com

History of Offshore Development

Let’s take a look at the history of offshore development.

Globally, offshore development began around the 1960s to 1970s. Initially, Western companies outsourced development work to developing countries as a way to reduce labor costs.

In Japan, offshore development started in the 1980s. Japanese companies began outsourcing to Chinese development firms, where labor costs were significantly lower at the time.

Since around 2006, Vietnam, India, the Philippines, and Bangladesh have emerged as new outsourcing destinations.

In recent years, offshore development companies capable of handling cutting-edge technologies such as AI, blockchain, NFTs, IoT, and VR have also entered the scene.

h2. Offshore Development Market Size

In today’s IT industry, more and more companies are adopting IT outsourcing, which involves delegating part of their operations to other companies—whether domestically or internationally through offshore development.

So, how big is the market size?

According to a report issued by REPORT OCEAN, the global IT outsourcing market was approximately USD 556.67 billion in 2020. Furthermore, it is expected to grow at a rate of over 7.7% between 2021 and 2027.

If this growth rate is maintained annually, the global IT outsourcing market is projected to reach USD 937.67 billion by 2027.

Source: REPORTOCEAN │ PR TIMES

In particular, the market is expanding in Asian countries such as China and India. Offshore development is becoming increasingly important for Japan to maintain a competitive edge in the IT outsourcing market.

According to a research report on the size of Japan's domestic offshore services market, it was approximately USD 1.7 billion in 2019 and is projected to reach around USD 1.9 billion by 2023.

h2. Latest Trends in Offshore Development

While the market size of offshore development continues to grow year by year, what kinds of companies are actually utilizing it?

Let’s take a look at the industries using offshore development and the most popular countries for outsourcing.

h3. Industries Using Offshore Development

According to “Offshore Development.com”, they have compiled data on the industries of companies that consulted them about offshore development.

In 2023, the most common industry was the IT industry, accounting for about 48%. Additionally, inquiries came from a wide range of industries, including service, manufacturing, and wholesale/retail sectors.

They also examined the types of companies making inquiries, with about 22% from IT vendors (SIers), and about 78% from end-user companies.

Source: Offshore Development White Paper (2023 Edition) │ Offshore Development.com

h3. Popular Countries for Offshore Development

Offshore Development.com also published rankings of countries considered for offshore outsourcing.

The ranking results of countries considered for offshore development are as follows:

1st: Vietnam (48%)
2nd: Philippines (21%)
3rd: India (13%)
4th: Bangladesh (8%)
5th: China (4%) & Myanmar (4%)
6th: Ukraine (2%)
*Note: “Unspecified” accounted for 64.8% of all inquiries.

Source: Offshore Development White Paper (2023 Edition) │ Offshore Development.com

Below, we will explain the features of the top three most popular countries.

h4.1. Vietnam

Vietnam is the most popular country for offshore development outsourcing from Japan. The country is actively promoting Japanese language education, and many people can speak Japanese.

Communication difficulties due to language and cultural differences are common challenges in offshore development, but in Vietnam, it's easier to communicate in Japanese, which is a major advantage.

Additionally, the government is putting great effort into developing IT talent. System development companies in major cities such as Hanoi and Ho Chi Minh City hire many highly skilled engineers.

It is easier to find engineers with the appropriate technologies for the systems you want to develop.

Vietnam produces about 50,000 new engineering graduates annually. As part of national policy, the country focuses on IT education, especially strengthening STEM subjects (Science, Technology, Engineering, and Mathematics).

The goal is to produce 1.5 million IT professionals, including engineers, by 2030. Because of this background, there is a large pool of talent who have received advanced IT education at universities. Many of them are excellent engineers, making it easy to secure resources.

h4.2. Philippines

In the Philippines, both Filipino and English are official languages. Therefore, if you are comfortable with English, you can smoothly proceed with development while communicating effectively.

Also, the time difference between Japan and the Philippines is only one hour, making time zone issues less of a concern.

It takes about four hours by plane from Japan to the Philippines. This proximity is another reason why the Philippines is gaining popularity.

h4.3. India

India, well-known as an IT powerhouse, is characterized by a large pool of highly skilled IT engineers.

India is particularly favored as an offshore development destination by clients from the United States.

While Hindi is the native language in India, English is also an official language, so communication in English is possible. The high level of technical skill and ease of communication in English are major advantages.

However, labor costs in India have been rising in recent years, and compared to Vietnam and the Philippines, development costs tend to be higher.

If you'd like to learn more about the top-ranked countries, please refer to the article "Latest Trends in Offshore Development and Rankings of Popular Countries: Features of the Top 7".

h2. Three Reasons Why Offshore Development Is Advancing in Japan

Why is offshore development gaining momentum in Japan? Here are three main reasons.

Difficulty in securing development resources
Significant improvement in the technical skills of offshore countries
Lower barriers to entry compared to the past

Let’s take a closer look at each of these three reasons.

h3.1. Difficulty in Securing Development Resources

Offshore development is often utilized in situations where development resources are unavailable for reasons such as the following:

Chronic shortage of in-house personnel
Current outsourcing partners are unable to deliver satisfactory development
Lack of engineers with the skills and knowledge required for desired system development

Offshore development is gaining attention as a means of solving on-site issues and challenges. Moreover, not only today but also in the future, it may become even more difficult to secure development resources.

According to the “Survey Report on IT Human Resource Supply and Demand” by the Ministry of Economy, Trade and Industry, it is stated that domestic IT resources alone will not be sufficient to meet the increasing demand for IT services in Japan.

The report presents three scenarios: low, medium, and high. Even under the low scenario, where IT service demand increases by just 1%, there will still be a shortage of about 160,000 personnel.

Therefore, offshore development, which involves outsourcing system development to overseas IT personnel, is expected to gain further traction in the future.

Reference: Survey Report on IT Human Resource Supply and Demand│Ministry of Economy, Trade and Industry

h3.2. Significant Improvement in the Technical Skills of Offshore Countries

The technical capabilities of offshore development countries have improved significantly compared to the past.

For example, in Vietnam, a popular offshore destination, the number of development cases involving cutting-edge technologies like AI, IoT, blockchain, and AR/VR has increased.

This remarkable improvement can be attributed to the fact that training and producing high-level IT personnel has become a national policy in these countries.

Additionally, offshore development companies are constantly enhancing their technical skills to stand out from competitors and are focusing on recruiting top-tier engineers.

As a result, more companies are leveraging offshore development to access top talent and advanced technology.

h3.3. Lower Barriers to Entry Compared to the Past

The barriers to implementing offshore development are much lower now than they were in the past.

It’s been about 20 years since offshore development started being adopted in Japan. Over this time, a wealth of knowledge and best practices for successful offshore projects has accumulated.

In the past, many companies experienced failures when outsourcing development overseas, leading to concerns like “it’s risky to entrust development to a foreign company” or “we might encounter unexpected troubles.”

However, nowadays, from small businesses to large enterprises, many Japanese companies have successfully implemented offshore development. As it becomes more widespread, the barrier to entry continues to drop.

Today, offshore development is increasingly considered as one of the options for outsourcing system development in Japan.

h2. Four Key Benefits of Offshore Development

The main benefits of using offshore development include the following four points:

Reduced development costs
Enhanced development capabilities
Solving labor shortages
Shortened delivery times

Let’s explore each of these benefits in detail.

h3.1. Reduced Development Costs

Offshore development involves outsourcing work to overseas companies where labor costs are lower than in Japan.

As a result, companies can significantly reduce engineer labor costs compared to domestic development, leading to lower overall development costs.

According to the "Offshore Development White Paper 2023," the average cost reduction achieved through offshore development is 21.5% compared to domestic development.

Reference: Offshore Development White Paper (2023 Edition)│offshore-kaihatsu.com

However, the cost reduction rate varies depending on the country, project scale, and development method. In some cases, even greater cost advantages can be achieved.

For more detailed information on development costs by country, please refer to "Offshore Development Costs: Unit Prices by Country and How to Reduce Costs".

h3.2. Enhanced Development Capabilities

By building a dedicated development team, companies can strengthen their development structure.

There are two types of offshore development: lab-based development and contract-based development. Lab-based development involves a contract in which a fixed number of personnel work for a set period.

With the lab-based development model, it's possible to secure skilled personnel for a certain period within the contract term. This model also makes it easier to instill your company’s unique development rules and work procedures.

By securing talented personnel and having them follow your internal rules, you can strengthen your company's development system.

h3.3. You Can Address the Talent Shortage

Offshore development also has the advantage of helping to resolve the IT talent shortage.

Many offshore countries place a strong emphasis on IT education. Let’s take Vietnam as an example.

In April 1995, the Vietnamese government formulated the “IT2000” (Basic Informatization Plan for Vietnam). Since then, the country has positioned IT as a key strategy and actively worked on human resource development and infrastructure improvement.

In this way, Vietnam is a country dedicated to IT education. Moreover, many system development companies employ a large number of engineers.

By outsourcing to countries rich in IT talent, companies in Japan can alleviate their own IT labor shortages.

Our company, Solashi Co., Ltd, which operates an offshore development center in Vietnam, primarily hires engineers from top universities, including the prestigious Hanoi University of Science and Technology.

With our strict hiring standards, proven technical capabilities, and abundant resources, we meet client needs. If you're struggling with a labor shortage, please contact us.

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h3.4. You Can Shorten Delivery Times

Offshore development can be expected to shorten delivery timelines.

By assembling highly skilled engineers at low cost, offshore development enables large-scale team efforts.

When more engineers participate in a project, total development hours increase. For example, if a task takes 100 hours and one person handles it, it takes 100 hours to complete.

However, with four engineers, the same work can be completed in just 25 hours. This improves overall productivity and shortens delivery time.

Gathering highly skilled engineers and progressing development efficiently is a major advantage of offshore development.

h2. 3 Disadvantages and Cautions of Offshore Development

When considering offshore development, it’s important to understand the following disadvantages and precautions.

Communication difficulties due to language and cultural differences
Differences in development methods can make quality control difficult
Time differences can lead to delays in response

Let’s explain each point in detail.

h3.1. Communication Difficulties Due to Language and Cultural Differences

Offshore development can face communication barriers due to language and cultural differences.

When communication in Japanese is not possible, misunderstandings about tasks or discrepancies in information are more likely to occur.

To prevent project delays and quality degradation, it's important to take various approaches, such as holding regular meetings and establishing communication guidelines.

h3.2. Quality Control is Difficult Due to Differences in Development Methods

Quality control can be a challenge in offshore development.

This is because development methods may differ depending on the country. System specifications and the education received may not be aligned with Japanese standards. Additionally, it’s harder to grasp the local situation in remote environments.

To maintain quality control in offshore development, it’s important to set clear quality and evaluation standards, and to regularly conduct code reviews and testing.

h3.3. Delayed Response Due to Time Differences

Time differences between Japan and other countries may lead to delays in response, depending on the offshore country.

Even if you need to urgently consult or request corrections, time differences can prevent immediate communication.

Moreover, if trouble occurs during system development, it may not be noticed or addressed promptly due to the time lag.

It’s preferable to choose a country with a small time difference from Japan. A time difference within 2–3 hours is ideal.

Country	Time Difference with Japan
Vietnam	2 hours
Philippines	1 hour
India	3.5 hours
Bangladesh	3 hours
China	1 hour
Myanmar	2.5 hours
Ukraine	7 hours

h2. 3 Key Points for Successful Offshore Development

To ensure successful offshore development, it's important to focus on the following points.

Clearly define the purpose of introducing offshore development
Maintain proper communication
Choose a company with experience in developing the type of system you want to implement

Below, we introduce three essential points for successful offshore development.

h3.1. Clearly Define the Purpose of Offshore Development

When considering offshore development, it's crucial to clearly understand why you're implementing it in the first place.

Whether you aim to reduce development costs, launch a new core business, or strengthen your company’s technological capabilities and development system—start by identifying your objective.

By clearly defining your goals, it becomes easier to choose the right development company.

h3.2. Focus on Appropriate Communication

To succeed in offshore development, it is important to focus on appropriate communication with overseas development companies.

In addition to holding regular meetings, using information-sharing tools can help ensure smooth communication.

Also, since misunderstandings and issues may arise due to differences in language and culture in offshore development, it's recommended to establish communication rules in advance.

By being mindful of proper communication on both sides, offshore development can proceed smoothly.

h3.3. Choose a Company with Experience Developing the System You Want to Build

We recommend choosing an offshore development company that has experience developing the type of system your company wants to realize.

If the company has past experience, they likely have established technical knowledge and processes to smoothly proceed with development.

To check the company's reliability, be sure to also check the number of their past achievements.

Development companies with a large number of successful projects have often worked frequently with Japanese client companies and accumulated extensive experience in successful offshore development.

You can usually find examples of past projects on the development company’s website or comparison sites, making it easy to confirm their track record.

h2. If You're Considering Offshore Development, Leave It to Solashi

This article explained the market size and latest trends of offshore development, as well as tips for successful offshore development. Please make use of this information and consider introducing offshore development into your business.

Even if your final goal is in-house development, we are happy to consult with you. Offshore development can be an effective solution when you lack immediate development resources and are unsure of your decision.

Our company, Solashi Co., Ltd, is an offshore development company based in Vietnam.

We handle all phases of work, from upstream processes like requirement extraction and requirement definition, to downstream processes such as operations and maintenance.

We also have extensive experience working with Japanese clients. Even for your first offshore development project, you can trust us with confidence. All communication with our engineers can be conducted in Japanese.

Our team includes Japanese project managers with experience in launching businesses, as well as BrSEs (Bridge System Engineers) fluent in Japanese and at least one other language.

You can carry out development without feeling any culture gap or misalignment in understanding. We also offer support-based partnerships and IT implementation consulting services as part of our strengths.
If you are considering offshore development, feel free to contact Solashi Co., Ltd.

Akira Shimazoe

Representative of Solashi Japan LLC. Born in April 1989 in Fukuoka Prefecture. Graduated from the Graduate School of Information and Mathematical Sciences at Osaka Prefecture University. Joined Suntory System Technology Co., Ltd., an IT subsidiary of Suntory Holdings, in 2014. Broadly responsible for the development, operation, and implementation of vending machine delivery management, efficiency improvements, and sales management systems. Founded Yper Inc. in 2017, serving as CTO and CPO. Contributed to the launch and growth of the app-linked delivery bag "OKIPPA." Selected for Toyo Keizai's prestigious "Amazing Venture 100" and Forbes' "Forbes 30 Under 30 Asia 2019."