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Supply and demand.

Demand: The vast majority of customers they get are seeking to get a lower price. Many of the customers are in non-technical companies, doing non-technical things, and they are told to acquire a software service company to develop something. They approach it as a bidding process and they go for the lowest bidder since they can't really assess anything else. Larger companies usually select a few long-term vendors and they work with them exclusively. Therein starts the problem.

Supply: Likewise, many of those software services companies will actually go out and try to compete on price. When they do that, they know that most of the customers they sell to have very little technical knowledge (think of banks, retailers, insurance companies, freight companies, telcos, etc.). When they're one of the few (or exclusive) vendors that the work with the client, they're creating a bulk deal for x amount of resources (i.e. a number of people). So they have to provide those people. However, the supply of skilled developers is low, since there are many great product companies within those countries (India, Ukraine, and Belarus) who offer great jobs to the experienced developers. So the fastest and cheapest way to meet the quota is with "freshers" (as they appear to be called in India). So now they're billing for people who have no experience at a very low rate in order to be competitive, they're also paying those developers pennies, and they're patching it up by having the few seniors within the company act as leads. And those seniors are split between 2-3 projects, and on each one of those projects, they have 4-5 juniors below them. This gives them a good "blended rate," but they still can't make a profit higher than 20%. The rate at which they lose talent is fast because the product companies are always stealing their good developers.

Overall, when I ask them why don't they just sell the senior developers at a higher margin and have fewer JR devs, the answer is that they'd never get a project because the competition is undercutting them on the price.




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