The cloud driving OPD growth

Software has become an increasingly important line item for Engineering Research & Development (ER&D) spend across all sectors – including those not traditionally tech oriented, including automotive, healthcare, banking, financial services and insurance (BFSI) and non-independent software vendor (ISV) sectors, as increasingly systems move to the cloud in response to remote working. It is estimated that by 2025, 85% of organizations will embrace a cloud-first principle and will not be able to execute their digital strategies without the use of cloud-native technologies[ii]. While widely dependent on the maturity of software already in place, companies require support to take applications to the cloud, from onboarding technology and identifying patches to monitoring the ongoing use and areas for improvement. Companies are outsourcing this support in droves, leading to growth in the OPD sector and making companies in this sector attractive M&A targets.

Beyond software, R&D is also becoming a popular area for outsourcing design elements – mechanical and electronics across chip design, testing, embedded systems – being increasingly outsourced. In 2017 we advised DMI, a leading provider of digital transformation and managed mobility services to commercial and government customers, on the acquisition of Lochbridge, a provider of internet solutions to the automotive, healthcare, BFSI sectors[iii]. In 2021, we helped OceanSound Partners acquire DMI, [iv] empowering the management for the next phase of growth of the business. Whilst technology has developed since then, the opportunities presented by scaling up OPD platforms remains.

Bespoke software and generative AI

We have observed a growing preference of tech companies for bespoke software and incorporating generative AI. While the use of generative AI in the broader Information Technology Enabled Services (ITeS) space has been increasing, early evidence suggests that its use in software development can substantially speed up the time it takes for a product to go to market, with benefits across code generation, documentation and refactoring.[v] We believe that given the complexity of software development and the need to combine automation with DevOps, the deployment of generative AI in the space will be staggered from simple code updates to more complicated tasks. Also, as the deployment of this software matures, we believe that software testing / quality assurance will be an important area that will be impacted by generative AI.

Large enterprises have increasingly invested in building and modernising their software applications, resulting in a demand of software development from enterprises versus that from traditional ISVs.

For strategic buyers, the preference for certain geographies and sectors may vary but the key buying criteria remains the same: technology expertise, domain knowledge, digital expertise. Inorganic growth may continue to be a priority for strategics as they look to ‘tuck in’ these smaller assets as efficiently and cost-effectively as possible.

Resilient valuations

With demand for OPD spanning across sectors, the market is truly buyer dependent. At a broad level, similar to many industries, most assets sit at the smaller end of the spectrum ($10 – 50M) and larger standalone businesses are rare. We believe this is where some of the appeal lies for strategic buyers. While PE firms are focused on where the delivery is coming from, strategic buyers are focused on synergies and are often willing to pay a premium for businesses that provide a long-term strategic fit. We believe that automotive, healthcare and BFSI will continue to remain interesting for buyers as well as businesses that have established centers of excellence in emerging technologies.

As such, demand for OPD is not sector dependent, nor is it limited by geography. Clients and delivery are often not based in the same country once businesses scale up, and so it is essential to look at this market from a global perspective. Growth of talent pools outside of India has resulted in further diversifying delivery organization and providing more comfort to ISVs – Central and Eastern Europe boasts approximately 2 million talented engineers[vi] while Latin America has massive growth potential on top of an already abundant number of skilled workers, as well as reduced operating costs and geographic proximity for US clients[vii].  

OPD is one of a few domains in IT services where valuations are holding out relative to where they were in 2021 as strategic buyers and PE firms – albeit to a lesser extent – are willing to pay high multiples of EBITDA. While growth in the space has decreased since the highs of 2021, we have observed valuations remain in the top quartile of sub-sectors within the broader ITeS space.

The private equity consolidation play

We believe consolidation of the market is likely to be driven by private equity: several PE-backed platforms are looking to add capabilities and scale up, and the broader IT/ ITeS space has a deep pool of publicly listed companies making IPOs an exit option for these mature players, in addition to a potential sale to a large PE. We have observed this in recent transactions as platforms scale up and are exited:  

  • In July 2021, GlobalLogic, a specialized provider of advanced digital engineering, was acquired by Hitachi, the parent company of Hitachi Group focused on creating a sustainable society with data and technology.[viii] GlobalLogic was previously owned by Partners Group, a Swiss based private equity fund.[ix] This transaction was completed in the post-Covid high of the sector, underscoring the scarcity of scaled up quality assets available. This was essentially the last chance for Hitachi or any other strategic to acquire this leading digital engineering asset[x] in the market before it went public
  • In November 2021, we advised GS Lab, a leading provider of digital product engineering services, on the sale of a majority stake to Kedaara, a financial sponsor backed platform focusing on opportunities in India. GS Lab offered OPD services from India, for their clients in the US. Shortly after the transaction Kedaara acquired another business, GAVS, and combined the 2 business to achieve a sizeable scale [xi]
  • In March 2022, we advised Edrans, a provider of digital transformation services, on its sale to Netrix, an IT service management solutions provider. Based in Argentina, Edrans provided predominantly cloud-focused service offerings, including cloud engineering, and through this transaction, could scale up its capabilities for its US clients[xii]
  • In May 2023, Globant, a digitally native technology services company, acquired Pentalog, a France-based digital transformation company[xiii]. The acquisition supports Globant’s plans to expand its geographic reach in Europe - France, the Netherlands, and the DACH region - and gives access to a team of highly skilled engineers and specialists. We previously advised Marlin Equity Partners on its investment in Pentalog in September 2020, in a transaction that allowed Pentalog to develop its services internationally in the software development market which had already expanded significantly in 2020.[xiv]

A long runway of deal activity

Looking to the future, we foresee a long runway of deal activity whilst interest and availability of assets remains high. We’re observing more and more PE backed platforms looking to buy the next platform or doing tuck-ins to scale up and capitalize on current valuations. Additionally, founder backed companies and those owned by smaller PE funds continue to attract interest from buyers, both strategic and PE. We expect OPD to be a material contributor to M&A activity in IT services in 2024 and beyond. 


To discuss any of the themes explored in this article, get in touch with authors George Anthraper and Jordan Finkler, or the wider Business & Tech Enabled Services team here > 


This article has been prepared solely for information purposes and is not intended to function as a “research report.” In particular, this means that it is not intended, nor does it contain sufficient information, to make a recommendation as to the advisability of investment in, or the value of, any security.   

Additionally, this article does not constitute or form part of, and should not be construed as, an offer to sell, or a solicitation of any offer to buy, or any recommendation with respect to, any securities. You should not base any investment decision on this article; any investment involves risks, including the risk of loss, and you should not invest without speaking to a financial advisor. 

For additional important information regarding this article, please see insights and publications disclaimer.

















[xiv] DC Advisory advised Marlin Equity Partners on its investment in Pentalog – Deal Announcements – News, Deals & Insights – DC Advisory