Entering the European market for software testing services

On the European market you need to comply with mandatory requirements and additional requirements that buyers may have. Collaborating in a team with European software developers is the most common work structure. As competition is strong, you should differentiate on quality rather than purely on costs. Specialising is also a good way to reduce competition.

1. What requirements and certifications must software testing services comply with to be allowed on the European market?

On the European market for software testing services, requirements vary per industry, per segment and even per country. New legislation is always in the making. As it would be impossible to list (or to know) all possible requirements, this chapter discusses the most common requirements. For more information, see our study on the requirements outsourcing services must comply with on the European market.

What are mandatory requirements?

Legal requirements include legislation about copyright (the Directive on the legal protection of computer programs) as well as personal data protection. Privacy is highly protected in Europe, via the General Data Protection Regulation (GDPR) and the ePrivacy Directive. If you do not respect these directives, you may be subject to enforcement actions and/or possible claims – even though you are located outside of the European Union.

We advise you to check the exact regulations in your European target market. All European Union member states have implemented the European Directive in national legislation. Although they are generally the same, there could be minor differences. Read more about the legal protection of computer programs on the website of the European Commission.
On the ePing website you can find an overview of country-specific measures that affect trade and differ from the international standards, as well as for the contact persons per country that the World Trade Organisation (WTO) has appointed. You can also subscribe to receive alerts (called ePing alerts) that might be relevant for your product or service.

Security

Non-legal requirements mainly deal with security. Although you are not obliged to comply by law, they are considered minimum requirements to enter the European market.

Data security is one of the main challenges for IT outsourcing service providers. This includes both data protection and recovery systems. Many European buyers expect you to implement an information security and management system, especially in industries in which security is essential, such as finance and banking, healthcare or mobile applications. Although there is no specific legislation on this, the ISO 27000 series contains common standards and guidelines for information security.

What additional requirements do buyers often have?

Quality management

There is no university degree in software testing. When companies hire IT and computer science-related graduates as software testing professionals, they are expected to learn on the job. Most employers invest in education, resulting in certification for their software testers. In some European countries, software testing trade unions are working on a curriculum for software testing. An example is Testnet from the Netherlands.

As the software testing industry becomes more competitive, an increasing number or European buyers demand software testing certification. The most requested software testing-specific quality certifications are: TMap and or various levels of ISTQB certification.

Some European buyers only do business with companies that have a specific quality management system in place. Even though implementing a quality management system does not automatically guarantee good-quality software testing, it proves that you have a repeatable process, and that you are a serious company that values standardisation.

Acknowledged and common systems are ISO 9001:2015 and the Capability Maturity Model Integration. Other ISO standards that can be applicable to software testing services are ISO/IEC 9126, ISO/IEC 9241-11, ISO/IEC 25000:2005 and ISO/IEC 12119.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) refers to companies taking responsibility for their impact on the world. Not only in the products or services they offer, but also concerning consumer rights, education and training of staff, human rights, health, innovation, the environment and working conditions.

CSR is particularly important to large companies and governments in Northern and Western Europe. Many European companies involve their suppliers in their CSR policies. Having a well-documented CSR policy may therefore give you a competitive advantage over companies without one. The ISO 26000 standard provides guidance on CSR. For small software companies, the most relevant and practical aspects of this standard are labour practices, fair operating practices and community involvement.

You can also match the CSR policy of your potential buyer by becoming an impact sourcing destination. This is a relatively new term. It is a sourcing model that aims to improve people’s lives, families, and communities through meaningful employment in ITO and BPO. This can be achieved either through outsourcing or by setting up remote or virtual teams using digital technology. Impact sourcing has good potential for companies that wish to make their business more socially responsible (buyers as well as sellers of software testing services). And it can be a Unique Selling Point (USP) for your business, because not every software tester can offer impact sourcing.

Another example of how CSR initiatives extend to small IT businesses is fair-trade software. This means software that is developed for better prices, under decent working conditions, supporting local sustainability and with fair terms of trade. In essence fair-trade software is a part of impact sourcing. Impact sourcing has a wider reach than fair-trade software.

Up to date knowledge and skills

Software testers are not trendsetters. But, as a software testing service provider, you do continually have to stay on top of the developments in the market. European buyers expect you to be able to offer them the possibility to work with the latest technology. It is therefore very important to stay informed about the latest technologies, platforms, frameworks and innovation, and to keep your skills up to date.

European buyers may expect you to work according to the Agile concept. This is based on the Agile Manifesto, representing the ability to respond to change. It focuses on how people work together, letting solutions evolve through collaboration between self-organising and cross-functional teams. Agile software development advocates adaptive planning, visualisation, evolutionary development, early delivery and continual improvement. With about 56% of companies using Agile methodologies using Scrum, this is the most widely-used Agile framework.

2. Through what channels can you get software testing services onto the European market?

How is the end market segmented?

The software testing services market is very fragmented, with several big and small players. The market is also very competitive. The market is mainly segmented based on products. It is also segmented by sub-segments, such as application testing and product testing, and it is segmented based on application, such as core banking software, asset and wealth management software and other banking software.

Figure 1: Horizontal and vertical market segments for software development that have the best opportunities for software testing service providers

All software that is being developed, or changed, needs to be tested. That is why the most interesting horizontal and vertical market segments for the software development industry are also the most interesting for the software testing industry.

The most promising services currently are AI, big data, blockchain, cloud, digital security, digital transformation, (I)IoT, machine learning, mobile development, robotics and VR/AR. Of all these only cloud and mobile development are currently regarded as commodities. However, to provide services in many of the other segments your skills in these common techniques are fundamental.

Through what channels do software testing services end up on the end market?

Most people and businesses have recovered from the initial shock of the COVID-19 pandemic. The time is right to start looking for new business opportunities in the European software testing outsourcing market. As a service provider in a developing country, you can use several trade channels to enter the European market. Figure 2 provides an overview of that trade structure. This structure is more or less the same in every European country.

Figure 2: Trade structure for outsourcing software testing services in the European market

What is the most interesting channel for you?

Your most common and most promising market entry channel is working in a team with European software developers. The selection of a channel depends on the type of your company, the nature of your product or service, your target market and the available resources for market entry.

Regardless of the channel you choose, your own marketing and promotion is a vital part of your market entry strategy, and you are responsible for it. In any case, the software testing market is a trust business. Most deals will be closed by companies and people recommending each other.

Working as a team with European software developers

The software testing industry has changed its way of working. Initially, the most popular process was to develop the software and then throw the testing phase over the fence to a group of testers and wait for them to figure it out. But software developers learned that collaboration with testers is very important, even so important that they prefer to work in teams through the whole software development process. Even if the team members are located in different parts of the world, they still prefer to work as a team.

Subcontracting by European service providers

Subcontracting by European service providers means that European service providers subcontract software testing services to you. A European service provider that is similar to your company would be your most suitable subcontractor. Ideally, this company should design, develop, market, sell and maintain their own software products and offer software testing services similar to yours.

For software testing services, a European service provider is usually an Independent Software Vendor (ISV) in the target country, or a specialised software testing provider that does not necessarily develop software.

The relationship between an ISV and a subcontracted supplier is generally characterised by:

• trust
• interdependence
• a structured relationship (functions, tasks, communication and procedures)
• potentially limited marketing visibility and market access opportunities for the subcontracted supplier
• no intellectual property (IP) rights, or a loss of IP rights for the subcontracted supplier. Generally, software testing does not create many IP related objects. However, IP is important in software testing, because the tester might have access to (part) of the source code if necessary.
• work orders on an if/when necessary basis

You can find a European service provider to partner up with either directly or by working together with a matchmaker and/or a sales representative. Because many European companies prefer to deal with a local contact person, an intermediary is a good option.

Consultant/matchmaker

A consultant/matchmaker is a person or a company with a large number of relevant contacts in a specific market segment or industry. As an intermediary, they are a ‘door opener’ and not an agent to make cold calls or send cold emails.

Make sure you properly inform your consultant/matchmaker about your company. They speak with many potential customers and are often involved in creating long lists of potential outsourcing providers. The more information they have on your company and the better they understand your capabilities, the more they can spread the word about you.

If you work with a consultant/matchmaker:

• the consultant/matchmaker makes appointments with prospects for you
• the presentation and sales process remains in your own hands
• you pay a retainer + success fee (which can be expensive)
• the consultant/matchmaker usually has multiple clients
• you need to set clear expectations and objectives to measure their performance

A retainer + success fee construction can be expensive. While the success fee depends on what the intermediary has delivered, you have to pay the retainer (usually a fixed monthly payment) regardless of their performance. Together, they should provide a strong motivation for the intermediary to deliver: the retainer should be high enough to cover some of the costs, but low enough to encourage delivery. A properly drafted contract, by a lawyer, is a must!

You also need to determine an exit strategy in the contract, with a clearly defined period after which the contract can be terminated without any further consequences. This period is usually not longer than three or four months, after which the contract will be evaluated and can be terminated or prolonged. For this period, there should be clearly defined delivery expectations and targets for the consultant/matchmaker (such as the number of relevant contacts, meetings and leads). You could also negotiate a trial period.

Sales/marketing representative

Another type of intermediary is a sales/marketing representative. These representatives are more involved in the sales process than consultants/matchmakers.

When working with a sales/marketing representative:

• the sales/marketing representative contacts prospects for you
• the sales/marketing representative also makes the sales and sometimes manages projects
• you pay a retainer + success fee (which can be expensive), or a fixed monthly fee
• the sales/marketing representative can have multiple clients or work exclusively for you

A good sales/marketing representative has a large, relevant network, so they do not make cold calls to provide services for you. Their success fee is often a percentage of the projects they bring in. Your expenses will rise by having to pay a sales/marketing representative, but you will be free to focus on your core business and search for other markets yourself.

Local sales office

Ideally, you should establish a local sales office in your European target market. A local presence makes it easier to build up long-term relationships with customers through personal contact. It also increases your credibility, builds trust and allows you to retain complete control over your marketing and sales activities. However, this is very difficult in practice, as it requires a lot of experience and large investments. Most companies in developing countries are simply too small and do not have the financial strength for this. And it is only viable if there is a verified market for your services.

Direct sales and online marketplaces

You can also try to sell your software testing services directly to European end user companies. Many European companies are looking for cost reduction and delivery capacity, which developing countries can often provide. This is one of your unique selling points. However, you should be aware that these end users might not have qualified IT staff to work with.

New electronic marketplaces may make this easier. These marketplaces are a cheap marketing tool. They are expected to lead to lower transaction costs for searching, evaluating, integrating and monitoring cloud services. Although they mainly contain smaller projects for freelancers, they could lead to pilot projects for companies. However, you need excellent end market knowledge.

Direct sales require experience in the European market. This strategy is most suitable for relatively large providers that want to target large European end users. Your best bet is to focus on a small, underserved niche market. However, for most suppliers from developing countries it is very challenging to sell software testing services directly. Sometimes, they work together to make a direct sales offer. Having one or more existing customers in Europe will help, as references are a must when you want to enter this market through direct sales.

3. What competition do you face on the European software testing services outsourcing market?

Which countries are you competing with?

In general, European companies prefer to outsource services to providers within the same country (also known as homesourcing, or simply outsourcing). For more information on nearshoring versus offshoring, see our study on the European market potential for software testing services.

Because software testing has become a team effort, most European companies prefer to work with companies that match at least three business hours per day with their own business hours. This means that most companies in the far east will not be ideally located as a software testing services partner.

The Global Services Location Index (GSLI) ranks the competitiveness of ITO/BPO destinations based on four categories: financial attractiveness, people skills and availability, business environment and digital resonance. For software development services, we have selected six countries that can be considered your strongest competition. The GSLI5 weighs the following selection criteria: digital resonance 60%, business environment 20%, financial attractiveness 10%, and people and skills 10%.