By Roman Eloshvili
For decades, Europe’s software industry has been built on services: outsourcing, custom development, and consulting. That model created jobs and export revenue, yes, but it is now reaching its limits. As margins compress and AI reshapes standards, European software firms must rethink their future. Productization is now becoming a strategic necessity. And here is why.
Europe’s software sector always had a clear and reliable engine powering it. Talented engineers, strong technical education, competitive costs — there were many factors that, when put together, made the region a natural hub for outsourcing, custom development, and IT consulting.
For a long time, this model worked well: it created thousands of companies and millions of job positions, ultimately helping position Europe as a critical supplier to global tech ecosystems. But today, that engine is losing momentum.
The ironic thing is that when we look at the overall IT services market, numbers show that it keeps growing. By 2029, it is expected to reach $5.17 trillion. On paper, sound impressive, doesn’t it? And it is. But in practice, it also means a very crowded market where providers constantly compete on just about every front: speed, prices, efficiency of services, etc.
As a result, for individual projects, it becomes harder and harder to find success. Pressure is intense, clients expect the same quality of outputs on lower budgets, and retaining top talent is a constant battle in its own right.
Yet at the same time, product-led companies show a major contrast. Despite often being smaller in headcount, they are scaling faster, raising capital more easily, and building far more resilient businesses. Private equity investment in SaaS saw a 66% jump in 2025, indicating that investor preferences lean increasingly toward scalable product companies rather than traditional service businesses.
The way I see it, this shift brings up a question that we must consider in earnest: can Europe’s service-first software companies remain competitive without evolving into product-first organizations?
Why the Service Model is Hitting a Ceiling
The traditional service model has three structural limitations that are becoming impossible to ignore.
First, services scale linearly, which, in simple words, means that revenue growth depends heavily on headcount growth. That made sense when demand was booming, and talent was abundant, but today, hiring is increasingly expensive and scaling teams across borders introduces a lot of operational complexity. Even well-run service firms eventually hit a growth ceiling under such conditions.
Second, like I already mentioned, margins are under constant pressure. With AI tools increasingly automating many development processes, tasks that used to justify large budgets and teams are now becoming faster and cheaper to deliver with fewer people.
From the client’s point of view, this leads to a question: why should I pay the same price for something that now takes less time and effort? So they start pushing for lower rates and shorter service times. Project revenue drops, and as costs remain largely intact, as companies still need to invest in AI tools and professionals to maintain them.
And finally, ambitious talent is harder to retain when you run a service-model business. Strong engineers are often driven by the desire to build something of their own, instead of executing someone else’s roadmap. And when your workers leave to join product startups or launch their own ventures, retaining success in the long run becomes a much heavier task.
None of this means services are “dead,” but it does mean the model, on its own, is no longer enough to sustain growth and competitiveness.
Why Productization is the Way to Go
Basically, it’s because product-led companies operate under a different set of rules. They decouple revenue from headcount, they create reusable value, and they can serve thousands of customers with the same core technology. Most importantly, they build their value by building assets, not just cultivating relationships.
This is why investors consistently reward product companies with higher valuations. It is also why ecosystems that produce strong product businesses tend to generate more innovation, capital reinvestment, and global influence over time.
Here’s a very recent example that proves this dynamic: Databricks recently raised $4 billion in yet another funding round. It’s a product-driven company that continues to bring in capital at significant valuations (the latest being $134B) and reinvests in its platform. This round is the third major one the company had this year, and it’s clear proof that product-led firms can build resilient revenue models.
Because of this, for Europe, productization is a strategic necessity if the region wants to move up the value chain. IT businesses here need to put greater focus on creating proprietary software, platforms, and data-driven products.
Making the Transition is the Hardest Part — What to Account For?
That said, moving from services to products is not so simple as flipping a switch. A software company can’t do it overnight.
The very first major wall that you need to break through here is the difference in mindsets. Service businesses are built around predictability and optimized for client satisfaction. You sign a contract, and you deliver on a short time-scale. But product companies must tolerate a lot of uncertainty that comes with experimentation and delayed returns.
You build products without really knowing when — or even if — they will pay off. Progress is often uneven, and in order to push through on this change, company leadership must think beyond utilization rates and monthly revenue reports. They need to think in terms of long-term value creation.
The second challenge is how capital allocation works. In a service business, most spending is tied directly to client work: if you have a project, you have a budget. But product development requires you to invest time and money long before any kind of revenue has a chance to exist.
You must be willing to put in the work over time, funding your development teams and accepting that without this upfront dedication, your products will never reach a stage where they can start paying themselves off.
Finally, the third key challenge is keeping focus. Many companies fail to make the transition because they spread themselves too thin; try to do everything at once: continue to run service operations, try to build multiple products at the same time, customize features for early customers. More often than not, this haste results in exhaustion and half-baked ideas that never become full-fledged products.
If you want to succeed, start small and with a much narrower approach. Pick one real, proven, and recurring problem that your company already understands deeply, and build a solution around that. This gives you a realistic chance to find your footing first — scaling can come later.
Image of the Future: Who Will Win
Despite all the hardships, I fully believe that what Europe’s software sector is facing now is not a decline or stagnation. What stands before it is a signal to change, and that signal needs to be heeded.
Companies that treat services not as the end goal, but as a foundation, will find themselves going a step further. Think of it like this: your previous client work can be used to understand what problems they’re forced to deal with. And that knowledge can then be turned into products that have good odds of being accepted since they answer the practical needs of your audience.
“Productization” is the next stage of maturity for Europe’s software industry, and the key to building companies that last in the days to come.
Roman Eloshvili
