When we think about innovation technology and entrepreneurship, California’s largest tech hubs—San Francisco and Silicon Valley—would immediately spring to mind. Besides its global renown for billion-dollar cultural exports in media and entertainment, California indeed holds the nation’s longstanding history as the bedrock of its technological might. It is home to many beloved tech giants, including Apple, Google, Twitter, and Meta (previously Facebook).

California’s status as the tech epicenter for decades is undeniable. But with an increasingly inhospitable business climate and skyrocketing property prices in the region, it must contend with the Southern states’ meteoric rise as America’s latest tech refuge. Nonetheless, maintaining its commercial attractiveness to businesses and investors looking to set up shop amidst burgeoning alternatives is not an easy task.

As things continue to unfold, some questions remain. Would the Golden State be doomed to repeat America’s automobile downfall in the Rust Belt? How has the state’s tech decline—if at all—impacted the demand for custom software development among local businesses? And is outsourcing software development really the answer to California’s plight?

Why tech companies in droves are leaving California

California has witnessed a tech exodus of businesses at an alarming pace over the years. Among those are big names like Palantir, Oracle, and Hewlett-Packard Enterprise—all of which announced relocations of their headquarters outside the state just last year. A study conducted by the Hoover Institution at Stanford University discovered that within the first six months of this year alone, 74 prominent businesses had relocated elsewhere. That is double the average monthly rate of the previous three years. So far, there have been 265 business relocations ever recorded from January 2018 to June 2021. Experts even highlighted that the number is likely an undercount as plenty of small and medium-sized businesses taking a similar route were not accounted for. Likewise, the Bay Area’s tech workforce had seen a decline of 35.3% in the inflow-outflow ratio in 2020—the steepest rate nationwide.

Concerns on high taxes, rising costs of living, and strict regulations contribute significantly to the out-migration trend seen in California. This is hardly surprising. The state ranks second to last in business tax climate—bested only by New Jersey. It also has one of the highest corporation tax rates in the country with a flat tax of 8.84%—accruing $16.6 billion in corporation tax revenue or more than 10% of the General Fund revenues for the year 2021 to 2022. This is on top of municipal taxes in some cities like San Francisco, with its 0.6% gross-receipts tax levied on financial service companies and 0.38% payroll tax. Similarly, California’s personal income tax goes as high as 12.3% for the high-end margin, further discouraging investors and entrepreneurs from moving in.

Regulatory red tape

Excessive bureaucracy has seriously muddled California’s business climate—with researchers calculating a total of 396,000 restrictions in place. These regulatory landmines have become a source of frustration for many business owners since such roadblocks inadvertently inflate the costs of running a business and—subsequently—the prices of goods and services.

But perhaps the biggest regulatory faux-pas takes place in the birthplace of America’s technological renaissance itself—San Francisco. The city recently introduced the Office of Emerging Technology—a new regulatory agency mandating tech companies to seek approval from the city government before launching any commercial novelties. The regulatory body would only greenlight new tech products deemed fit to serve the common good. While it sounds good in theory, many fear that this heavy-handed approach would stifle myriad innovation capabilities and potentially cause tech firms to lose out to their competitors elsewhere.

The backwash of the Coronavirus crisis has also played a role in California’s tech slump. With social distancing and lockdown protocols still in effect, an increasing number of Bay Area companies—led by Twitter, Facebook, and Dropbox—have opened permanent remote posts for their employees. While telecommuting has provided greater flexibility for both workers and tech firms, the demand for local talent pools might be in jeopardy. Last year, a survey discovered that 66% of professionals in the Bay Area would opt for working remotely—with 28% thinking of relocating outside the metropolitan area.

California remains the nation’s tech epicenter

While the odds so far seem stacked against the Golden State, some experts underline contrasting trends instead. The shocking departures of several household tech companies might add pressure to the state’s running reign as the tech powerhouse. However, MarketWatch showed that venture capital for startups in the Bay Area continued to break a record number in 2020, growing by 8% from the previous year even amidst the reported exodus of tech companies and workers.

From the total $123.6 billion in VC funding recorded in the US last year, roughly 54.2% of the amount went to California. Silicon Valley and San Francisco received $26.4 billion and $20 billion, respectively. The Bay Area’s tech juggernauts had also seen a bullish growth by 37% last year, with market caps standing nearly at $10.5 trillion in total.

Meanwhile, despite trickling out of the Bay Area at an annual net migration rate of 82.8% in 2020, most former residents still chose the neighboring Californian cities as their destinations—with Alameda and San Mateo topping the list.

What does this mean for local businesses?

With tech firms in tow moving out of state or to remote operations and virtual-based services, the distribution of programmers and developers is no longer heavily concentrated around California’s tech belt. This critical juncture has made it much harder for local businesses to recruit top talents who are willing to eke out around the Bay Area with its stifling living costs.

Remuneration is also a concern for many local businesses. Although the annual salary of tech workers in California averages around $116,820 annually, this number could reach 507% higher in San Jose. Subsequently, this puts most small businesses in the area out of options for finding affordable talents for in-house development.

Alternatively, the rise of remote workforce has encouraged more companies to engage their software development primarily out of state. More than ever, Californian businesses in a pinch find it incredibly lucrative and feasible to outsource their development projects since it consolidates diverse talents with proven credentials at a more reasonable price range.

Outsourcing custom software development is certainly not new. Statista reported the contract value for outsourced IT services reached $66.5 billion. A further breakdown of the contract types revealed that software application development and software application maintenance dominated the list with 64% and 51%, respectively.

Benefits of outsourcing development

It might seem counterintuitive to outsource development outside the state when your business operates in the heart of the nation’s vibrant tech scene. However, don’t dismiss the idea just yet. Below are several reasons worth ruminating as to why outsourcing might be best for your company:

  • Costs. With California’s crippling costs of doing business, outsourcing development allows you to find a team of software experts to contract at a competitive rate. Outsourcing also eliminates the potential overheads you might incur from recruiting and training talents internally.
  • Faster time-to-market. Given California’s fiercely competitive tech market, speed is incredibly critical in giving you an edge over other businesses. By hiring an external development team, you can swiftly scale your software capabilities anytime as you see fit.
  • Top-notch talents. Custom software development requires many specializations, ranging from the application’s platform to the tech stack to use. This makes it difficult to build a qualified team to meet various project specifications. Outsourcing, thus, helps you find the best software development team for the job in an instant.
  • Access to cutting-edge development tools. Acquiring the necessary development tools to build your dream application isn’t always feasible or affordable. Conversely, through outsourcing, you can always find a development agency with capabilities and resources that match your requirements.

Final thoughts

California remains at the forefront of innovation thanks to the economic and cultural imprints left by plenty of homegrown tech giants still flourishing in the area. However, the soaring business expenses and living costs have made it difficult for smaller industry players to incubate their own technological innovations. More than ever, outsourcing custom software development becomes highly favorable to those willing to bear witness to the Golden State’s next technology boom.

Looking to outsource a software development project for your company in California? Reach out to us below and get a complimentary consultation session to get started!

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Client Success Manager

Sindhu is a tenacious and impassioned digital product and project manager specializing in driving client success across complex healthcare technology implementations and integrations. She is a certified Agile Scrum Master and holds advanced degrees in computer science and software engineering. Her philosophy is that “work is where the heart is” and believes the key to success is creating a solid, supportive, and cohesive team.