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Business Innovation Partner Insights

What Corporate Software Development Can Learn from VCs

See part one of this two part series here.

What is the future of software product engineering?  And what will it take for businesses to be successful, as software plays a bigger and bigger role in all industries? To answer these questions, it helps to look at the venture capital industry and the models it has successfully followed for many years.

VCs invest in companies, giving them just enough capital to sustain their business while motivating them to aim high, achieve certain milestones, and ultimately unlock new levels of investment and financial incentives.  They do this using equity.  Equity aligns the incentives for investors, the management team, and employees.  Typically, VC-backed technology companies pay less than market-based compensation, but they pair that with equity that often offers the opportunity for significant financial “upside” when there is an exit event like an initial public offering or company sale. 

When we consider the future, software product engineering firms will work with enterprise clients in a very similar fashion. Product engineering firms like Cognizant will play a role analogous to startups, while enterprise clients will more closely resemble investors.  Clients will seek to “invest” in the partner with the best leadership and track record for building and taking to market products that drive revenue and that enable wholly new business models.  We suggest clients seek out partners with delivery models that are natively product-centric, and that have credible end-to-end capabilities for market evaluation, product strategy, design, and engineering expertise.

The structure of such partnership deals aligns incentives and focuses on outcomes.  A minimal baseline payment is made to the partner that is leading the product engineering.  The key is that future payments are contingent on the success of the project. So the product engineering firm shares in the upside when a resulting product is put in the market.  This is like the use of equity in the VC model, and may take the form of direct revenue or a share of a product’s profit margin, or be performance-based, with incentives paid to both parties. 

This often also leads to joint branded products  or offerings. This takes the idea of shared investment and incentives to a new level. Such a model might involve a new product taken to market with shared responsibility. It can also include creating a shared joint venture, and shared responsibilities for brand development, leadership, technology offerings, staffing, marketing, distribution and ultimately, revenue sharing.

Risks and challenges this approach must address:

  • The War for Talent – Unemployment in technology currently sits at around 2%, even with COVID-19. Because of this, the competition for new talent remains fierce, as does the challenge of retaining existing software product engineers. And there is a growing global talent gap in software engineering that is expected to reach 85 million by the year 2030 (roughly the population of Germany). Strong growth and market opportunities are great, but recruiting and retaining the right software product engineers, in any market, will be a challenge that only gets more difficult.  Crucial to this is a model whereby the engineering teams, regardless of what company they are working for, visibly see the impact they are having, and are able to work on innovative and modern products. The most talented people get excited when they make innovation happen, and may want to specialize in one industry, or many. So, giving people the opportunity to participate in designing and building impactful products and rotating across multiple industries to learn and cross-pollinate experiences is a key factor that helps in acquiring and retaining the very best.
  • An Experience-Led Product Mindset is Crucial – Successful software products, whether built for consumers or an enterprise audience, must start with an understanding of the end user.  The secret to successful products is the continuous choreographed “dance” across product, design, and engineering teams.  Some project managers can straddle the fence and make all sides collaborate. But the speed at which things are moving and the emergence of new business models means both engineering and product design need a deeper appreciation for how the other side works and what it needs to be successful. Integration and seamless collaboration between the two will be important for success.  Cognizant’s pod model and experience-led product engineering approach is an effective answer to this. 
  • 70% of Digital Transformations Fail – Everyone may have the best intentions, but in the end the vast majority of digital transformations don’t go as planned. Many end up failing. New business models may help, in which both clients and engineering services firms have real skin in the game, so both sides are ‘all in’ and focused on product and end goals. But they’ll also increase pressure on both sides.
  • What About The Culture? – What ultimately will decide who succeeds and who fails will be how adept companies are at evolving their culture to be more agile, product-focused, and focused on ROI. During the pandemic, companies have devoted a great deal of resources to try and accelerate their digital processes and translate that into business results. But COVID is also an opportunity to revitalize corporate cultures towards a digitally-focused innovation mindset. Those that don’t will surely fail.

What We Recommend

Software development is no longer just a line item as part of a company’s overall technology spend. It has emerged as a strategic cornerstone for successful enterprises, and in the last 12 months its value and importance has skyrocketed. To put it more bluntly, instead of fighting for a seat at the table for business operations and strategy, software development now occupies nearly every seat in the room. It has never been of more vital importance as a key driver for existing and future business development and growth.

Yet the hard part for companies and software product engineering partners begins now. Everyone moved at warp speed during the pandemic to create new opportunities, new products and revenue streams, and to deal with a displaced and remote workforce. But what happens next will define the next decade and determine winners and losers.

Companies must be willing to support and invest in:

  • Culture — Regardless of where your team works (at home, in an office, a hybrid, etc.), they need to feel they are part of something bigger than just themselves. Developing an innovation culture will motivate and empower product development teams, while inspiring the rest of an organization as well as partners to better collaborate on measurable business outcomes.
  • Talent — Attracting, retaining and developing the best talent, especially in a post-pandemic world, remains crucial to achieving overall business objectives. Covid-19 proved that remote work is not only possible, but often preferred. Geography is no longer a variable when your best talent determines where, how and who they want to work with.
  • Transformational Partnerships — Companies can’t expect to go it alone. When imagining the future of their organization, companies need to rely on objective and proven partners that will stand shoulder to shoulder with them to transform their business as well as their industry. This includes a reimagining of business models, of relationships and go-to-market strategies that will stimulate growth and product innovation for the next decade.

The past year gave us a glimpse of what we can achieve when we move with velocity and purpose. The next decade of software product engineering will demonstrate our ability to apply everything we’ve learned from the global pandemic to further evolve our organizations, our businesses, and the society we live in.

Cognizant Softvision is a leader in the Product Engineering space as a partner to leading enterprises across industries.  We are preparing to lead this market shift towards Transformational Partnerships.  Based on our core Community and Pod based delivery model, we continue to bring innovation to the industry in how we structure work with clients to align incentives and show tangible business impact. 

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