What Corporate Software Development Can Learn from VCs

By and  |  May 27, 2021, 1:53 AM

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:

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:

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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