How evolving talent strategy is reshaping software business models

In this episode, we discuss how research and development (R&D), team operating models, geographical distribution, and compensation have all been altered in the software industry and how that affects M&A.

Key takeaways:

Companies should maintain pandemic lessons on how to pivot and adapt.
They need to choose the right operating model for their organization to adapt to macroeconomic headwinds.
Flexibility is essential, but strategies are needed for maintaining the organization’s culture. Parameters can be set around remote work to provide flexibility along with accountability.
There are different R&D strategies and collaboration tools that companies can adopt. Examining strategies and tools chosen by a target should be part of due diligence.

For your convenience, full text transcript of this podcast is also available.

Welcome to the EY Tech Connect podcast, where we have candid conversations about the most pressing priorities facing tech, media and telecommunications companies, and provide strategic insights on the key issues that matter to them. As industry ecosystems evolve in new directions, we use these discussions to reflect on how companies can not only take advantage of new opportunities, but also tackle emerging challenges.

Christina Winquist

Hello everyone, welcome to the EY Tech Connect podcast. Today, we’re looking at how talent is helping to transform software operating models and the impact it has on acquisitions and transactions. We’ve all seen the once in a lifetime disruption in labor trends as a result of the pandemic. Software, R&D, team operating models, geographical distribution and compensation have all been altered. Today, we’re speaking with Allie Earle, EY-Parthenon Principal and Software Strategy Group at EY, Keith MacKay, Managing Director, Software Strategy Group at EY and then we have Andrew Young is our global technology analyst here at EY. Hi, Andrew.

Andrew Young

Hi, Christina, great to be with you. I’m delighted to be joined by Allie and Keith today. The famous quote, software is eating the world was first coined by Marc Andreessen over a decade ago now. And not surprisingly, the software economy and the businesses that power it have matured and evolved significantly in the intervening years. At the same time, recent macroeconomic volatility and the continuing repercussions of the COVID-19 pandemic, among other issues, are presenting new and shifting challenges to software executives. Luckily, Allie and Keith are here today to help us make sense of these shocks and provide some insight into how decision-makers in the software economy can navigate them more effectively. But before we jump to solutions, let’s outline some of the challenges. Perhaps, starting with you, Allie, what are some of the key challenges that software executives, especially those focused on R&D, are facing today that maybe weren’t as top of mind even just three years ago?

Allie Earle

I’m real excited to be here with you, Andrew. I think a big piece that we’re seeing over the last few years is flexibility. Obviously, the pandemic has had really large impacts to the way that all companies are working. And software companies are really no different. A big one that we’ve seen recently is the demand for workers to be flexible and work from home or coming back into the office. And we’ve seen companies have different viewpoints going from one extreme to the other or finding a happy medium in between.

Keith Mackay

Within an organization, different approaches are taken all across the organization. There is no real one-size-fits-all solution that we’re seeing. The need for flexibility and the challenges around it are really affecting us all. I saw a study recently from Lending Tree that showed the difference in the percentage of workers working from home in October 2021 and then in October 2022. It’s changed very little over that time. It obviously changed a lot going into the pandemic, but in October 2021, it was 29.5% and in October 2022, it was 29.1%. So, it had only dropped, you know, four-tenths of a percent.

Winquist

Wow.

Mackay

Yeah, which is crazy, although it differs by age group. So, folks in the 25 to 39 age group, who are starting families, who are just more comfortable being offline, that age group actually rose in the percentage of folks working from home, so from 38.8% to 40.5%. Not a lot, but it’s holding reasonably steady, which indicates to us that, this is here to stay, a third of workers are working in remote-friendly jobs. And another study showed that 50% of applications on LinkedIn are for remote work jobs. This is very recent, but only 15% of the job listings are remote. So, people are, the marketplace, or the employee base is ready to work from home to a greater degree than the jobs are ready to be remotely worked from home.

Earle

Which can make sense, because in order to provide a truly flexible working environment for your team, you have to think differently about the products that you’re building, the team environment, building a company with 100% in office collaboration and teamwork, you end up having specific impacts to the way that your teams work. In the software economy, that has direct impacts to waterfall or agile development processes, or how often the scrum teams meet daily or weekly, or how you communicate different changes to your product strategy, if that is, you know, being spread across the remote workforce nowadays. You have to find new ways to communicate and set up time for that collaboration, which can be challenging for developers who do need, significant part of their days to actually code and build the product. And so, I think it takes a lot longer for businesses and leaders and management teams to think of new ways to adapt their entire business model internally to accommodate the flexibility.

Winquist

Yeah, exactly, I think we’re all living that. So, is there a uniform way that executives are handling these types of challenges? For example, how do you compensate a remote worker? Based on where they’re located, based on the office you’re tagged to? What do you think about that?

Mackay

We see a broad array of strategies used for both of those things. So, the considerations are still in flux. We internally ran a survey of 500 CTOs and CPOs of software companies and we found that while many have adopted a different set of policies for how remote work is handled versus three years ago, they also expect their approaches to change over the next three years. They don’t think they’ve gotten it quite right. We’ve seen some organizations that compensate based on the job regardless of where the performer of that job is, and they have workers all over the world and they pay in a role-based compensation. And others pay based on the office that the worker is based so they may have an east coast and west coast office in very different kind of pricing bands, and they will pay more to their San Francisco-based developer than to their Boston-based developer, even though the two developers might live next door to one another in Iowa. There isn’t a one-size-fits-all solution. We’re seeing it handled in many different ways.

Earle

One thing that we expect that the pandemic in that large remote working period that all companies had to face for some period of time hopefully was a learning lesson to adopt more flexible policies and not just build a new type of rigid one-size-fits-all policy. The term “the new normal” was used really heavily for some time across organizations, which we’ve seen a consensus in that it really means that you have to build teams that are able to pivot and adapt. Some of these decisions that executives are making today, they’re now making with a new mindset that their tomorrow can look completely different and they need to make sure that they have enough safeguards to change their policies and provide, updates as they go.

Young

The only constant is change. It makes sense. So, when you’re working on behalf of a private equity investor or a corporate acquirer, for example, to diligence a company, what are the things that you are looking for during the due diligence process on the R&D side, to see how companies are actually going about handling these challenges?

Earle

What’s really exciting about software companies is that there are so many different product strategies that they can have, and there’s really no one perfect R&D strategy that we would expect to see when evaluating a technology company. That being said, there are some really clear indicators on whether or not a company is being thoughtful and proactive with reacting to some of these recent challenges. One would be how proactive are they in building their product strategy and from a historical standpoint and future alignment between the teams they’re building, the sizes and the skill sets. And so for a maybe more tangible example, if a company is planning on building out a brand new platform, which will require new development skills, have they actually put new hiring plans in place of reaching out to new talent pools and attracting new types of talent and putting educational and development programs in place for their existing teams to start training up on those skills over time versus having more of a reactive firefighting type approach over the years. That’s something that we can see fairly easily when speaking with management and looking at their financial trends and hiring practices over time and seeing if the two really do line up.

Mackay

Yeah, absolutely. We also try to get a sense of how forward thinking the management team is. What are the skill requirements for the job? Each kind of position in these software companies that we look at have different levels of collaboration required, different kinds of tools that get used to promote that collaboration. A lot of the work that we do in our practice involves interviewing folks. And you can do an interview like we are now in many different places, over Zoom or Teams or the telephone. But having an in-person meeting allows a very different kind of interaction, different kinds of body language that become a lot more apparent, and a Zoom-based interview is sort of like playing poker over Zoom. You don’t see the tells, you don’t get the body language, you don’t make the same kinds of connections.

Earle

The tools piece actually is a big one. We always ask management teams and the development teams what tools are you using to collaborate or to track your progress and I think from even just a progress tracking tool, whether or not the company has invested in the right tooling to say this is our plan, everybody’s on board, let’s talk through this together in a new, remote fashion and can keep each other on track and honest of progress and can see in advance when things are starting to slip. That has a really good story versus, every few years, we look retroactively at our roadmaps and realize, we’ve built something different, which is something that you don’t want to see. I think a lot of this really comes down to just the proactive planning piece across the board and every aspect of a software company. You know, the software economy has changed so much over the last 10 years and the entire world has changed so much over the last 10 years. If a software company hasn’t changed their R&D organization strategy and the way their teams are working over the past few years or ten years, it would be really peculiar and it would be a really clear sign that they’re losing out on growth opportunities.

Mackay

And I think that’s a really important point to double down on. When you think about the kinds of jobs that are remote capable or remote compatible, a big piece of it is understanding what is the output of this job supposed to be, can you see that output? Can you measure that output? And do you understand what the definition of success is or done is and is that something that can be created by that remote worker and understood by management so that they can see that, yes, this is the work that we’re looking to get done and we can successfully get it done in this remote environment. We can measure, maintain, manage and provide adequate support to do this work. We saw this ourselves through the pandemic. Attrition was much higher. We are very much in an apprenticeship in our work. And a lot of that apprenticeship for new workers involves a lot of training. And we spent a tremendous amount of time on the phone with folks and on Teams with folks. But it’s not the same when they get off the phone and they’re in a childhood bedroom, being invited to dinner by their parents while they’re still trying to assimilate how to do the job and learn what the work is. And that’s really tricky. And so, a lot of those things were improved for us by being in office, having flexible work-from-home time, but having an understood schedule across the group where we were all together some of the time and all apart some of the time, and could plan to work appropriately and portion it out so that the right work was done in the right environment with the right teams.

Earle

It really has a large impact to the culture too, right?

Mackay

Huge.

Earle

From the learning and onboarding, absolutely. But even just the ongoing work environment, you can only get to know someone so well if you are just talking to them for one or two hours a day remotely, you can’t do the small talk. You can’t ask them casually about their day, especially if you’re at different levels, let alone at the same rank, it will never really have the same feel. And, you know, we saw early on in when remote working became really popular, there were all these jokes going around about, happy hours on Zoom and the wine tasting, which were all fun and they were all attempts to bring people together, but it is really hard to build a culture when you haven’t been able to shake someone’s hand.

Winquist

Absolutely.

Mackay

And it seems, something that we’ve seen across clients too and less so in a lot of the sort of knowledge worker kinds of environments that we’re exposed to, because many of those folks have even pre-pandemic, had some aspect of remote work, either working with shared teams in low-cost development centers or shared teams even across multiple offices within their organization. But in other kinds of industries, we also see concerns about monitoring and understanding how much work is getting done and the tools that employees are using to periodically move their mouse so that even when there isn’t work to be done, they feel they’re representing sufficiently to management that the work is getting done. And this, again, comes back to can we measure output in a way that is appropriate for the task and the job.

Winquist

Right. So, with all that being said, what are the three key things that software executives can do to solve all these issues? What are the actions that they must take?

Mackay

I guess the first thing I would say is a strategy for eligibility for remote work. So, how do you decide whether any given employee is capable of appropriate for and ready for remote work? And is the job one that makes sense to be done remotely? So, really having a clear going in strategy across your work streams, which are the streams that are appropriate and who are the folks, what are the criteria for those folks to so that work?

Earle

I would also say really communicating clear processes and expectations for remote work and flexible work. What are you getting after? What are you trying to get out of your teams and how does that help when folks are remote or in the office. So, not having folks come in, just to end up working by themselves as individual contributors, but being really intentional about, here are the reasons why we’ll all be together for these days. These are the expectations; these are the processes.

Mackay

And I guess a third might be one of the trickier things that we still see a lot of our organizations struggling with and that is: what are the right compensation strategies? Does it make sense to have folks tagged to a home office and use the typical compensation that you use for that home office or that geo? Or is it role-based? And from your perspective, anybody doing this particular task fits into a salary band that’s appropriate for that task. And what is fair and appropriate for your organization the way that you’ve structured the organization. So, it’s another aspect of really having a strategy for that eligibility for that remote work, but it’s really thinking about rather than the worker and task aspect of it, what is the compensation aspect of it.

Earl

Mm-hmm. And you had said three, but I might add a fourth and say being really intentional about culture. I think you need to decide on what your team and company’s culture is and then make sure that remote working strategy and your team working strategies are all aligned to that culture. It can’t be thought as separately, because if you’re building something and telling folks to come in or don’t come in, or trying to put forward a really collaborative culture, but don’t give folks the right tools to actually collaborate, things won’t work, and they won’t scale down the road.

Mackay

And if these are criteria for success, I would say that that last point of Allie’s around thinking through culture is every bit as or more important than any of the other three, because if you don’t get the culture right, you’re not going to be able to do anything right. You really have to think it through.

Young

It makes a ton of sense. This has been just a fantastically insightful conversation and I think it really helps bring some specificity and some actionability to the challenges and potential solutions facing players in the software economy, whether it’s around establishing an appropriate operational model in the face of macroeconomic headwinds, building that conducive and enabling culture or striking the right balance in terms of talent engagement and remote work strategies. Allie and Keith, I think have really made it clear that decision-makers in the space stand to benefit from proactive rather than reactive strategy development and planning on these issues, establishing those processes and expectations around remote or hybrid work and perhaps most importantly, recognizing that there is that need for building an enabling culture and recognizing that there will never be an end date to that need for adaptation. As such, we’ll be sure to keep an eye out for more insights and recommendations for deriving value in the software economy going forward. So, thank you again to Allie and Keith for joining us today, and back to you, Christina, to take us home.

Winquist

All right, thank you Allie, thank you Keith, really for your time. It’s been great. And thank you everybody for joining us today on EY Tech Connect podcast. For more thought leading perspectives, visit ey.com/tmt and you can also follow us on Twitter at EY_TMT and don’t forget to review and subscribe. Thank you.

Earle

Thank you.

Mackay

Thanks. It’s been fun.

Young

Thanks everyone.

Presenters

Andrew Young

EY Global Technology Industry Lead Analyst

Allie O'Rourke

EY-Parthenon Principal, Software Strategy Group, Ernst & Young LLP

Keith Mackay

EY-Parthenon Managing Director, Software Strategy Group, Ernst & Young LLP

Podcast

Episode 10

Duration

20m 16s

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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

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How evolving talent strategy is reshaping software business models

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Andrew Young

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