Todd Pruzan, HBR
Welcome to the HBR Video Quick Take. I’m Todd Pruzan, senior editor for research and special projects at Harvard Business Review. The global pandemic has accelerated the need for software companies to jump-start their digital transformation journeys and compress decades’ worth of much-needed change. Many organizations are looking beyond quick-fix initiatives.
Today, I’m here with James Markarian, chief technology officer at Marlin Equity, who has more than two decades of experience working with software organizations of various sizes and maturities. James will speak about how the industry has changed and how the next evolution of software companies are capturing value in unique ways. James, thank you so much for joining us today.
James Markarian, Marlin Equity Partners
Thanks, Todd. Great to be here.
Todd Pruzan, HBR
James, you’ve spent a lot of your career working with software companies. How has software changed in the past few years?
James Markarian, Marlin Equity Partners
Software’s really gone through a massive transformation in the past couple of years. In fact, it’s almost unrecognizable from the software industry [of], say, two decades ago. We’re building software on the cloud now instead of on-premises. We’re stitching code together instead of writing it from scratch. We’re starting to see this trend where we’re really moving from coding everything to a combination of code and data, so it’s like opening up a new definition for what we even consider software to be.
And lastly, I think the way that we think about software engineering projects has really changed a lot; [whereas before] we used to build software for software’s sake, now we’re building software more with an eye toward the business value that it delivers. And I think that’s really changing the way that we think about how we run these projects, how we hold software teams accountable. So it’s really gone through [an] overwhelming transformation in just a couple of decades.
Todd Pruzan, HBR
Great. So what are some of the important trends that you’re seeing in software right now?
James Markarian, Marlin Equity Partners
Well, I think that there are a few trends. I think one of the things that lots of people talk about or have talked about for a while is the consumerization of software, including now B2B software. And what I mean by that is the level of fit and finish that’s necessary for software these days is quite a bit higher than what we had, like I said, a couple of decades ago.
So if you went to common consumer applications—I think Amazon or even some of the social media applications—the level of finesse that’s involved in those user interfaces is really high versus if you looked at accounting packages or if you looked at payroll packages, et cetera. They didn’t quite have the same degree of fidelity in the user interfaces, so that’s changing quite a bit.
How we actually get there has also changed. We’re putting a lot of investment in UI/UX development. We’re putting [in] a lot of instrumentation via software like Pendo, and Mixpanel, and Amplitude, so that we get a lot of user feedback. And we try to feed that in as quickly as possible into the software development process and into refining the user interface because we really want to emphasize retaining the customers that we have and attracting new customers to the extent possible.
We’re also seeing this move toward more continuous integration and continuous deployment so that we can roll out features super quickly. And it used to be that, especially for enterprise software, we’d see releases maybe every quarter—in the old days, every year or [every] few years. Now it’s every week, or every day in extreme cases. And that’s to keep our customers happy and to keep up with the competition.
Lastly, as I mentioned, we’re really seeing the advent of data and even AI/ML really trying to [push] the envelope in terms of what software can do for folks—be a little more predictive, be a little more intelligent. Instead of just plain working software, the goal is really to continually surprise our users and do novel things that they didn’t really think the software could do for them. We’re seeing a lot of really powerful, transformative things happening in the software industry.
Todd Pruzan, HBR
So how do private equity firms like yours try to identify and create value within their software company investments? And in general, how has this been evolving over the past few years?
James Markarian, Marlin Equity Partners
Probably the biggest transformation that you’ve seen is in PE—and this isn’t exclusive—but I think PE in the old days maybe had more of a reputation as being a cost-cutting operation. So we wanted to focus on margin. And everybody loves cost savings, so that’s never going to go out of style.
On the other hand, there’s a lot of focus now on growth and what investments we can make, what changes we can make to the software development process so that we can drive value creation, as we mentioned at the start, because we’re thinking a little bit about exit value in terms of growth and revenue multiples more than just EBITDA multiples. So we come in and, like other private equity companies, look at the state of the software companies with respect to current best practices.
Are you taking advantage of everything on public cloud infrastructure? Are you looking at talent in the right way? Are you using outsourcing or offshoring appropriately? And with more of an eye toward bringing in the best talent for the job rather than just looking at taking costs out of the equation.
Lastly, we look again at are you really monetizing everything? We often find companies are sitting on a gold mine of data that they’re maybe using for internal purposes; maybe occasionally they’re performing some reporting for their customers. But largely speaking, they’re not looking the way social media companies, for example, are looking at mining and taking advantage of that data to make their overall service better or think about what else they can do with that data. So we look at lots of different levers that we might take advantage of to add value to these software investments that we make.
Todd Pruzan, HBR
James, based on all the organizations you work with, is there a common set of skills you see that’s critical for a successful software company to develop?
James Markarian, Marlin Equity Partners
Yeah, I think so. It’s a little bit tricky because we work in every different software domain, so there are definitely some nuances. But when you look at the infrastructure and how you build scalable, reliable services, there’s a core set of engineering functions that are going to be there.
Now, versus the old days, we’re seeing that people need to know how to use these services but not necessarily build these services. So what can I get from Azure? What can I get from GCP? What can I get from AWS? Et cetera. Those are extremely important [when it comes to] knowing what tools are available and what technologies are available. As I mentioned before, being highly skilled in UI and the things that bring these technologies closer to the application, being really skilled in UI and understanding the user experience, understanding who the customer is, and really adapting the solutions to exactly what they need and how to make them more productive are among the the key capabilities.
Lastly, I think that really knowing what the mix is—how much talent we need in the firm, how much we can leverage from our partners, and how much we can use from outsourcers [are all critical], so people need to think a little bit more from a business standpoint than just a raw engineering standpoint.
And so [here’s what] we’re seeing in the leaders for engineering today: they’re a little more business conscious than they used to be. In fact, I’d go as far as to say they really have to be. They can’t be successful in today’s market unless they really have a business focus in addition to all the technology that they need to keep functioning and developing at the same time.
Todd Pruzan, HBR
James, what do you see as the greatest impediment for any organization to build out these skills?
James Markarian, Marlin Equity Partners
I think the greatest impediment is that there are a lot of things that we’re facing right now. First of all, there’s so much technology being developed in the world. There is just a massive shortage of quality engineering talent.
What I always say is this—look, the number of really smart engineers in the world is finite. And we all compete for those really top engineers. And just because there are more dollars—either from the VC community or from private equity—coming in, [that] doesn’t necessarily mean that we’re minting more supersmart engineers.
First of all, there is going to be a talent shortage. And whether you solve the visa problem or whether you’re just trying to go it alone and hire directly out of schools, there’s always going to be that challenge. I think one of the bigger challenges once you get over this idea of where we get talent from [is related to the fact that] there’s inertia that creeps into individual organizations. That is normally [the] pattern, and it doesn’t really matter how big or small you are. What got us to the point that we are is not what’s going to make us successful in the future. You don’t want to be too aggressive about it and just continue to jettison all your most valuable engineers because they have the old way of thinking. But you need to have this model where you’re really introducing new ways of doing things and new techniques, and bringing in new people, and not get too stuck in the past.
There have been experiences from my past where old, seemingly invaluable engineers, engineers whom the company was really reliant on in the early days, once the company needs to transition, the engineers actually ended up being blockers for a lot of things. And the technologies and the companies got better when some of these folks moved on. It’s just more important now than ever to not be a slave to the past and really think about evolving with the times, regardless of the legacy that you have, either in people or processes.
Todd Pruzan, HBR
James, how has the pandemic and the transition to remote work changed the way organizations are building teams?
James Markarian, Marlin Equity Partners
It’s a good question. I think that the final chapter hasn’t really been written on how the pandemic will affect things, so the best we can do right now is say what we’ve learned so far.
The way I think about things is in two modes. One is dependent on the phase that you’re in for your technology, so how low level it is in one dimension. And the other dimension is how well developed it is at this point.
If you’re in an innovation phase—we’re inventing something and we need to come up with a new application or a new way of doing things—I think it’s going to be really hard for most companies to do that remotely, [as we do not have] that really high-frequency interaction between engineers or between engineers and product managers. I think we’ll have trouble innovating for some applications in this new model.
I think the lower things go along this other dimension, the more “infrastructurey” it is if you’re working on a database or operating system—not that many people do these days—but these things that are algorithmically oriented, where you have a lot of education at the university level, are actually a lot easier to implement. They’re not as new. They’re pretty low level. People can work in siloed ways and can contribute to a larger whole. Some things actually lend themselves better than others to remote development.
The big thing that everybody is seeing, of course, is that it’s flattening the world where we think about hiring our engineers, whether it’s in the next town over, several states over, several countries over, or several continents over. Now that we’re getting more used to—for certain modes of these implementations—more remote development work, I think it’s really opening up the whole world.
And so whether it’s Eastern European outsourcing, or it’s Indian outsourcing, or South American outsourcing, I think the appetite toward that is changing quite a bit. Part of [it is] necessary. So you have Google and Facebook now competing for resources in parts of the country or parts of the world that they weren’t really competing in before. So we have to get super creative about how we think about where we get this talent. And Covid-19 really changed all that and changed attitudes.
Todd Pruzan, HBR
So what advice would you give to company leaders about their products and about their research and development?
James Markarian, Marlin Equity Partners
Again, there’s a question about whether one size fits all. I’ll start with a very basic thing that I’ve observed over [the] years in my career, which is probably closer to three decades than two, for better or worse. Whenever I’ve thought back on things, I’ve always thought about the fact that I could have been more aggressive, thought more innovatively about the things that we did, about the things that we could do, about not respecting the past as much as maybe even I have.
It’s very easy to become a slave to things that you’ve built before, even—and I hate to say it—to your existing customers and not thinking as much ahead about where we want to be instead of letting inertia take over and making us a slave to the things that we’ve done before. So I think about being aggressive and never losing that.
Part of that is another thing that I thought about, which is really running R&D more like a business. What you see in a lot of organizations is it’s almost like a fear folks have of R&D. Like, hey, we don’t want to upset engineering. It’s super complicated. There are all these reasons why maybe folks don’t treat it as harshly as they do with, for example, sales or some of the other functions, [which are] things that people feel like they understand.
R&D actually would benefit from, one, being more transparent, but two, more rigor around being held accountable for what they’re delivering, not just from an R&D milestone point of view, but what they’re delivering back to the business. Typically, when I see a lot of companies, I think they lack this alignment between the business and R&D and holding everybody accountable for achieving that alignment.
Probably the last couple of quick things that I’d say [include that] we see the security breaches come up all the time, like SolarWinds and other breaches, Colonial Pipeline, et cetera. Also, I think most people are underinvested in security, and we’ve got to take that, as an industry, a lot more seriously than we have.
This is not just something that’s going to happen to someone else. This is not just something that AWS is going to save us from. This is about a lot of nitty-gritty detail, and really listening and doing what the CSO tells us to do, because this is going to be a big liability for us in the future.
Where I leave this is your future might be your data. You might think of yourself as an application company, but really, if you roll forward a few years, as I think Marc Andreessen said, software eats the world. I think data is now eating the world. There’s probably a data-oriented approach or a growth vector for the business that’s a lot more data-oriented than most people are pursuing right now.
I’m a big advocate of doing more with data, and we’re seeing the beginning of that from, obviously, the rise of companies like Databricks and Snowflake. But also, as the horizontal technology percolates down into individual companies, we’re seeing a lot more of those strategies pop up. And it’s a great time to be in data.
Todd Pruzan, HBR
Indeed. Well, James, this has been a great conversation. Thank you so much for joining us today.
James Markarian, Marlin Equity Partners
My pleasure. Thank you for having me, Todd.
To learn more about Marlin Equity Partners, please visit marlinequity.com.