Unprecedented Demand for Software Engineers Will Redefine Hiring Forever

Our recent Karat summer offsite started off with seemingly innocuous ice-breakers: If you could have any superpower what would it be? Who is your hero and why? What was your earliest memory of the internet? In response to the last question, one of our engineering interns, Sabrina, paused briefly before telling me matter-of-factly that she did not have any memories before the internet. I was taken aback. My first reaction: am I that old? My second reaction: Marc Andreessen was right — software has eaten the world.

By the time Andreessen coined this phrase in 2011, software had upended countless industries. Amazon alone had eaten quite a few, and has more in its sights. Borders was an early victim, which sealed its fate when it handed Amazon the keys to its online business in 2001 under the misguided belief that online book sales were not strategic. Jeff Bezos, on the other hand, knew that it was still just “Day 1” in the battle for online supremacy. More recently, Uber and Lyft have upended the transportation industry, Airbnb has transformed the hospitality industry, and Slack has moved us out of our inboxes to a real-time collaboration platform.

All of this innovation, along with easy access to capital and a booming economy, has led to an unprecedented demand for software engineers. Yet the supply of engineers has hardly kept up. There are currently over half a million open computing jobs in the U.S., while only about 50,000 computer science students graduated into the workforce last year. As a result, most tech companies are only hitting about 60% of their hiring goals.

Much like software has disrupted traditional industries, the growing demand for software engineers will forever redefine how companies hire. Companies are waking up to the reality that scarcity of tech talent is not a temporary issue. They are being forced to innovate to build incredibly efficient, robust hiring practices to remain competitive.

Progressive companies are responding to this hiring pressure cooker by creating flexible work environments and structures, building long-term relationships with candidates, and empowering business units to lead recruiting efforts, while also doing what they need to do (read: paying more) to stay competitive. Companies are also turning to us here at Karat. We accelerate companies’ ability to hire by conducting first-round technical interviews on their behalf.

The demand for software engineers is at an all-time high

Three trends are accelerating the demand for software engineers: companies have significant capital at their disposal, they are increasingly developing software in-house, and non-tech companies are turning into tech companies.

So much capital to spend

Companies have more money to spend than ever before. Profits for established, public companies in the U.S. are at all-time high and growing: Q2 profits rose 16% year over year, the largest quarterly gain in six years. Funding for private companies is booming, too: venture capital spending was at a decade high in 2017 with over $84 billion invested.

Tech companies aren’t sitting on their profits — they are taking these funds and investing in R&D, mostly on software engineers. Ten of the top 16 U.S. public companies spending on R&D were tech companies. Among the top five were Amazon, which spent $22.6 billion on R&D in 2017, and Alphabet, which spent $16.6 billion. Software R&D spending is also increasing faster than any other industry, growing at a 16% annual clip in 2017.

A shift toward in-house software development for internal use

One driver of this increased spending is a clear trend towards developing more software in-house. In 1985, firms spent 7% of their investments on proprietary IT; by 2016, that was up to 24%, or roughly $250 billion per year. The software that is being built is increasingly for internal usage, not for customers. Companies are realizing that their own internal operating systems are a key competitive advantage.

The convergence of tech and non-tech

It’s not just the traditional players spending on tech R&D. For example, banks are now getting harder to differentiate from tech companies in terms of their spending on technology. Goldman Sachs CEO Lloyd Blankfein recently stated that “engineering underpins our growth initiatives.” Same goes for JP Morgan Chase, which spends $9.5 billion each year on technology, mostly on the 50,000 technologists working there (note: Facebook only has 30,275 employees total). JP Morgan Chase’s 2016 annual report stated that “technology continues to fuel everything we do.” And most of the open roles at industrial companies like Siemens and Black & Decker are for experts in machine learning, artificial intelligence, and cybersecurity.

Companies are being forced to innovate in hiring

The pressure to innovate in hiring is real and greater than ever before. We are seeing companies deal with this in a number of ways.

Companies are willing to hire talent wherever that talent may exist and increasingly on the employee’s terms.

Many employees want more control over their lives and schedules — 60 million people in the U.S. engage in independent work. Nearly 70% of companies are integrating this free agent/gig talent into their workforce. For those who are fully employed, a growing percentage are working remotely and they are doing so more of the time: 31% of American workers now work remotely 4–5 days per week, up from 24% in 2012. This is especially common in tech companies, and more of them, such as Gitlab, Chef, and InVision, have gone fully remote.

Companies are hiring more “silver medalists.”

In a 2017 Jobvite survey of more than 800 U.S. recruiters and hiring managers, 88% said they had tapped silver medalists, the runners-up in the interview process, to fill jobs. Companies like Citrix have an explicit “keep-warm” strategy, where they routinely go back to a database of silver medalists when new job opportunities arise — 15% of their hires now come from this pool.

Image source: People Magazine.

Business units and executives are leading recruitment efforts.

Frustrated with their inability to find enough qualified talent to meet their needs, business units are taking the lead in the hiring process and shouldering more of the responsibility for finding and hiring talent. More companies now report that business units and C-suite executives lead their strategic workforce efforts over the office of the CHRO or the talent acquisition team.

Companies are paying more.

According to Forrester, employers that lag behind will wind up paying up to 20% above market salary rates for new hires with particularly in-demand skills — a group that includes data scientists, high-end software developers, and information security analysts.

Karat is helping companies solve this problem

At Karat, we are working to solve these problems for our clients while making hiring more fair and human. Here are a few strategies we use to do this.

Giving existing engineers time back to focus on what they do best: building product.

When hitting hiring goals is challenging and R&D resources are scarce, it is absolutely essential to optimize the existing software engineering staff. Having engineers conduct interviews at the top of the funnel, where there is a low likelihood of success for any single candidate, sub-optimally utilizes their time (and negatively affects their morale, too). Our clients reallocate all the time and effort their engineers were spending in phone screens towards building product or accelerating hiring by conducting more onsites.

At Karat, we let the back-end engineers do the back-end work, the front-end engineers do the front-end work, and the interview engineers conduct interviews.

Allowing companies to interview more candidates than ever before.

Most companies are only assessing about 10% of the software engineering candidates who apply to a job. They limit the precious time spent by engineers assessing candidates to those they believe will have a high likelihood of success. But this means they are missing out on great candidates and serves to reinforce existing biases by placing disproportionate emphasis on factors such as which school a candidate attended or where he/she/they worked previously. Companies have tried to solve this problem in many ways — the rise of offline code tests, for example — but those tend to put off a large number of candidates as they know they are in high demand and expect a higher touch recruiting experience.

At Karat, we leverage our network of experienced interview engineers to conduct first-round technical interviews on behalf of our clients, thereby eliminating resource constraints surrounding interviewing. Clients can then assess more of the direct applicant pool which ultimately leads to more hires: on average, Karat clients are able to hire 30% more engineers after they start working with us.

Giving candidates second chances to reduce false negatives and be more inclusive.

We recognize the importance of providing candidates with more than one opportunity to demonstrate their talent — if they had a bad day or just feel like they could have done better, we’ll interview them again. This puts candidates at ease and reduces false negatives. And we have found that it works: 10% of candidates who received offers from our clients have completed a redo interview. For candidates who take advantage of the redo, it is the better of their two interviews that is most predictive of how they will do in onsite interviews. Their performance onsite is commensurate with the performance of other candidates who achieved the same result the first time. This makes sense — it’s easy to have a bad day, but really hard to just luck into solving a set of complex programming problems.

Finally, and thankfully, we’ll be eliminating all ice-breakers at future company events. Gotta stay young!