Good morning,
“Every company is a software company.”
Shifting to this mindset in 2023 would benefit any company, in any industry even if it’s more than 100 years old, according to McKinsey. To compete and grow in a digital world, traditional companies are realizing they must look, think, and act like a software company.
I sat down with Jeremy Schneider, a senior partner at McKinsey in the New York office, and a co-author of a report that delves into this topic. “Software is becoming an essential element across an enormous share of most companies,” Schneider says. “Nearly 70% of top-performing companies are using software as a core strategy to differentiate themselves from the competition. And a third of top-performing companies are actually selling software.”
He continues, “If you think about companies that have really gone far down this path and have been successful, either the entire company or at least part of the company really feels like, operates like, and has a culture like a software business.”
The team analyzed more than 20 software transformations and interviewed a dozen senior executives who have led successful software transitions, he says. The findings: Becoming a software business requires foundational change with different skill sets, practices, leadership, and organizational structures.
“The way people are interacting with software is changing,” Sudhir Nair, global head of the Aladdin Business at BlackRock told McKinsey. (Aladdin is a portfolio management software system.) “Today, at BlackRock and at our Aladdin client [companies], a meaningful portion of the organization self-identifies as technologists, and a big chunk of those people don’t sit within the part of the business formally recognized as the tech org."
Cultural transformation
Cloud computing, platform as a service, and A.I.-based programming assistance are "putting unprecedented power into the hands of billions of workers," according to McKinsey. And it's certainly helping to power remote work. But some companies still aren’t getting the business culture change part.
“I often go in and talk to companies and they say, ‘I want to build deeper software capability. That’s no problem. I’ll just go hire some more software engineers,’” Schneider explains. “But the reality is, that’s such a tiny portion of what is required. It really is a cultural transformation that enables you to attract and retain the right talent. And it enables you to set up that talent for success by empowering them, and shifting the mindset of the organization to value what they do.”
If fact, finance chiefs play a big role in this process, Schneider says. “There are five CFO practices in the context of building deeper software capability or acting like a software company,” he told me.
1) Having the right mindset towards investment. “The reality is, building deep software capability or products requires sustained investment,” Schneider says. “In many cases, it can take three to sometimes as long as five years before you experience the fantastic returns people are excited about in software.”
2) “It’s important for the CFO to understand software M&A,” he says. Especially since it’s “still quite expensive relative to other categories of M&A.”
3) Reallocating resources is an important part of all CFOs jobs, but in software, a piece of that reallocation is even greater than most other businesses, Schneider says.
4) There’s a number of areas of portfolio management that often fall on the CFO's plate. “But running a software portfolio requires understanding what is the right shape and contour of investment across different stages of the life cycle,” he says.
5) If you’re directly monetizing software, understanding how to put in place the right metrics internally and externally, like annual recurring revenue, is important, he says.
“We find more and more companies across industries are coming to us saying, ‘I don’t want to learn from my peers. I want to learn from the best software companies because I’m investing hundreds of millions of dollars in software engineering,” Schneider says.
Software companies also understand how to prioritize the customer, he says. “If you think about the way great software companies build a product, a customer-first focus is deeply embedded in that,” Schneider says.
Mckinsey’s report also states: “In our experience, one-third to one-half of a leadership team should be deep software experts.” I asked Schneider if that meant CFOs will need to be more tech-savvy.
“If you think about the CFO lens on a software transformation, it really goes from thinking of technology as a cost center with a group of projects to thinking of it as a collection of products that are creating value,” he explains. “Whether that value is directly revenue or revenue enablement. That mindset shift is quite essential. In many cases, that meant bringing in new finance leadership for the mindset shift. Or some CFOs themselves can make the shift.”
For some finance chiefs, beefing up tech knowledge should be first on their list of New Year’s resolutions.
Have a good weekend.
Sheryl Estrada
sheryl.estrada@fortune.com
Sign up here to receive CFO Daily weekday mornings in your inbox.
