About 20 years ago, software’s use within organisations was largely confined to big transactional systems in the data center. Now, it underpins nearly every function in every industry. Software spending has grown accordingly, jumping from 32 per cent of total corporate IT investment in 1990 to almost 60 per cent in 2011.
That reality introduces new competitive dynamics. Managers have to worry about competitors leapfrogging them with ever-faster cycle times, courtesy of such software-enabled techniques as rapid prototyping and real-time testing. They must also be mindful of network effects, since customers can become accustomed to working with a certain platform and be slow to switch. That can be good news for incumbents but a major barrier for those trying to break into a certain category. Another challenge is that an organisation may be swimming in data but exploiting only a fraction of available information.
To effectively respond to these new dynamics, companies must begin thinking about ways to broaden their ecosystems and revenue streams while becoming more responsive and agile. These are issues that software providers have been addressing for a number of years. Given the increasing importance of software for almost every company’s performance, executives in all industries should consider how software may fundamentally change their businesses. The answers will vary for different industries and companies, but we believe the exercise is a useful step toward making the most of large and rising software investments.
Moving from products to platforms
Success in the software industry has long been influenced, and often driven, by the ecosystem of developers, plug-ins, software-development kits and application-programming interfaces (APIs), and add-ons that drive added value and increase stickiness for products. Similarly, companies in other industries need to think expansively and include upstream suppliers as well as downstream vendors or consumers, and focus on how each part of the value chain integrates into the new platform.
Many companies still stick to the business models of the past, where product development is almost exclusively an in-house activity and kept under strict control. But some, like consumer-goods giant P&G, have flung their doors open to include a wide range of partners in developing and tailoring the next big thing. Instead of “not invented here,” the mind-set is shifting to “proudly found elsewhere.” P&G, for instance, launched a “connect and develop” platform that has secured more than 1,000 partner agreements on innovation.
By opening innovation processes to outside voices, organisations not only gain a broader range of perspectives to enrich the innovation gene pool, they also gain valuable scale—more resources at a fraction of the price.
Accelerating revenue by creating new business models
Software and Internet companies have developed multiple avenues to generate revenue, going beyond a simple licensing model. Companies like LinkedIn and Skype have thrived using the “freemium” model. Both cultivated a large base of users with their basic, no-cost platform, and then introduced several paid-for options, ranging from recruiting services and tiered access and networking privileges in the case of LinkedIn and landline calling in the case of Skype. They were able to tap an audience that was loyal to their brand to boost revenues. Other revenue models include using as-a-service and consumption-based pricing and creating new integrated services.
Innovative companies in other industries are experimenting with ways to combine products, services, and data to create entirely new businesses—often with software playing a critical role in knitting together or enabling these new models. Nike took this approach with one of its shoe lines. It created Nike+, a sensor compatible with Apple iOS devices (for instance, the iPod or iPhone), to be used with its running shoes. The sensor allows the wearer to track mileage and running habits and upload data onto a Web site to manage workouts, connect with fellow runners, and share routes. The line not only launched a profitable new revenue stream but also helped boost Nike’s market share and created a community of highly engaged users.
Accelerating cycle time and co-creating with customers
Empowered by constant connectivity, the rise of social networks, and an increasing amount of software in products, companies are seeing new options in the way they interact with customers and develop and release products.
The software world was one of the first to roll out new products before all the planned features and capabilities were built. It started with a basic model, or minimum viable product, that customers could upgrade over the life of the product with just a few clicks. New features were introduced when ready rather than stalling the base product launch. This allowed companies to get to market faster, enable new features (or fix bugs), and improve their ability to respond to competitors’ changes. Apple launched its first iPhone, for instance, without an app store or the ability to add new applications. It added those features in a software update one year later.
Creating an agile organisation
The three lessons above involve accelerating the clock speed of the enterprise and thinking differently about the structures across the business or boundaries with customers or users. Adopting these behaviors will require a more agile and flexible organisation.
Software creation is inherently team based; as a result, the vast majority of software companies have built teamwork into their ethos. Teams assemble and reassemble based on specific projects, often resulting in flatter organisations than may be seen in other industries. To the uninitiated (and sometimes even to those in the industry), this way of working feels like barely controlled chaos. Companies that do this well depend on core organisational elements, including increased transparency, a laser-like focus on aligning culture and mind-set, and clearly defined, common goals.
In the future, it’s clear that accelerated cycles, increased transparency, and teaming outside the typical organisational boundaries (both within and outside the company) will have great impact on how executives organise and manage their teams. There are already tools ready for this challenge. Rypple, for example, is a software platform that allows companies to take a new approach to HR management and performance evaluations by using ongoing feedback, more public recognition, and social goals such as more dynamic team or individual objectives that change or evolve organically rather than through an annual top-down process.
IT and business have tended to operate as separate functions in many organisations, making it harder for those groomed in one discipline to cross over to the other. The software shift described in this article has the potential to force greater fusion in executive capabilities. In more traditional companies, IT employees will need to become business managers, while product-development and business unit leaders will need to become software savvy. A base level of software fluency will be a requirement for all levels, including upper management, in order to understand not only the core technologies but also the dynamics of working in a quick-turn, massively more connected, and digitised marketplace, in which economic value is driven increasingly by information-based services.