McKinsey: What Can Business Learn From the Software Industry?

McKinsey: What Can Business Learn From the Software Industry? image mckinsey qIn a recent article (“Competing in a digital world”) on the McKinsey website, authors Sarrazin and Sikes identify 4 lessons that they believe business in general could and should learn from the software industry. It’s an interesting perspective, and indicative of the pervasive role that software is playing in value creation across a growing range of businesses and industries.

As they point out, software underpins nearly every function in industry. It’s no longer the preserve of the data centre. And it’s leading to entirely new offerings, options and delivery models, facilitating collaboration and driving innovation – and changing the face of competition.

But I suspect that many organisations in the software industry itself have so far barely scratched the surface of the potential of the “4 lessons” identified by McKinsey to transform their own businesses – and that’s the perspective from which I want to review McKinsey’s conclusions:

1: The shift from products to platforms

The McKinsey article identifies the importance of ecosystems, and stresses the importance of thinking in terms of platforms, rather than just in terms of products. They draw upon real-world examples of the consequences of open innovation.

They point out that in highly-respected long-established companies like Procter & Gamble, the corporate mind-set has shifted from “not invented here” to “profoundly found elsewhere”. Instead of relying on in-house resources for innovation, they are opening up to the idea of co-development.

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It’s concept that many players in the software industry have already embraced – both as shapers and members of ecosystems. But – as McKinsey suggest – the mechanism by which value is created and earned across these ecosystems is still evolving.

Which leads to my first question: what is your organisation’s role in the ecosystems that are shaping your market sector – and are you creating and earning as much value as you could? And if not, what are you doing about it?

2: Accelerating revenue through new business models

The latest generation of software companies must look back at their forbearer’s limited set of go-to-market options with astonishment. Where once software companies had a single revenue model – the licenced software sale backed by on-going maintenance streams, the options available today for monetising value appear to be limited only by the imagination (and the ability to execute).

McKinsey: What Can Business Learn From the Software Industry? image LinkedIn Logo 225wMcKinsey cite LinkedIn as an example of building on a “freemium” base with a wide and growing range of charged-for services and options. Perhaps it’s no mistake that LinkedIn have beaten analyst estimates for seven straight quarters. But they aren’t the only company benefiting from multi-legged revenue models.

This is an area where Big Data, accessibly analysed, can drive innovation. The authors highlight the importance of mining data, comparative benchmarks and usage patterns in order to identify new revenue opportunities.

Which leads naturally to my second question: what is the true potential lifetime value of your customers, and to what extent are you prepared (and able) to trade off instant gratification for long term revenue potential?

3: Shortening cycle times through co-creation

When I started in the software industry, the predominant development model was “if we build it, they will come”: have an idea you thought was brilliant, swear your developers to absolute secrecy, take longer to deliver than you would ever have imagined, and hope – after an extended gestation period – that people would buy.

And, of course, it failed uncomfortably often. The lean start-up movement brought us the idea that it’s OK to release products that are functionally incomplete by historic standards as long as they solve at least one problem that’s critically important to their target audience – and then develop with short cycle-times to deliver the extensions and enhancements that are most valuable.

It’s a far more democratic approach, and one that has been shown to be far more likely to deliver solutions that customers see real value in. It’s enabling agile, listening organisations to develop stuff that people and organisations actually want to buy.

So here’s my third question: are you really doing all that you could do to ensure that your development priorities and deliverables are being driven by the things that are most likely to persuade more of your customers to part with more of their money?

4: Organisational agility

Which leads us, neatly enough, to the fourth and final lesson: accelerating the clock-speed of the organisation by embracing agile, adaptive structures. McKinsey talk about the need to manage in an environment of “barely controlled chaos”.

Rather than working within rigidly-defined silos, teams need to assemble and reassemble based on specific projects, co-opting collaborators as required. It requires structures (if that is what they are) that stress a common culture, adaptability and clearly-defined goals.

Rather than having a rigid plan, today’s high-performing organisations recognise the military lesson that no plan ever survives first contact with the enemy, and instead focus on clearly communicating the destination, and the principles by which the journey is to be undertaken.

Which leads neatly to my final question: are you doing all that you could to build real agility into every aspect of your business? And are you prepared to tolerate some of the consequences (for example, accepting that some experiments will fail) in order to achieve the greater gains?

I hope you found these ideas relevant. If you like them, please share this article with your colleagues and via your favourite social media. And please add your comments below…

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