“Every company is a software company.”
Shifting to this mindset by 2023 will benefit any company, in any industry even if it’s over 100 years old, according to McKinsey. To compete and grow in the digital world, traditional companies are realizing that they need to look, think, and act like software companies.
I sat down with Jeremy Schneider, a senior partner at McKinsey in the New York office, and co-author of a report that delves into this topic. “Software is an important element in a large part of most companies,” Schneider said. Nearly 70% of the best companies use software as a core strategy to differentiate themselves from the competition. And a third of the best companies sell software.
He continued, “If you think about the companies that have gone this far and been successful, the entire company or at least part of the company really feels, operates like, and has a culture like a software business.”
The team analyzed more than 20 software transformations and interviewed dozens of senior executives who had led successful software transitions, he said. Findings: becoming a software business requires fundamental changes with different skill sets, practices, leadership, and organizational structures.
“The way people interact with software is changing,” Sudhir Nair, global head of Aladdin Business at BlackRock told McKinsey. (Aladdin is a portfolio management software system.) “Today, at BlackRock and in our Aladdin clients [companies]a significant portion of the organization self-identified as technologists, and a large portion of them do not sit in any part of the business that is officially recognized as a technology organization.
Cultural transformation
Cloud computing, platforms as a service, and AI-based programming aids are “putting unprecedented power into the hands of billions of workers,” according to McKinsey. And it certainly helps to master remote work. But some companies still don’t get the business culture change part.
“I often go in and talk to companies and say, ‘I want to build deeper software capabilities. That’s not a problem. I’ll just hire another software engineer,'” Schneider explained. “But the reality is, only a small part is needed. It really is a cultural transformation that allows you to attract and retain the right talent. And it allows you to set up that talent for success by empowering them, and changing the organizational mindset to value what they do.
In fact, the chief financial officer has a big role to play in this process, Schneider said. “There are five CFO practices in the context of building deeper software capabilities or acting like a software company,” he said.
1) Have the right mindset for investing. “The truth is, building a deep software capability or product requires constant investment,” Schneider said. “In many cases, it can take three to five years before you get the amazing results that people like in software.”
2) “It’s important for CFOs to understand M&A software,” he says. Mainly because it’s “still quite expensive compared to other M&A categories.”
3) Resource allocation is an important part of any CFO’s job, but in software, the portion of that reallocation is greater than in any other business, Schneider said.
4) There are several areas of portfolio management that are often on the CFO’s plate. “But running a software portfolio requires understanding what the right investment shape and contours are at different stages of the life cycle,” he said.
5) If you are directly monetizing the software, understanding how to put in place the right metrics internally and externally, like annual recurring revenue, is important, he said.
“We’re finding more and more companies across the industry are coming, 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 said.
Software companies also know how to prioritize customers, he said. “If you think about how good software companies build their products, the most important customer focus is already there,” Schneider said.
The Mckinsey report also states: “In our experience, one-third to one-half of the leadership team should be deep software experts.” I asked Schneider if that means CFOs need to be more tech savvy.
“If you think through the lens of a CFO about software transformation, it’s to think of technology as a cost center with a group of projects to think of as a collection of products that create value,” he said. “Whether the value is direct revenue or revenue enablement. The shift in mindset is quite important. In many cases, it means bringing in a new financial leader to change the mindset. Or some CFO himself can make a change.
For some finance heads, improving their technology knowledge should be first on their list of New Year’s resolutions.
Have a great weekend.
Sheryl Estrada
sheryl.estrada@fortune.com
big problem
A new study from Accenture (NYSE: ACN) found that 76% of semiconductor executives expect the industry’s supply chain challenges to become easier by 2024. in the supply chain lift. Other challenges identified include geopolitics (48%), cybersecurity threats (42%), a changing competitive landscape (39%), and talent shortages (35%). The findings are based on a global survey of 300 senior semiconductor executives.
Deeper
Here are some weekend reads:
Slack CEO says ‘relatively cheap’ severance package gives him ‘comfort’ after Salesforce announces 10% cut in 3 am message by Kylie Robison
Apple cuts orders for key products amid weak demand – why analysts are still bullish on the company by Will Daniel.
No more coffee warnings and free layoffs – Goldman Sachs workers are in for a rude awakening by Chloe Berger
6 foods and drinks to choose in the New Year to improve your mood, energy, and longevity by Alexa Mikhail
Leader board
Here’s a list of some of the key moves this week:
Jennifer Williams named CFO at R1 RCM Inc. (Nasdaq: RCM), the revenue cycle management partner for hospitals and health systems, effective immediately. Williams succeeds Rachel Wilson, who will remain with the company in an advisory role during the transition period. Williams previously served as Cloudmed’s CFO and brings more than 20 years of experience across a number of businesses, including Change Healthcare, First Advantage, LexisNexis Risk Solutions, and Ernst & Young.
Tom Boyle, CFO, has been named also chief investment officer at Public Storage (NYSE: PSA ), an owner, acquirer, developer, and operator of storage properties, effective January 1. Boyle’s additional role as chief investment officer will include development, redevelopment, acquisition, management assets, and third party management. He joined Public Storage in 2016, serving as CFO of operations, until his appointment as corporate CFO in 2019. Prior to joining Public Storage, Boyle served in positions of increasing responsibility with Morgan Stanley since 2005, from analyst to his final role as executive director. . equity and debt capital markets.
Zahir Ibrahim named CFO at BARK, Inc. (NYSE: BARK), an e-commerce and content company for dog lovers, effective immediately. Most recently, Ibrahim served as CFO and chief administrative officer at startup Do Good Foods LLC. Previously, he was CFO of KIND LLC, a healthy snack company. Ibrahim also previously served as CFO at Annie’s Inc., a natural and organic food company. He also held several roles at Molson Coors Brewing Company culminating with VP, controller, and chief accounting officer. Earlier in his career, Ibrahim served in senior financial positions at CML Innovative Technologies, and Elementis Specialties, and Pirelli Tires.
Paul K. This was promoted to EVP and CFO at Hawaiian Electric Industries, Inc. (HEI) (NYSE: HE), the parent company of Hawaiian Electric Company, Inc. and American Savings Bank, FSB, effective January 1. Ito is an interim HEI. CFO from July 2022. He was selected after a national search. Ito has been at HEI since 2018, serving as VP of tax, controller and treasurer. He also manages the HEI’s information technology efforts, leading digital transformation initiatives in accounting, tax and financial reporting.
Renee Lentini named interim CFO at ImmunoGen, Inc. (Nasdaq: IMGN), as Susan Altschuller, current SVP, and CFO, is on leave under the Family and Medical Leave Act, will not continue employment after she leaves. Lentini most recently served as VP finance and chief accounting officer. Since joining ImmunoGen in 2004, Lentini has held positions of increasing responsibility with the company’s financial organization, including oversight of global accounting, tax, and treasury. ImmunoGen is looking for Altschuller’s permanent replacement.
Hear
“Vulnerability is very important, and being relatable as a leader is very important. The more the team knows about me and the more they feel that I am comfortable sharing this with them, the closer they are to the company, and the more they know what will be we follow.”
— Saks CEO Marc Metrick, who oversees the luxury brand’s digital component, a separate corporate entity from Saks Fifth Avenue stores, spoke with fortune about Leadership and how wealthy consumers seem unfazed by the market turmoil.