4 ways to run a business like a software company

These days, every organization is in the software business. That means adopting the rules of this fast-paced industry.
Written by Joe McKendrick, Contributing Writer

I've been immersed in the software and tech industry for a number of years, an industry where year-to-year growth of anything less than 10% is tantamount to going out of business. The barriers to entry are lower than those of other industries, and it's relatively easy for a startup making $150,000 a year to double its year-to-year sales for a period of time. But for a larger concern, the pressure is intense to push the next big thing out the door to keep growing at a double-digit pace.

Along the way, successful software companies learn a lot of best practices that help them keep their edge -- staying so close to the customer that you're in their face every day, keeping a razor-sharp focus on the core business and its priorities, and nurturing a workplace culture that emphasizes entrepreneurial values, on getting things done over formalities, rigid schedules, hierarchies and finger-pointing.

So, as the digital economy engulfs the larger economy, we find that software companies are no longer the only "software" companies in town. Manufacturers, aerospace companies, media companies, government agencies, educational institutions and all other sorts of "non-IT' companies also have become, for all intents and purposes, software companies as well. Some have big IT departments that are producing a lot of code that they now run and make available to partners, others have partners producing and hosting software for them that they in turn make available to other partners.

Is it time non-IT companies run their businesses more like software companies? Yes -- and there are a lot of valuable lessons the software industry can provide as well, say Hugo Sarrazin and Johnson Sikes, both with McKinsey & Company in a recent post.  For one, think about the competitive dynamics that come with being a software company:

"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 organization may be swimming in data but exploiting only a fraction of available information."

To adopt the lean and nimble practices software companies have learned to hone, Sarrazin and Johnson Sikes provide the following advice:

1. Produce platforms, not products: "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."

2. Create new business models, accelerate revenues: "Software and Internet companies have developed multiple avenues to generate revenue, going beyond a simple licensing model.  Industries from manufacturing to consumer goods have stitched information assets into their traditional product offerings and have come away redefining the category and raising the bar for competitors."

3. Accelerate cycle time, cocreate with customers: "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. Other industries are learning from this example. Many digital cameras, for instance, can receive firmware upgrades to fix bugs or enable new capabilities.... Crowdsourcing is an example of cocreation: companies use social tools to engage customers or partners in solving problems, which reinforces engagement and a sense of community in the process."

4. Go agile: "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 organizations 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 organizational elements, including increased transparency, a laser-like focus on aligning culture and mind-set, and clearly defined, common goals."

This post was originally published on Smartplanet.com

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