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https://content.fortune.com/wp-content/uploads/2023/01/GettyImages-1164704318.jpg“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
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Big deal
A new study from Accenture (NYSE: ACN) found that 76% of semiconductor executives expect the industry’s supply chain challenges to ease by 2024. However, the executives cited challenges that could affect their ability to innovate even as the lingering effects of COVID-19 on the supply chain lift. Other challenges identified include geopolitics (48%), cybersecurity threats (42%), the changing competitive landscape (39%), and talent shortages (35%). The findings are based on a global survey of 300 senior semiconductor executives.
Going deeper
Here are a few weekend reads:
Slack CEO says ‘relatively generous’ severance packages give him ‘some comfort’ after Salesforce announces 10% cut in a 3 a.m. message by Kylie Robison
Apple is cutting back on ordering key products in the face of weakening demand—here’s why analysts are still bullish on the company by Will Daniel
No more free coffee and layoff warnings—Goldman Sachs workers experience a rude awakening by Chloe Berger
6 foods and drinks to choose in the New Year to improve mood, energy, and longevity by Alexa Mikhail
Leaderboard
Here’s a list of some notable moves this week:
Jennifer Williams was named CFO at R1 RCM Inc. (Nasdaq: RCM), a revenue cycle management partner for hospitals and healthcare systems, effective immediately. Williams succeeds Rachel Wilson, who will remain with the company in an advisory role during a transition period. Williams previously served as CFO of Cloudmed and brings more than 20 years of experience across several businesses, including Change Healthcare, First Advantage, LexisNexis Risk Solutions, and Ernst & Young.
Tom Boyle, CFO, has been appointed to also serve as chief investment officer at Public Storage (NYSE: PSA), an owner, acquirer, developer, and operator of self-storage properties, effective Jan. 1, Boyle’s additional role as chief investment officer will include development, redevelopment, acquisitions, asset management, and third-party management. He joined Public Storage in 2016, serving as CFO of operations, until his appointment as the company’s CFO in 2019. Before joining Public Storage, Boyle served in roles of increasing responsibility with Morgan Stanley since 2005, from analyst to his last role as executive director of equity and debt capital markets.
Zahir Ibrahim was named CFO at BARK, Inc. (NYSE: BARK), e-commerce and content company for dog lovers, effective immediately. Most recently, Ibrahim served as CFO and chief administrative officer at the startup Do Good Foods LLC. Before that, he served as CFO of KIND LLC, a healthy snacks 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. Ito was promoted to EVP and CFO at Hawaiian Electric Industries, Inc. (HEI) (NYSE: HE), the parent company to Hawaiian Electric Company, Inc. and American Savings Bank, F.S.B., effective Jan. 1. Ito was serving as HEI’s interim CFO since July 2022. He was selected following a national search. Ito has been with HEI since 2018, where he has served as VP of tax, controller and treasurer. He also managed HEI’s information technology efforts, leading digital transformation initiatives in accounting, tax, and financial reporting.
Renee Lentini was named interim CFO at ImmunoGen, Inc. (Nasdaq: IMGN), as Susan Altschuller, current SVP, and CFO, on leave under the Family and Medical Leave Act, will not continue employment after her leave. Lentini was most recently VP of finance and chief accounting officer. Since joining ImmunoGen in 2004, Lentini has held positions of increasing responsibility with the company’s finance organization, including oversight for global accounting, tax, and treasury. ImmunoGen is searching for Altschuller’s permanent replacement.
Overheard
“Vulnerability is very important, and being relatable as a leader is very important. The more my team knows about me and the more they feel that I’m comfortable sharing this with them, the closer they feel to the company, and the more they understand what we’re going after.”
—Saks’s CEO Marc Metrick, who oversees the luxury brand’s digital component, a separate corporate entity from the Saks Fifth Avenue stores, talked with Fortune about leadership and how rich consumers seem unfazed by market turmoil.
