Introduction
How every company can become a software company and why they should
Most now accept that every company must become a software company. Ten years ago, we were discussing how Amazon, Airbnb, and Netflix reshaped shopping, travel booking, and entertainment by delivering those services through computers and phones. Now we are discussing how Tesla – which makes physical cars – is a tech company as much as a carmaker, with connected products packed with smart digital technologies.
The advantages of software transformation are apparent. Connected smart products enable greater functionality and data collection with instant over-the-air upgrades. They can run new software or apps – allowing users to customize their experience. They provide usage data that can spot problems and shape future R&D or the development of AI tools. And they enable companies to innovate rapidly – testing and launching new revenue-generating software products through a digital ecosystem, without needing to physically change the product.
However, the challenge remains of how products with a long development history in the pre-digital age – cars, trains, planes, electricity grids, and so on – can become software-based and how their makers can become software companies.
The early view was that digital innovators would disrupt all established companies, as Blockbuster and Kodak were. But this hasn’t happened. Shopping and photography can be easily done on a smartphone. High-end semiconductor manufacture and electricity distribution cannot. While Netflix and Amazon are held up as exemplars of digital corporate behemoths that have usurped non-digital incumbents, in most industries those incumbents have held fast. The average age of Fortune 500 firms in 90 years old – higher than it was at the dawn of the internet age.
Big engineering companies are well-placed to survive and respond to digital disruption. They already make the things that are undergoing software-driven transformation. The cost and regulatory hurdles of creating a new passenger plane that could challenge the Airbus-Boeing duopoly are enormous – and not about to emerge from a Stanford graduate’s garage. Tesla aside, most EVs in the West are now produced by established carmakers. Tesla increasingly looks like the exception. In the world of engineered products and infrastructure, established engineering companies are very well placed to do most of the disruption.
But they are not invincible. Tomorrow’s winners must be redesigned to thrive in the digital, hyperconnected age to develop digital products that satisfy customers, gain an edge over competitors, and ensure they stay ahead of the would-be disruptors. This is not just a defensive necessity, but a gateway to rapid growth.
The imperative of software adoption has driven organizations to undergo “software-driven transformation.” This transformation manifests in a variety of ways. These include accelerating software adoption, increasing software development maturity, establishing new software houses, and embracing AI, including augmenting traditional software engineering with Generative AI, to drive new revenue through software. Today, around 25% of companies from traditional industries already consider themselves software companies, and around another 20-40% (depending on the industry) believe they will be in the next 3-5 years. Organizations are investing one-fifth of their R&D budgets into software, with more than 50% of this in product/engineering services and customer-facing areas.
However, the challenges of becoming a fully-fledged software company are immense. Legacy products were not designed as integrated, intelligent products. These require redesign and transformation with integrated software. Often, adding software to an enterprise’s products and services requires changes to business and commercial models. The organizations themselves have legacy IT systems, infrastructure, and processes hindering rapid software innovation. Staff often operate within a culture of caution driven by legacy processes, compliance requirements or legitimate safety concerns. These factors represent challenges to developing the digital native, innovation-first culture required of a modern software company.
So, if these large companies are here to stay, how can they transform themselves into the software-driven companies that were supposed to replace them, and develop the software-driven products of the future?
