These days, it seems that nearly everybody wants to be a software company. Maybe because all things digital have leaped forward during the pandem

Four myths about building a software business

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2021-05-25 12:30:03

These days, it seems that nearly everybody wants to be a software company. Maybe because all things digital have leaped forward during the pandemic, many companies now expect software products and digital solutions to contribute to sales directly or to underpin the competitive advantage of their business models.

Among industrial companies, for example, some 38 percent say that they aspire to generate 50 percent or more of revenues within the next three years from digital technologies and services. That’s more than 40 percent higher than the number achieving that level today (Exhibit 1).

The attraction is obvious: the value that leading companies have captured by shifting to digital business models. Moreover, nearly two-thirds of companies expect that the digitization of their core businesses will be (or already is) essential to remaining economically viable. Only about 8 percent of companies believe that their current business models will remain viable if they don’t digitize. But making the shift to digital requires not only upgrading your IT and tech infrastructure, but also transforming your entire business model through creating, or even becoming, a software business (in whole or part), scaling a software offering, or using software as the core of your competitive advantage.

But while getting software into the core of your business model—or launching entirely new software businesses—might seem an obvious play in the current business environment, that doesn’t mean it will be easy. In reality, there are few successful cases of nonsoftware companies building software businesses (Exhibit 2) and many notable failures, including from otherwise high-performing companies. Of the approximately $500 billion in total global software revenues in the year 2019, nonsoftware natives captured only 20 percent. Nontechnology players, for their part, brought in only 6 percent (Exhibit 3).

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