McKinsey Quarterly 2023 Number 1

whether in the software business or not, are part of a single culture. For example, all employees at Keysight Technologies, a leader in electronic testing and measurement, have a certain portion of their pay tied to overall performance of the company. Some CEOs we spoke with also emphasize being intentional about spending time with business leaders in the legacy business and ensuring that those leaders’ priorities continue to have a place at the top of the corporate agenda. External communications about the software effort are equally important, especially given the impact of software initiatives on valuations. The CEO of a large industrial company told us that half of all the questions they had faced on a recent investor call were about the company’s new software business. Investment Software-centric businesses can be highly valuable franchises, but they require sustained investment. Most of these new businesses need to invest an average 25 to 35 percent of revenues over three to five years before they start to generate profits.

Three ‘switch to software’ models

Archetype one: embed software into the core of the business. For companies facing significant external business threats or looking to take a big leap in growth, becoming a soft ware business at the core is a go-big strategy. - While the company’s business model remains consistent, its operating model shifts to put software at its core. One leading global bank, for example, realized that to respond to fintech companies and changing customer expecta tions, it needed to become a digital-first bank. - It created 25 general-manager roles to operate like CEOs and be fully responsible for leading high-priority software initiatives. It also hired hundreds of engineers, product managers, and other technical team members to help pivot its tech organization and operate with the speed and agility of a start-up. Archetype two: build a new software business. When companies face a funda mental disruption or find highly attractive - adjacencies, they often launch new software businesses. The new business typically has

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There are three archetypes for companies moving toward a software business model:

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McKinsey Quarterly 2023 Number 1

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