In a now famous op-ed Why Software is Eating the World, Marc Andreesen, the Silicon Valley thought leader, presented his view of market disruption led by tech. He noted the trend toward software companies redefining industries, taking over leadership positions within them, and predicted that software companies would continue to reshape the economy in the coming years. That was in 2011.
Today the valuations of public tech companies validate Andreesen’s position. Few believe we will have a dot com meltdown as we did in the 1990s, even if tech stocks seem overvalued for now. The question is: what does the prospect of software ‘eating the world’ mean to individual companies?
We don’t believe that every company needs to become a software company, even if it was possible. Our view is that businesses need to be animated by both software thinking and finance thinking to build sustainable value over time. Most companies privilege one or the other. A single mindset often results in trained incapacity - an inability to apply the right kind of thinking to scenarios that arise outside of the company’s habitual frame of reference.
So what are these different mindsets?
Software thinking sees virtue in disruption. Andreesen’s post is a good illustration of this view by its assignment of value toward game-changing tech. The Silicon Valley adage “move fast and break things” declares it most succinctly. In seeing disruption as a positive force, software thinking is future oriented. It is optimistic about the role of technology in solving human problems. And is accepting of failures along the way.
Finance thinking is different in its origins, intent and worldview. Here, skepticism is a hallmark of professionalism. History matters, and stands to help guide the present. The term “best practices” originated in this sphere, another indication that finance thinkers work from established principles and are often the guardians of the status quo.
A conflict exists between these two ways of understanding any company. And because of this conflict, businesses have trouble properly organizing around the central problem that needs to be addressed: digital transformation.
Too often, established organizations cannot hear the perspectives borne out of software engineering practice. For example, the firm may intend to modernize by moving some activity to the cloud. Acting without a clear understanding of how the business must change alongside a cloud software deployment, its efforts are likely to fail.
Today you need access to both software thinking and finance thinking to succeed. But how you leverage these perspectives depends on your company’s particular context. To this end, we outline some broad groupings of businesses with similar concerns and how they can bring these two thought worlds into better relation.
A digital-native business is fully at home in the digital world. These companies are oriented around online experiences or delivering value to customers through digital distribution (almost) exclusively. Marketplaces like Etsy and online gaming companies like Roblox are digital natives. Streaming media companies like Netflix and Hulu, multi-faceted Big Tech giants like Google and Facebook are all digital-natives.
These companies have the benefit of being organized around digital channels and scale. They are accustomed to vibrant and dynamic markets, tend to be more entrepreneurial than traditional companies. They are less hierarchical. Within these organizations, there is often an emphasis on data accessibility to promote innovation and insight. These companies understand the importance of growth - whether in customer acquisition, user adoption, or the number of instances and events represented by their service. They tend to emphasize the use of near real-time data since ‘in the moment’ decision making is favored over time consuming deliberation.
A digital-native company may reach a high degree of market success without a dedicated supporting finance team. As an extreme example, consider Instagram’s rise from late 2010-2012. The company acquired 25k users in its first day and 1m within three months. Instagram was sold to Facebook for $1B in 2012 with thirteen employees, none of whom was a finance/accounting professional. While Instagram represents an outlier, it demonstrates that digital-native companies operate with different success factors than traditional businesses. They need to support handle rapid increases in scale and to reliably represent business metrics to stakeholders. Some of these companies benefit from skill-building within product and software teams rather than by the imposition of a traditional finance silo to manage the business, leveraging outside consulting services when needed.
At the other end of the spectrum, consider Roblox, which calls its product a co-experience platform. Founded in 2004, Roblox has raised close to $1B and has over 2,600 employees. Naturally, the company’s need to finance its ambitious growth plan with its public share listing has required it to develop a strong finance presence. But the way Roblox works as a platform calls forth a relationship between software and finance teams that is new.
Roblox monetizes its platform through the sale and use of its virtual currency, called Robux. One of the questions that arises from the platform’s design is how to measure revenue from the purchase and use of Robux. This problem raised red flags with the SEC and resulted in a delay of its public share listing. Another question relates to how the use of this virtual currency should function. Should the currency have an expiry feature, and if so what would that mean for business results? A third question relates to regulating the virtual currency. What precautions are needed to insure against theft of Robux and under what circumstances should a user be able to redeem Robux into US Dollars? The design of digital experiences increasingly must leverage finance thinking to succeed. Recent controversy involving Robinhood, a digital-native aimed at democratizing financial services, exemplifies the need to temper the values of industry disruption with the knowledge of regulation and historical precedent.
For many digital-natives, a valuable strategy to link software and finance thinking is to engage outside services to provide counsel and direction during its early development. But soon enough it will be important to provide this function in-house. We favor an approach that encourages finance to develop a set of overlapping skills with software engineering to build a common frame of reference.
For Scribal, digital transformation implies a re-articulation of the business itself, allowing software practices and tech to manifest broadly through the value chain. Perhaps this is what some analysts mean by stating that a digitally transforming business must somehow become a “software company”. Becoming a different kind of company certainly can feel like an existential circumstance, but we see transformation more simply. It is just an outgrowth of tactical decisions. These open the business to reframing problems in an environment increasingly dominated by digital phenomena. Let’s consider some business adaptations we typically see at digitally transforming companies:
Digitally transforming companies are likely to be working on several of these initiatives simultaneously. As they do, they are bringing in-house a certain set of tools that can deepen their perspective with time. Even tactical change can inform a broader conversation about its successive moves to improve its competitive position.
But some circumstances challenge the advance of a digitally transforming company.
Intuit’s Quicken and Turbotax software have enjoyed a highly loyal following for many years. Originally these products were distributed as shrink-wrapped software sold through brick-and-mortar retail stores, after which they are installed and used on home computers. Recent efforts to shift to an online version presented challenges. Many long-time users were uncomfortable moving to a product in the cloud. But other customers liked the streamlined digital product experience. The cloud product could be purchased and started up in a couple of clicks, it could automatically gather information from third parties such as banks, brokerages, and tax services at the touch of a button. But the bifurcation of customers into two groups was a new problem. The company would have to manage different product experiences associated with recently acquired users than for long-time customers. This in turn meant optimizing on different problems and doing so with different operational metrics.
This is a typical challenge for digitally transforming companies. Prior success acts to establish the norms and expectations of customers. During digital transformation, companies discover that an existing constituency has little interest in the company’s new direction. Take Intuit’s experience with Turbotax. Many loyal customers were willing to drive to a store, read an installation manual, and set up software on their local machine even though the company had a more optimal experience in mind. It turns out these customers were more concerned with data privacy than they were in improved convenience.
Sometimes these dilemmas can be improved by thoughtful organizational design. For example, it may be appropriate to carve out a new product area as an independent self-reporting entity, allowing it to grow to the point where it can be operationally integrated once mature. Alternatively, the business could separate the legacy unit with no plan to bring the two back together. At some point a decision could be made to spin off the legacy unit or simply to discontinue the product.
Another problem arises from introducing subscriptions. Take Adobe: one of the great digital transformation success stories to date. Its suite of products including Illustrator and Photoshop used a traditional software licensing model. Customers bought a particular version of the software which was shipped on a physical CD. But in 2012, Adobe moved to a cloud-based subscription model.
This change introduced new questions for Adobe’s finance group. How do you translate customer behavior into financial representations? Customers might upgrade, downgrade, or change their subscription plans over the course of their lifetimes. But these actions were not subject to external accounting guidelines. They needed to be understood and interpreted in circumstances unique to Adobe.
New events enabled by digital technology can be ambiguous. Consider an ‘upgrade’ scenario. If a customer moves to a new plan with less time commitment for more money and product, does this, in fact, connote an upgrade? Suppose the customer is induced to move plans by the reduced time commitment and terminates at the end of the period. In such a case, upgrade may have been a misleading term for the customer’s action. In the aggregate, such misclassifications lead to diminished information reliability.
Changing business semantics demand that finance and software teams work in close collaboration. The goal must be to support clear business communication decoupled from the dictates of software system design. What matters is the economic meaning of events and how those events translate into reliable business information and better decision making. But today, we still see software products that erroneously account for themselves.
There are many ways to define digital-first, but when we talk about digital-first companies at Scribal, it means that the influence of digital technology now directs the company’s path, with legacy products still in the mix.
The New York Times is an example of digital-first print media. In 2020, revenues from digital subscriptions exceeded those from print subscriptions for the first time. Current technologies now significantly inform the experience of reading the New York Times. For instance, users can engage in content by commenting on articles, watching videos, and gathering up-to-the-minute news. These were not possible in a system built around the logic of offset printing and physical distribution. But a large readership still prefers the tactile experience of reading the news. Likewise, many other digital-first companies maintain legacy products because of customer preferences for something familiar and tangible.
Challenges can arise because digital and physical product economics are very different. Scale is the principal distinction, and this changes the organizational needs of the business entirely. The digital-first business needs to be driven primarily by new metrics over legacy ones beyond distribution. Sales and Marketing teams need to work differently to achieve goals based on these new metrics; incentive plans often need redesign. New teams like Devops come into being. Their work must be well understood and supported. With these complexities, the digital first business may benefit from separating the non-digital into a self-contained organizational unit. That way, conflict between old and new teams, practices, and goals are minimized.
Many times companies maintain complementary products meant to be purchased together - both physical and digital. One example might be an internet-connected device, such as a home security camera, where the customer also purchases security monitoring through a bundled subscription. Bundling introduces complexity to billing, after-sale management of the customer, and in applying revenue recognition guidelines. But with strong finance input, product and software teams can create a sales and fulfillment pipeline that meets these demands reliably in highly competitive markets.
Digital is now entrenched as the status quo. Thus, the most important question for every business is how to rethink itself in light of the internet and software technologies. But this does not mean your organization needs to be a software company to succeed. You need access to software thinking, to its frame of mind and its emerging work practices. And you also need finance thinking, crafts grounded and shaped over a long time horizon. Combining the two together can result in intelligent - even radical - decisions to improve how the business works in today’s dynamic and challenging market.