Software is an increasingly pervasive part of the New Economy. As a result, today’s general managers need to be aware of the most effective methods for developing and deploying software products and services within their organizations. Delegating such decisions to a technical staff, however skilled, can be a risky strategy. A study completed last year contains a surprising insight for managers: Dealing with the software revolution requires a process that is not revolutionary but evolutionary.

Evidence of the increasing importance of software abounds. In the United States alone, sales of software products and services exceeded $140 billion during 1998, a gain of more than 17% from the previous year.1 In 2000, the software industry’s contribution to the U.S. economy was expected to surpass that of the auto industry and overtake all other manufacturing industry groups for the first time.2 Employment in software-related positions is growing, too. In 1998, the U.S. software industry directly employed more than 800,000 people, with an average salary twice the national figure.3 More than 2 million people are now employed as software programmers, showing that software is not developed at a Microsoft or an Oracle but within the information-technology departments of large, traditional organizations.4

Software also is playing a larger role in the content delivered to customers in many industries. Nowadays, the average family sedan or high-end coffee maker may contain more software than the first Apollo spacecraft. What’s more, the software features in those products may be the most critical differentiating factors. And even in industries in which software is not yet part of the products, it is playing a greater role in the products’ development. As companies adopt new computer-aided design technologies, the development processes for many products increasingly resemble those found in the software industry.

Developing Products on Internet Time

Given the importance of software, the lack of research on the best ways to manage its development is surprising. Many different models have been proposed since the much-cited waterfall model emerged more than 30 years ago. Unfortunately, few studies have confirmed empirically the benefits of the newer models. The most widely quoted references report lessons from only a few successful projects.5

Now a two-year empirical study, which the author and colleagues Marco Iansiti and Roberto Verganti completed last year, reveals thought-provoking information from the Internet-software industry — an industry in which the need for a responsive