Consider Figure 1: it compares trends for IT unit costs and IT total spend over a five-year period, for client/server, mainframe and network costs. On a unit cost basis, the data shows that IT costs have declined substantially over time. However, that decline has been more than offset by increasing usage of IT resources (IT Volume). The result is an increase in overall IT spending. That increase leaves CEOs and other senior executives questioning the value of IT. And question it they should, because in most cases, IT investments are not yielding demonstrable business benefits or competitive advantage.
While the debate over IT value addresses a wide range of complex
factors, in many respects the issue is quite simple: a large portion of IT spend is wasted.
Specifically, its wasted on managing and maintaining complex and inefficient application environments - patching holes, plugging leaks and cobbling together makeshift solutions that integrate obsolete legacy systems with poorly implemented enterprise suites.
Ironically, the same mindset that has driven the increasing cost efficiency of IT operations has contributed directly to this waste and inefficiency.
A number of root causes underlying the dysfunction of application development environments can be identified. The cycle of inefficiency often begins when a business application is first developed. To contain costs, the application is often not properly architected to scale or to accommodate growth, resulting in performance issues and increased downtime. Applications designed to run three to five years end up being used for seven to ten, or even longer- again, in the interests of economy.
When implementing an enterprise-wide system, meanwhile, many organizations choose to write interfaces between the new applications and legacy systems, rather than writing additional functionality into the enterprise solution. The rationale: short-term savings on development resources. However, myriad systems, platforms and applications result, each with a unique set of maintenance requirements and costs. Eventually, this approach drives up IT costs further, and the overriding objective of bringing in the enterprise application in the first place is lost.
In one instance, an organization had developed an in-house enterprise solution and then purchased a commercial application to replace it. Over time, the homegrown application was never retired, and the vendor no longer supported the commercial application. A third enterprise application was then implemented to work with the two earlier systems, rather than replace them. The net effect was that 40 percent of the organizations application development costs were devoted just to maintaining the interfaces between three disparate solutions.
At this point, instead of investing in a viable solution, the cost-conscious, penny-pinching mentality of IT management prevails, resulting in stopgap measures and muddling through. Plans to prioritize applications, complete the transition to new solutions and/or an enterprise-wide system and retire legacy applications invariably get pushed to the back burner.
The insularity of application development environments contributes further to waste and inefficiency. Application development organizations often operate as independent fiefdoms, evolving in response to the unique characteristics and requirements of individual business units, rather than the organization as a whole. A multitude of development tools and platforms result, each requiring particular skill sets to manage and maintain. In many cases, features and functionality overlap between applications, adding to the complexity.
Under the circumstances, evaluating application development performance through benchmarking techniques presents a challenge. Even a high-level metric such as the optimal number of developers becomes problematic because the organization cant define a comparative context. Put simply, the organization has no way of knowing whether performance is good, bad or indifferent - all they know is how they did in previous years.
Absent relevant comparisons and periodic external reality checks, budgeting for application development - particularly within support environments - takes on an entitlement mentality, increasing the risk of dramatic cost escalations over time.
The good news is that organizations are increasingly focusing on improving the efficiency and performance of individual applications, as well as transforming the management of the entire application environment. Part of the reason for this change in focus is the recognition that significant savings from improving the efficiency infrastructure are increasingly hard to come by. Organizations that have achieved top-performing status in their infrastructure management are undertaking a fundamental reassessment of their approach to applications. The ultimate goal of many is to transition from a supply-side focus on IT costs as a discrete function to a demand-side approach, whereby IT resources are allocated according to business requirements.
Transforming a dysfunctional environment to one where IT resources and applications are utilized in a strategic manner requires a detailed change plan as well as investment in the transition process.
Analyzing an application environment in the context of comparable organizations can significantly improve the efficiency of individual applications. Such an analysis can determine an appropriate number of software solutions, development tools, developers, and size of the maintenance budget. The perspective of world-best performers - which doesnt have to be industry-specific to be meaningful - provides a valuable baseline, and enables realistic improvement goals.
A detailed analysis of performance drivers can identify the root causes of cost and quality problems. As the chart below shows, at a high level, the unit costs of the client organization (the upper number) are in line with those of top performers (lower number). However, analysis at the sub-process level identifies anomalies in management and admin costs as well as in PC hardware costs. By applying leading practices in these areas, the client organization can realize significant gains in cost efficiency and productivity.
Build a Framework
Comparative analysis can improve the efficiency of application development and maintenance in terms of the productivity, quality and cost of each individual application. An application portfolio initiative takes things a step further by aligning applications in a collective sense with business requirements. By mapping application performance to business processes, it becomes possible to understand what drives demand for those services. This facilitates the movement from a supply-side, cost-efficient perspective of IT to a demand-management perspective that allows IT to truly add value by enabling the improvement of business operations.
The process prioritizes applications, identifying those that are strategically and operationally critical, as well as those that are unimportant, redundant or obsolescent, and therefore candidates for elimination. For this type of analysis, comparisons to external organizations - while they may help identify leading practices to adopt - are less important than an internal assessment of existing applications against each other and against business needs, in order to determine which applications to keep, which to enhance and which to retire.
The process involves mapping each application against ten criteria, each of which is described in greater detail below. In any given situation, a subset of this list will often be identified as most important for an organization.
- Strategic significance
- Functional adequacy
- Technical adequacy
- Application skill set
- External support capabilities
Once the key criteria are selected, each one must be thoroughly assessed and scored. For example, a review of strategic significance must examine the applications role in advancing the organizations business strategy. Specific issues to address include identifying the customer or business sectors that the application supports, and whether control of the application resides with the business units or the IT organization.
An assessment of purpose, meanwhile, examines the applications original purpose in the context of existing business requirements, focusing on whether those requirements have changed and if the application is still relevant.
Once each of the criteria is scored, a picture of the overall effectiveness of the application portfolio emerges, as shown in Figure 3. In this instance, the red line shows the performance of the environment being analyzed, while the black line shows the average of the comparative reference group. (The further the line extends to the edge of the octagon, the better the performance.)
Supply-Side to Demand-Side
The application portfolio model outlined here can serve as a critical element of a roadmap that links applications directly to business requirements, creating enormous potential for identifying improvement opportunities. The traditional supply-side approach to IT management limits the impact of improvement initiatives to the realm of IT, so that savings are reflected only in the IT budget. A demand-driven perspective extends that potential for improvement across the enterprise.
By providing insight into the specific IT and other cost components of a product or process, a business-driven approach can identify where to invest in IT, and how to gauge the impact of that investment. The result is enhanced communication between the business and IT, and the foundation of a true strategic partnership.
A comprehensive and systematic approach to application management can effectively address business requirements and enhance the value of IT in a number of ways. The most apparent benefit is the elimination of redundant systems, legacy applications and concomitant maintenance requirements. Perhaps more significant, streamlining information sharing across the enterprise can facilitate competitiveness and innovation by reducing cycle times for product development, enhancing responsiveness to customer needs and increasing speed to market.
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