Warnings of the scale of disruption caused by the year 2000
software problem (no planes fell from the sky, after all) proved to
be largely false. However, the year 2000 did present corporate IT
teams with a stimulus to shut down old and inefficient applications
which cost too much to run and were used by too few people, writes
Nigel Hughes ofCompass
Management Consulting.
Almost ten years later, the current squeeze on corporate
spending is proving an equally strong stimulus for appraisal of
corporate software estates. As corporates seek to conserve cash and
the public sector seeks out efficiency savings, there is a new
impetus for radical change.
Complexity in the application environment is an important driver
of increased overall costs in the IT function, so a focus on the
extent of existing applications and those under development can
produce big savings. Compass has observed some of the best
performing organisations already taking advantage of economic
pressures by replacing legacy systems and modernising their
application portfolio. In particular, some organisations are
showing a new appetite to consolidate the duplicate applications
which have been accumulated through mergers, expansion projects and
corporate re-structuring.
By streamlining the range of applications to be supported, IT
operations can be significantly cut back. With the costs of
maintaining legacy systems running at more than 70% of a typical
software budget, lowering the application support burden can
achieve swift, significant and enduring economies.
This portfolio analysis approach to making savings is proving
more powerful in generating positive and sustainable change than a
rushed decision to outsource application development.
IT buyers consistently over-estimate the savings they believe
they can achieve through outsourcing or offshoring alone. Although
the short term gains may look attractive, long term studies of
efficiency suggest that there can be unintended consequences in the
form of significant losses in productivity.
Compass is reporting cases where productivity of a software
development effort has dropped by up to 60% as poor knowledge of
the business function spoils efficiency. It seems that development
projects struggle to recover - in cost terms - from a loss of
functional expertise from among people on the ground who understand
the business the software is supporting. With the additional
pressures of fluid currency markets, (which have gone the wrong way
for UK buyers of offshore services in recent months) it is crucial
that candidate projects for offshoring are carefully chosen and
that vital business analysis skills are kept in-house in order to
maximise returns from an offshoring initiative.
Even if the business analysis is carried out onshore,
poorly-planned offshore projects can still be hit by losses in
development productivity of 20% or more. So while 40% lower
offshore personnel rates look attractive to finance teams, the cost
of additional management oversight, increased infrastructure spend,
employee attrition, language difficulties and cultural issues can
mean that the final charge is 20% more than a current in-house
operation located onshore.
There is no doubt that carefully selected and well-managed
development projects can be successfully completed offshore.
However, the first step in any cost reduction exercise should be a
rationalisation of the existing application portfolio. Companies
taking this route are reporting reductions on annual software spend
by 20-40% within 12 months. These initiatives are simultaneously
delivering cash to the bottom line and freeing up resources to
implement updated and cost-effective solutions.