How to cut costs by rationalising application software

Many IT departments are promoting application portfolio management as a way to cut technology budgets in tough times.

Many IT departments are promoting application portfolio management as a way to cut technology budgets in tough times.

In theory, consolidation or replacement of old, expensive legacy applications would free up money for new initiatives. However, the reality is that IT is not the owner of the application portfolio, the business is. IT's role is more akin to the money manager; it must persuade the business that the rewards of a change in the portfolio outweigh the risk. AMR Research talked to 14 IS directors at a variety of manufacturing companies about their application portfolios and future plans.

Abandoned or lower-use applications are easy first targets
While most companies make sure they comply with licence limits on the maximum number of users, they may not realise missed savings in unnecessary fees when usage trails off. Upon investigation, we found that most CIOs reported that they are paying maintenance on applications that are no longer used. Consider that one CIO was able to eliminate £1.3m in maintenance fees by determining the number of licences still active.

These changes are often invisible to the user community or easily negotiated with a few remaining users, freeing up budget for other projects. Without the need for widespread consensus, the changes can be implemented quickly - getting past these obvious opportunities takes much more effort.

Change of applications brings business risk and expense
Just like IT, business managers must tighten their budgets. Their top concern is that any change will disrupt their business operations, even if the result might be better. The system in place has been customised to fit the business exactly, and the people are trained to use it. "If it ain't broke, don't fix it!" rules the day.

Project management, training, and data conversion all take time away from executing the business plan. In fact, the manager you need to work with may not even have time to evaluate your proposal. New systems also have out-of-pocket expenses for new hardware, software licences, and implementation services.

Business managers are sceptical that old applications are risky
In an old house with aging wiring, few owners worry about the lights until they don't turn on. Likewise, a company's thinking is often "as long as the application ran today, it will run tomorrow". In 1999, when companies audited their software for Year 2000, many found applications used daily that had not been compiled from source code in five to 10 years. Business managers believe that the CIO and staff will take care of any problems (and absorb it in the IT budget).

Newer applications are often more expensive to maintain than old, stable ones
The companies we surveyed spend more than half their maintenance budget on applications less than three years old and more than 80% on applications installed for less than seven years. The older applications don't get changed often, and most bug fixes and enhancements have already been done. Newer applications have maintenance fees based on a percentage of a higher licence fee, are more complex to maintain, and still must be tweaked and customised to fit the business.

Most IT groups do not track usage and cost well enough to make a case
Only 20% of the companies interviewed tracked all IT costs associated with managing applications. Most only tracked external costs, such as maintenance fees and contracted services. In most cases, the cost of maintaining existing applications is buried in the IT head count. Only 33% of the companies had chargeback mechanisms based on number of users or actual usage, and only 13% even measured usage. Companies that have outsourced much of their IT information often have the best data, in the form of an itemised bill from their service provider.

Business strategy shifts are the window of opportunity to rationalise the portfolio
The consensus of the research group is that application rationalisation is an element of a business change project, not a stand-alone project. Those that are successful tracked business change projects and looked for opportunities to standardise applications and shut off old ones. To succeed, they had to do the following:
  • Deliver more functionality than the system replaced
  • Remove an impediment to the new, streamlined business process
  • Show that the new system would reduce the risk or accelerate the benefit of the business change
The biggest opportunity experienced by several of the companies was creating global business units. The far-flung groups need to be pulled out of regional operating companies and put on a common system. Similar opportunities exist because of merger and acquisition activity, but they are often accompanied by turf battles over whose system is best.

Business units in a cyclical downturn may need help
The biggest headaches our CIOs faced were business units that delayed application investment for years. Many were in cyclic industries that don't have time during the booms or money during the busts. The old legacy applications had accumulated hundreds of small feeder or analysis applications over the years, whose aggregated cost of maintenance is high.

A few CIOs indicated that they helped smaller units get on the corporate-standard applications by subsidising a portion, but not all, of the implementation costs. This lowered the financial hurdle for the business unit and removed a maintenance headache for the CIO.

Recommendations

  • Do a bottom-up inventory of the applications so you understand the costs associated with existing ones. IT network and asset management tools that automatically create an inventory of servers and desktops and organise cost information can help here.
  • Correlate this with a top-down, business-process-based application inventory, identifying the core applications used by each business unit and what small feeder applications are used. Concentrate on the applications that consume the top 80% of your maintenance budget and staff time.
  • Track down major strategic initiatives of the business units and determine which applications are likely to interfere with the goal. Prepare a case to sell the change to your business unit customers that emphasises new capabilities, acceleration of change, or removed obstacles in terms of their change plans.
  • Go after applications whose usage has declined independently and quietly as a regular housekeeping task.



Bob Parker is vice-president and general manager, enabling technologies
Service at AMR Research. William Swanton is vice-president, product operations service at AMR Research.

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