ra2 studio - Fotolia

Cut legacy IT costs to drive digital business initiatives, says Hackett Group study

Hackett Group's research shows that CIOs must become more ruthless with culling legacy systems if the business is to fully embrace digitisation

Research from strategic advisory service Hackett Group has found that IT organisations are at a crossroads, with CIOs needing to ensure legacy applications and processes that are redundant due to modernisation are retired at the end of the project to fulfil the business case.

IT is constrained by sunk investments and legacy technology and skillsets, while it must also embrace the digital world of cloud, big data analytics, social media, the internet of things (IoT) and mobility.

Hackett Group found that some IT departments are overwhelmed by the challenge posed by the avalanche of technology innovations and take a defensive stance, tweaking the established IT service delivery model.

Others are energised by the opportunity to elevate the role of technology to a higher strategic level, as senior management embraces digital as a cornerstone of the business strategy.

According to Hackett Group, world-class IT organisations are in the latter camp, and any IT organisation failing to follow the lead of world-class businesses by fully embracing digital transformation as the basis for the future state of IT service delivery will be marginalised.

The study also showed that the most efficiently run IT departments spend 21% less per user than typical companies and rely on 8% fewer staff.

Its research found that in large enterprises, with a revenue of $10bn, world-class IT departments were able to cut costs by as much as $41m on average.

Such cost savings can help CIOs struggling with budget constraints to fund digitisation initiatives. Hackett Group found that the top IT departments spent just 53% of their budgets on running IT, compared with 60% in typical companies.

A larger percentage of process costs were committed to new business-focused initiatives (43% versus 32%).

Read more CIO strategy articles

Given that IT budgets are growing modestly, IT departments have to self-fund their internal transformation, including developing the competencies needed to support digital business transformation.

But as Hackett Group’s findings have shown, many IT departments have significant resources tied up in supporting “run-the-business” activities, which detracts from their ability to support the higher value activities that drive business results.

Speaking to Computer Weekly about the challenges IT faces in the age of digitisation, Scott Holland, practice leader of the IT executive advisory program at Hackett Group, said: “Legacy applications will not go away unless there is a concerted effort to focus on them.”

While it is highly unlikely that a CIO will be able to switch off the legacy SAP system, as it is part of the DNA of the business, Holland said a lot of legacy applications do not provide business value.

“Successful companies look at their application portfolio and develop technology roadmaps. You have to learn to live with core investments, especially if there is legacy with a lot of users,” he said.

If there is a legacy system such as SAP, Holland recommended that CIOs assess whether it could be used to support a new business idea, rather than buy in a totally different product.

“When you talk to the business about ideas and you run SAP environment, ask why SAP won’t work in this environment,” said Holland.

Cull non-core legacy

However, beyond the core system, Holland urged CIOs to be ruthless with reducing legacy software. “If you don’t build a business case to retire applications, you create problems,” he said.

He blamed weak governance for the growth of legacy software, saying there is a lack of discipline. “Legacy will never go away. The question is how diligent you are at chipping away at the legacy portfolio.”

He said CIOs must remain focused if the last step in closing the book on a project is to retire the applications. “If the business case says we will free up three applications, part of the benefits to the business is about no longer supporting the old applications.”

In Holland’s experience, the IT department must have a heart-to-heart conversation with the business sponsors. “Their objective is not to create problems for IT, but they don’t have visibility of costs,” he said.

A workable solution may be to agree with the business that IT should not bear the cost of support if the legacy application cannot be retired.

A politically sensitive issue for CIOs occurs when a project has the potential to automate manual business processes. “Finance people would be reluctant to free up 50 people if you say you can automate the processes,” said Holland.

Instead, the CIO needs to speak in terms of operational expenses and discuss how to move people from transaction processing to knowledge worker roles, he added.

Read more on IT strategy