APPLICATION PORTFOLIO

Use this same portfolio picture for an analysis of your business applications environment to look for cost savings. The process of identifying application cost savings cannot proceed without a solid understanding of what applications are already in use within the organization, who is using it, where it's being used, for what business purpose, and how much it is currently costing the organization. For significant cost reductions, consider the tactics in this section for changes to the business applications portfolio as shown in Figure 1.

• ✓ Eliminate unused software
• ✓ Consolidate redundant applications
• ✓ Replace applications with high support costs
• ✓ Consider second-best applications
• ✓ Standardize application vendors
• ✓ Consolidate application instances
• ✓ Standardize development tools
• ✓ Identify gaps in functionality
• ✓ Use more functionality
• ✓ Discontinue source code in escrow
• ✓ Do an assessment and strategic plan
• ✓ Consider legacy system renewal
• ✓ Consider life extension strategy
• ✓ Consider buy before build strategy
• ✓ Use a structured selection process
• ✓ Take an enterprise view

Figure 1: Tactics to get the most from your business applications portfolio

Eliminate Unused Software

It is challenging to reduce costs in the applications area because changes typically take a long time to implement. However, eliminating unused software modules is one of the quick hits that immediately take costs off the budget. Do this by reducing shelf ware. Make sure you are not paying for any unused or unimplemented software. Third-party software inventory and spending audits to validate software licenses frequently find overspending on licenses compared to the frequency of under-licensed software. Retiring unused application software usually results in a reduction in use of supporting infrastructure items, which you then can also eliminate. For example, one company found an application that had never been deployed. This application had 30 communication lines installed but these lines also were never used. Likewise, consider retiring unused modules or excess users of any in-use application to reduce the maintenance costs relative to those modules.

Consolidate Redundant Applications

Review modules that you have purchased as part of an enterprise system that duplicate functionality provided by silo applications. Consider replacing or removing redundant applications that have overlapping functionality in order to reduce costs. For example, recording and reporting employee time is often part of your payroll system. It might also be contained in your human resource system as well as your shop floor control system and project portfolio system. You might also have departmental silo systems to track and report time. In this example, restructuring your applications so you do all time reporting in a single enterprise application will reduce the cost of providing this functionality. Eliminate all use of duplicate functionality in other systems unless there is a compelling argument to do otherwise.

In the case of an organization with multiple geographic sites, look closely at applications that are deployed in different locations as you might find redundant applications that are ideal opportunities for consolidation.

Replace Applications with High Support Costs

Review your maintenance and support costs as well as your full time equivalent (FTE) personnel needed to support each application. Rank the applications by total cost of ownership. Make sure that the business value received from each application is in proper alignment relative to the costs. Review the support costs by application with each business executive to ensure they feel they are getting comparable value. Relative to the other applications, if an application seems costly compared to the business value, work with the business to consider replacing expensive applications with a more cost-effective solution. In some cases, this more cost-effective solution may be a lean or even manual method.

Assess the business applications to ensure they are providing the desired business value. One company did this by working with the IT steering committee to place each application on a grid indicating value and cost as shown in Figure 2 according to the following actions:

• Applications identified in Grid 1 are high-value applications, funding is a priority, and they are generally maintained as status quo unless expenses must increase for some reason.
• Applications identified in Grid 2 are also high-value strategic applications, but review them to see if you are able to decrease maintenance costs without negatively affecting value to the business.
• Applications identified in Grid 3 are lower-value applications considered for consolidation into higher-value applications with a lower priority as they have a relatively low on-going cost.
• Applications in Grid 4 are immediate candidates to review for consolidation, as the costs are significant relative to the value to the business.
  
  

 Figure 2: Application value matrix

Consider Second-Best Applications

When evaluating software options, many organizations implement the best software, best-of-breed, or high-end software. It is like the old saying, "no one ever got fired for going with IBM." In some cases, the second-best software may give you enough functionality to meet the business needs. You may not always need the most high-end software particularly when comparing the price differences. At times, you are able to get 90 percent of the functionality at 60 percent of the cost and that may be sufficient for your needs.

Standardize Application Vendors

If you consolidate the major portion of your application portfolio with one main vendor (e.g., IBM, Microsoft, Oracle, SAP, etc.,) as much as possible, you are able to gain additional discounts due to higher volume purchases, and it will cost less in interfaces and in achieving seamless streamlined processes. Training costs and personnel support costs are also less with a consistent technology stack. On the other hand, be aware that some of your post-purchase leverage is gone with a single vendor approach and a larger footprint has a much higher barrier, or costs, to exit. Therefore, in some instances a series of interfaced niche applications give a company more flexibility and interchangeability, particularly with the use of enterprise architecture and portal technologies.

Consolidate Application Instances

Many large global organizations spend millions of dollars implementing a common Enterprise Resource Planning (ERP) system, but some implement many different application instances to meet the needs of different divisions, locations, or business units. Each separate instance costs additional money for licenses as well as maintenance and support. Whenever possible, try to consolidate application instances into the fewest number for a lower total cost of ownership.

Standardize Development Tools

For both custom development and vendor-supplied packages, standardize on the fewest possible development tools, and classify the ones you retain as primary and special use.Each additional development tool costs the organization money as you need to have trained resources and backup resources that know each language and development tool. Of course, weigh this against the business functionality provided as you do not want to exclude applications that would provide value for the business because they are using a different language.

Identify Gaps in Functionality

As you look at your applications portfolio, contrast it against the business organization and functions. Identify any key missing areas to review for potential benefits from implementing technology. For example, one company did this analysis and found that the company's marketing area did not have automation. The company realized it was because the marketing executive did not have an appreciation of technology and did not drive the need for tools. When looking at the processes in marketing, they found a severe need for improved processes and technology, which, when implemented, resulted in tremendous business benefit.

Give people the tools to foster accountability, efficiency, innovation, and collaboration throughout the organization. Enterprise tools used across the company achieve a significant savings in business costs as opposed to siloed business unit solutions that meet the needs of only one department. One example is implementing a powerful data warehouse and Business Intelligence (BI) system that gets the right information to the right individual faster and cheaper, enabling improved business decisions. Businesses leverage and mine customer data to come up with solutions that allow a business to interact with customers in new ways that drive additional revenue.

Consider using new technology to provide functionality that was not possible in the past. This may help reduce business costs and eliminate other costly IT applications. For example, newer functionality provided with Web 2.0 collaboration products (e.g., blogging, Sharepoint, wikis, and mashups) can be extremely useful.

Use More Functionality

Most companies fail to take full advantage of their enterprise software packages, ignoring important features that drive significant business efficiencies. For example, one retailer created purchase orders to use in planning purchases and shipment timings with its vendors. This resulted in expensive downstream purchase order changes and reconciliations due to subsequent review and feedback from the merchants. When IT instructed the retailer's merchants in the use of purchase requisitions, which was previously an unused function, it significantly reduced time-consuming activities.

Considering both the full range of functionality and potential modules, industry estimates say that companies use 25 percent of the functionality that is available in packages. Work with the business managers and staff at all levels to review additional functionality that you currently own to see if they would benefit from using additional features. Of course, as a company uses additional functionality in existing software, the cost-per-functionality decreases. Payback from software implementations multiplies as the software penetrates more broadly and deeply into the organization.

Also, look at using more of what you own relative to hardware. For example, one company outsourced payroll as they initially did not have the capability to operate it independently. After implementing a secure data center for other needs, they looked at bringing payroll back in-house by using existing capacity, which saved considerable money.

Discontinuing Source Code in Escrow

Some companies regularly subscribe to source code in escrow whenever they license application software. Granted, this is a relatively nominal cost compared to the expense of having to replace an unsupported application. However, all of these nominal costs add up to a sizeable annual expense when a company subscribes to dozens of escrow agreements. Recognize that many source code escrow agreements are structured such that the only release event is where the vendor goes out of business, which is extremely uncommon. Rarely do vendors release source code without a very expensive and heated legal fight. When push comes to shove, most companies choose to continue operating their relatively stable unsupported applications rather than go to the expense of getting the source code and maintaining it internally. Subscribe to source code escrow only when the application is mission-critical and worth spending the additional tens of thousands of dollars required to get the source code released.

BUSINESS APPLICATIONS | Cost Reduction Strategies

Look at Cost Reduction Holistically

Rather than a myopic approach to cost cutting by reactively reducing IT expenses, management must look at cost reduction systemically and contemplate how technology can enable the business to cut costs in an even larger sense. Although the focus of this book is on reducing IT costs, one should view this perspective in the context of the overall goals of the company. IT must work proactively with the business units to achieve cost reduction in the appropriate areas. Reducing overall organization costs may be a combination of increasing some IT costs while reducing costs in other parts of the organization.

One company wondered why their IT costs were so high, but after an objective assessment they realized it was the result of an overly complex business model that IT was supporting. As they acquired new companies, they did not change the policies and business processes of the newly acquired business unit but had IT modify the application software to support all the various ways of doing business in different divisions, locations, and geographies. Over time, the variety in the business increased IT support and maintenance costs. It can be difficult and time consuming to simplify the business processes and policies to have fewer ways of doing things, but it can be well worth the effort and can significantly reduce costs.

Instead of taking a reactive approach to reducing IT costs, management must take a strategic approach to cost reduction by reviewing the total costs and the overall impact to the business. Although IT is a significant part of a company's costs, it is also a key vehicle to enable cost reduction across an organization. IT is required to implement and maintain efficiencies throughout all areas of the business. As such, management must view IT cost reductions within the context of overall business costs. CIOs face the challenges of reducing IT costs while maintaining or increasing the value that IT provides the business.

When a company reviews its end-to-end business processes, IT is able to assist in trimming costs out of all areas of business operations. Investments in technology can lead to significant overall business savings. Although IT savings are an important goal, be sure you do not affect business cost-savings efforts during the process of reducing IT costs. The challenge is to know where the key opportunities exist.

For example, in a company focused on being a low-cost provider based on operational excellence, technology is fundamental to improve overall efficiencies and reduce costs. A chain of beauty salons cannot improve efficiencies when cutting and coloring hair, so efficiencies must come from back-office functions. However, cutting costs in IT may disable the ability for IT to help make the business leaner. Cutting the IT budget may mean that IT has to turn down requests that would improve business efficiencies because it requires IT resources

Innovation is Better than Cutting

When the economy is in a downturn, the first instinct of many organizations is to freeze projects. However, halting projects can be the riskiest option for a business, and it can have a significant negative impact on a company's long-term success.

As every CIO knows, technology projects can have an impact on bottom-line profitability but can also have a positive impact on the revenue and top-line growth of an organization. Technology enables the business to innovate with new solutions to help the business survive or even to thrive in a crisis. Simply cutting IT costs and projects can be counterproductive for an organization. For example, in a company focused on customer intimacy, technology is instrumental in top-line revenue growth and improving customer satisfaction and retention. The wrong cuts in IT can damage a company's total value proposition and competitive advantage. Every CIO knows this and, in the absence of a crisis, most business executives know it too. The challenge for a CIO is to ensure that business executives do not forget this in the face of short-term financial pressure.

Nicholas Carr claims that IT is just a commodity that cannot help a company create differentiation and compete in the market. He views IT simply as a cost center. What Mr. Carr fails to recognize is that in many cases the strategies and tactics used by operational and customer-facing departments would not be possible without technology or the analysis supported by technology. We have seen technology provide a competitive advantage for many companies to the point of helping a company become a market leader. Three obvious examples include eBay, Amazon.com, and Wal-Mart. It was, and continues to be, serious investments in IT that have allowed these companies to dominate industry segments in a highly competitive market.

Technology enables companies by:

• Reducing expenses or the costs of doing business
• Increasing margins by changing the business model and relationship between a dollar of revenue and associated costs
• Opening new sales channels
• Defining new customer segments, acquiring new customers, or retaining existing customers
• Increasing cross-selling and up-selling
• Creating new business models
• Meeting customers' expectations and increasing customer satisfaction
• Improving customer service
• Delivering new products to market
• Optimizing the supply chain
• Increasing the speed of processes
• Improving quality
• Improving decision making
• Supporting the business strategy

In the past, the main focus of IT projects was to reduce company expenses in the business. Now, most companies have automated business processes and realized much of the obvious expense reductions. IT in many companies has turned their focus to opportunities to improve customer satisfaction, service, quality, speed, revenue, and other areas identified in the previous list. The CIO can help the business to recognize the opportunities created by a financial downturn by understanding the business strategy, market conditions, and competitive forces. Many technologies help a company increase its revenue, reduce company costs, and secure a competitive advantage. IT is able to do more than weather the turbulent economic conditions; it can actually help the business to be more agile and competitive. If you are not using technology to improve overall business success, now is the time to step up that mission rather than to retreat.

The following are just a few examples of how companies have used technology for overall innovation and strengthening the business model:

• IT-supported analysis helped automobile companies discover that the vast majority of U.S. residents interested in fishing, hunting, and boating also own a truck or SUV and typically choose a U.S. brand vehicle. As such, they are ideal for targeted marketing.
• Direct delivery companies have found that handheld computers with route accounting software reduce the end-of-day closing process from hours to minutes. They also provide previous orders and truck inventory at the driver's fingertips which increase revenue per customer.
• Many companies in the travel industry have used technology to increase customer satisfaction and affect their overall company performance. With technology improvements, we no longer take trips the same way we had in the past. Making reservations and getting the lowest fares with sites such as Orbitz or Travelocity are common, printing your airline boarding passes from home, checking in at kiosks and using the rental car mobile check-in when you return the car are all examples that have improved customer satisfaction and reduced total company costs.
• A simple screen to verify accuracy in the fast food drive-through reduces errors, improves quality, and increases customer satisfaction.
• Online Fed Ex package tracking provides improved customer satisfaction and fewer customer service calls.
• Online assistance when ordering from retail sites such as Lands' End improves customer service and increases sales.
• Modeling software is used by companies to predict product failures and improve product quality.
• Frequent buyer programs and e-commerce sites with cross-selling and up-selling all impact customer buying and increase sales.
• Web-based reservation systems, stock trading systems, or ordering of printed digital pictures are all examples of business models increased or created by technology advancements.
• Companies use software to identify fraudulent use of credit cards and reduce costs of improper use.
• Firms use software to take an order anywhere in the world and fulfill it anywhere in the world depending on inventory and cost of transportation.
• Software is used to improve the speed of processes, such as orders, manufacturing, fulfillment, and the delivery process. Companies automate the transfer of information between the ordering company and suppliers.
• Software is used to recognize revenue faster and to transact funds.
• Software routes delivery trucks for decreased gas usage and quicker deliveries.
• Process software communicates to the supplier the levels of available product and when additional deliveries are required.

Make Sure the Technology Supports Your Strategy

Technology is great. However, as everyone knows, improperly implemented technology can be costly and ineffective. Some people become enamored with the attraction of the latest technology without having a valid business purpose. It is the business equivalent of keeping up with the Joneses. Apple introduced the iPhone, and suddenly executives were requesting one without any real business justification. It is not questionable technology. Rather, the business function and costs are inappropriate for a specific business need.

Some companies jump to the conclusion that implementing technology solves everything. However, it might not always support the business strategy properly or cost effectively. Phone-response technology is a good example. Yes, at times phone response technology is a wonderful time-saver to get you directly to the right person who can help you. Have you ever been caught in a frustrating "press one for this, press two for that" cycle when you just wanted to talk to a human being? At times, it is impossible to get through the maze of response requests even though the company may have a customer intimacy strategy! Another personal frustration is when companies replace thinking, decision making, and logic with technology. An employee's response, "the computer will not let me do that," is frustrating for a customer. Be careful how and where you use technology. Make sure it supports the business strategy. Although CIOs are probably very well aware of this issue, they must continually remind executives who are making budget and priority decisions. Do not do stupid things with smart technology. Continually look for inappropriate uses of technology to eliminate and reduce costs. Better yet, make sure the company initially does not invest in inappropriate technology by having an effective governance process.

The organization must give employees tools that foster accountability, innovation, collaboration, and good decision making. Use technology that works for the company, not against the company. A company may have selected the wrong software, or the business needs have changed, and can spend a lot of money trying to make software work for the business when it may not be a good fit for the business from the beginning. At times it can be important to take a step back and objectively evaluate if it would be less expensive to implement new software rather than continuing to make the old software fit the new business model. For example, you would never convert your sports car to a van as your requirements changed and family grew, but rather you would purchase a new vehicle. One company initially selected software for the process manufacturing business. Over time its business model changed and it found itself in the discrete manufacturing business. They spent a considerable amount of money every year modifying the Enterprise Resource Planning (ERP) software for their needs. An objective assessment revealed that they had unsuitable software and could save a considerable amount of money and increase functionality by implementing software that was a better fit for their business model.

Have an Eye on the Long Haul

Although almost any software will work in the short run, in the long run you will see a difference in total costs, including business process inefficiencies, software changes, support, interfaces, data correction, training, and errors. IT must focus on both short-term cost reductions as well as long-term structural changes that will result in a lower total cost of ownership. Many technology improvements take significant time to implement, such as a new enterprise system that has a lower total cost of ownership. It takes time to achieve measurable and sustainable savings from some changes. One example is implementing e-commerce for customer self-service ordering in order to reduce or eliminate the clerical order-entry function. However, this will deliver savings only after customer adoption, which takes years. At times, focusing on reducing costs in the short term creates problems for the long term. Similarly, it requires an increase in costs in the short term to experience a reduction of costs in the long term. If your company is in a position in which it needs to make drastic cuts that will prove costly in the long term, ensure management understands this.

For example, one company knew they needed to invest in a new ERP system. However, due to the magnitude of the effort, the company continued to delay the investment and focused instead on short-term cost reductions. While trying to save money, the on-going maintenance and support costs continued to rise as the business grew. During this growth, the inefficient processes became even worse. Eventually, the company reached the point that the legacy applications and inefficient business processes stunted future growth. By the time the company finally invested in the new ERP system, the total costs were significantly higher than if the company had implemented it earlier. The opportunity costs from years of inefficient processes were enormous.

Implement Small, Select Projects

Divide programs and large projects into small manageable projects to realize more quickly portions of the results and cost savings. A program with a large return in five years is not helpful if you need to reduce costs this year to survive. Ensure a consistent strategic direction by designing the large-scope project but implementing it in small projects whenever possible. Place high-priority functionality into the first project to create larger cost savings earlier and to realize a quicker return on investment (ROI). Business and industry change too quickly to bet on risky, long-term returns.

Consider implementing only portions of a program rather than the entire one. Focus on projects within the program that garner the majority of the benefits by following the 80/20 rule, where 20 percent of the project realizes 80 percent of the benefits and ROI. When economic pressure is high, it is usually not a good time to launch expensive multi-year efforts. Some companies require that all projects have less than six- to nine-months' duration or that a project's ROI must be achieved in 12 months or less.