Managing the Application Portfolio From Cradle to Grave

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m e t a g r o u p . c o m • 8 0 0 - 9 4 5 - M E T A [ 6 3 8 2 ]

January 2005

Managing the Application Portfolio

From Cradle to Grave

A META Group White Paper

Managing the IT Asset Life Cycle

The traditional focus of analysis is on new project opportunities to optimize new IT investments. However, in the vast majority of companies, the installed IT asset base remains essentially unmanaged. At the same time, companies are

concerned that 61% of the IT budget is dedicated to “keeping the lights on” in a cost-constrained IT budget environment. A recent survey conducted by the BPM Forum concurs with META Group’s own research findings that the single greatest opportunity to identify IT savings and to increase business value delivered is in the active management of the existing asset base.

In most companies, senior managers believe that 10%-20% of the IT budget is wasted on maintaining unwanted applications — an obvious squandering of precious IT resources. Cost management represents just one side of the IT investment picture; the management of IT benefits is dismal. Two out of three companies have no effective means of measuring or managing the benefits of IT investments. META Group research indicates that less than 5% of companies actively manage benefits attainment post-project. In short, the vast majority of companies are not sure what return they are getting for their investment in IT. Indeed, three out of four companies have no systematic process for retiring applications. To put the cost of unwanted applications into real numbers, a

company with an average IT spend that is wasting 10% of IT budget on unwanted applications can add 0.38% of total revenue to the bottom line by eliminating those unwanted applications — without any reduction in business value provided.

Broadly speaking, business and IT managers are abdicating their responsibility to create value for shareholders through the willful mismanagement of IT spending. Companies that have historically managed large investments over a long life cycle (e.g., nuclear power generation, airlines, telecommunications) have developed sophisticated models for managing the asset life cycle from cradle to grave. IT organizations, as custodians of applications assets, must also become more adept at managing the entire asset life cycle, rather than just the implementation project. Companies that actively manage the IT application portfolio, such as Intel’s IT organization, have a clear definition of the value provided by the applications in their portfolios and the opportunities to increase IT value delivery through additional investments. Given this information, Intel can make reasoned

judgments about which new applications it should be investing in, how much to invest to maintain applications, and when to retire applications in the portfolio.

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Figure 1 — Application Asset Life Cycle

Source: META Group

Costs

Benefits

Implementation Project Decommissioning Operating Costs Realized Value Ye ar 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 1₀ Upgrade Projects

Costs

Benefits

Implementation Project Decommissioning Operating Costs Realized Value Ye ar 0 Ye ar 0 YeYear 1ar 1 YeYear 2ar 2 YeYear 3ar 3 YeYear 4ar 4 YeYear 5ar 5 YeYear 6ar 6 YeYear 7ar 7 YeYear 8ar 8 YeYear 9ar 9 YeYear 1ar 1₀₀ Upgrade Projects

The life span of an asset, when measured in time, investment, and value, actually begins with an idea, well before the decision to invest. Resources are expended investigating the viability, usefulness, and options to realize the idea. Once installed, the application will have ongoing costs for operations/maintenance and periodic upgrades until, finally, the application is decommissioned. The diagram below (see Figure 1) demonstrates the costs and benefits of an application from concept through to decommissioning. Taking a life-cycle investment approach forces planners to think through the likely events and their potential costs to provide business and IT investment decision makers with a clear picture of the impacts of investing in that project in the first place.

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IT Portfolio Management

IT portfolio management (IT PfM) is a disciplined and structured approach designed to map business requirements to technology decisions. IT PfM enables organizations to categorize, evaluate, and manage IT assets — hardware, software, people, and processes — and to prioritize projects that will create new assets or enhance the value of existing assets. IT PfM also enables organizations to align IT spending to business priorities and achieve an acceptable balance of risk and reward.

An IT portfolio is a categorized set of assets and projects that drive IT spending. Using a familiar metaphor — the portfolio — helps IT to engage business

managers in a discussion of managing IT investments versus being order takers and defenders of the IT budget. As a personal portfolio might contain real estate, securities, cash, and personal skills, an IT portfolio contains physical hardware and software assets, IT projects, IT staff/skills, and business processes.

Implementing IT Portfolio Management

Management of the IT portfolio must be a continuous process. This process is both proactive — identifying potential risks and opportunities (future state) for assets in the portfolio — and reactive — evaluating and maintaining existing assets (current state) at an optimal level. The active management of the application asset’s life cycle will uncover when maintaining it becomes

prohibitively expensive, or when replacing it can drive new business opportunities. With a personal investment portfolio, individuals may engage a financial institution to be the custodians of their investments, but they must take an active role in the management of their investments. Similarly, the program management office has custodial responsibility for the IT PfM, but business managers have overall

responsibility for decision making concerning the IT portfolio mix — adding new applications and changing out low-value ones on a dynamic basis.

IT assets, like assets in a personal portfolio, should be managed with a “buy, sell, or hold” mentality. We find that many organizations, like many investors, are good at buying, but have difficulty in determining when to “sell.”

The portfolio management process should help identify these optimum “buy” and “sell” points, by:

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The portfolio management process should also be used to develop and review the IT organization’s strategic direction. Indeed, it reflects the tempo and working environment of the organization.

IT PfM is becoming common practice among business executives with fiduciary responsibility for the enterprise, as well as a core competency for consulting firms and systems integrators. Cognizant Technology Solutions and other recognized players in the PfM marketspace are keenly aware of the need to manage the entire life cycle of IT assets, and they have identified opportunities in many organizations to reduce IT costs or re-allocate IT resources to higher-value

investments. Organizations that effectively manage the installed IT asset base, as well as profile risk and reward tradeoffs to enable prioritization and funding of IT projects and service enhancements, have a real and positive impact on the bottom line and are able to invest in innovation that distinguishes them from their

competitors.

Bottom Line

IT PfM is the only method by which organizations can manage IT from an

investment perspective — in line with the current state of the business, and with a continuing focus on value, risk, cost, and benefits. Companies that have adopted IT PfM maintain exemplary records of continuous IT efficiency and effectiveness improvements — with some organizations reducing costs by up to 30% while increasing value by 2x-3x.

IT organizations must adopt practices and principles that continually align business pressures with demands on the IT portfolio. Portfolio management is simply the most effective strategy for achieving sustainable IT/business alignment. IT organizations that fail to employ portfolio management risk sliding into a trap of business-as-usual complacency, while falling behind competitors that exploit this highly effective approach.

Brian Burke is a vice president with Enterprise Planning & Architecture Strategies, a META Group advisory service. For additional information on this topic or other META Group offerings, contact info@metagroup.com.

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About META Group

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Managing the Application Portfolio From Cradle to Grave