Gartner - Eight Steps to Application Rationalization

10/22/2015 Eight Steps to Revitalize Your IT Cost Optimization Initiative With Application Rationalization

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20 July 2015G00277893

Analyst(s): Stefan Van Der Zijden | Matthew Hotle | JohnP. Roberts

SummaryIT cost optimization initiatives can decelerate afteropportunities to save money in IT infrastructure, softwareplatforms and IT services have been exhausted. ITleaders often turn to application rationalization for potentialnew cost savings, but this requires a radical change inapproach.

Overview

Key ChallengesThe application portfolio represents a large part of the IT budget and a major opportunity for costsavings by lowering redundancy, diversity and complexity; however, application rationalization offersno quick wins.

Application rationalization is not an IT initiative and demands strong business leadership.

Moving an IT cost optimization program from early costefficiency stages to reducing applicationportfolio complexity requires a totally different approach.

RecommendationsObey the key rule for success in application rationalization, which says that changes in the applicationportfolio must be led by a business initiative to change, standardize or simplify the business processes.

Reorganize and refocus the IT cost optimization initiative for application portfolio rationalization, andinvolve all application stakeholders.

Follow the eight steps outlined in this document to move your IT cost optimization initiative intoapplication portfolio rationalization.

Table of Contents

Introduction

IT Cost Optimization

Eight Steps to Revitalize Your IT CostOptimization Initiative With ApplicationRationalization Tweet

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Application Support Costs

Analysis

Obey the Key Rule for Success in ApplicationRationalization

Reorganize, Refocus and Involve All ApplicationStakeholders

The Eight Steps to Application Rationalization

Step 1 — Select the Target Domains

Step 2 — Create an Application Governance Team forEach Selected Domain

Step 3 — Assess Application Portfolios With Fitness andValue Reviews

Step 4 — Get Detailed Data on Application RunningCosts

Step 5 — Identify Opportunities for Cost Savings

Step 6 — Set Targets, Measure Results and CelebrateSuccess

Step 7 — Initiate Application Migration or ConsolidationProjects

Step 8 — Decommission Applications

Be Prepared for the Long Haul and Ready to Invest

Case Study

Gartner Recommended Reading

Tables

Table 1. Average Split Between Application SupportActivities

Figures

Figure 1. Gartner IT Cost Optimization Framework

Figure 2. The "Piling On" Effect of Projects on FutureOperational Expenses

Figure 3. Composition of an Application GovernanceTeam

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Introduction

IT Cost OptimizationGartner defines IT cost optimization (often known as ITCO) as "a discipline that includes the practices,capabilities and behaviors of reducing spending, reducing costs, managing service levels and showing thebusiness value of IT."

It is not just a "oneoff" costcutting round, it is an ongoing activity, implemented in the organization withproper governance and controls. It focuses on optimizing IT spending to provide the highest return andvalue for the business (see "IT Cost Optimization Should Be an Ongoing Discipline" ).

The Gartner IT cost optimization framework defines four levels (as seen in Figure 1):

Level 1 — IT Procurement: Identify opportunities to reduce spend within existing vendor contractsand servicedelivery models.

Level 2 — Cost Savings Within IT: Evaluate changes to service delivery across major domainslooking for consolidation, streamlining, or selective outsourcing opportunities.

Level 3 — Joint Business and IT Cost Savings: Seek out opportunities to eliminate/reduceapplication footprint (and with it, the infrastructure supporting these applications) while also evaluatingunderperforming projects in flight.

Level 4 — Enable Innovation and Business Restructuring: Reimagine business service deliverywith technology (by improving customer experience, or introducing new payment models, forexample).

These four levels illustrate how cost optimization evolves from an internal focus on IT performance, to afocus on optimizing IT's contributions to business success (see Figure 1).

The levels cover cost cutting (Levels 1 and 2), cost optimization (Levels 1, 2 and 3) and increasingbusiness value of IT (Levels 3 and 4). Each higher level requires more effort but yields greater results.Level 1 and Level 2 initiatives are IT driven by and fully within the scope of the IT department. Level 3 andLevel 4 initiatives, however, will impact the business and require a joint approach between the IT andbusiness units.

Figure 1. Gartner IT Cost Optimization Framework

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SOURCE: GARTNER (JULY 2015)

The need to control IT costs and optimize IT investments remains unchanged. In recent past, many ITorganizations optimized costs by focusing on lowering the costs of line items, IT components and services(Level 1), and moving to different delivery models including outsourcing and cloud (Level 2). At somepoint, the cost optimization opportunities in Level 1 and Level 2 will be exhausted. IT leaders will need tolook for other areas to reduce cost and will start looking at the initiatives in Level 3 containing jointbusiness and IT cost savings.

Application Support CostsThe cost of application support is typically the next step once IT infrastructure, software platforms and ITservices have been optimized. The application portfolio can represent a large part of a company's IT



budget and presents a major opportunity for cost savings by lowering redundancy, diversity andcomplexity. In many organizations, the cost of application support has been growing and growing silently.As IT projects deliver new capabilities, incremental maintenance and support loads are created, typicallyadding as much as 10% to 25% to the total project budget. These incremental operational expenses areincreasing the base costs of application support year over year (see Figure 2). Because mostorganizations do not actively optimize or rationalize these costs, this represents a major opportunity forsavings (see "Application Leaders: Stop Eating Profits and Capital With Unnecessary OperationalExpenses" ).

Figure 2. The "Piling On" Effect of Projects on Future Operational Expenses

Ops = operations


Gartner's IT Key Metrics Data (see "How to Manage the IT Budget Wisely Through Cost and ValueOptimization" ) illustrates the opportunity for reductions in application support costs. Annual IT applicationdevelopment and support investment is roughly 34% of total IT spending, and 51% of that investment is fornew development projects. The remaining 49% is for maintenance of existing systems. These figures areaverages across every size of business and every industry sector, but they do illustrate that applicationsupport costs account for a big portion of the IT budget.

Gartner's IT Key Metrics Data also shows big difference among organizations in the effectiveness of thisspend: a 44% difference in application support costs per function point between average and lowest cost,with the average being $62 per function point in 2014 and the middle quartiles ranging from $38 to $84





(see "IT Key Metrics Data 2015: Key Applications Measures: Application Support: Current Year" ).

Based on the data our clients reported in the Key Metrics Data, the average split between applicationsupport activities is shown in Table 1.

Table 1. Average Split Between Application Support Activities

Activity Percentage

Bug fixes 20%

Minor enhancements 20%

Business/operations support 40%

Technical upgrades 15%

Other 5%


Application rationalization is a key best practice to drive longterm cost optimization in application support(see "Best Practices to Drive Cost and Value Optimization in Application Support" ).

The goal of application rationalization is to reduce the cost and complexity of the existing applicationportfolio by either:

Decommissioning redundant applications

Consolidating applications that support similar business capabilities

Modernizing applications that are based on aging technology

Simplifying applications by removing complex customizations

Application rationalization provides a major opportunity for IT leaders that are looking at their currentapplication portfolio as the next frontier to continue their cost optimization programs. It may also spawnpotential savings further down the infrastructure stack as decommissioning an application can also lead tothe retirement of servers, storage, databases, middleware and — most significantly — the people requiredto operate them. However, application rationalization is an initiative that resides on Level 3 of the IT costoptimization framework. It is a joint business and IT initiative and requires a different approach, involvingdifferent stakeholders and a longterm focus.





Analysis

Obey the Key Rule for Success in Application RationalizationBecause changes in the application portfolio must be led by a business initiative to change, standardize orsimplify the business processes, application rationalization is often wrongly considered to be an ITresponsibility. Application decommissioning, consolidation and modernization all seem to be technicalactivities. Why then is application rationalization a Level 3 IT cost optimization initiative (with joint businessand IT cost savings)? The structural problem is the close relationship between business processes,information needs and applications.

Gartner has defined the first law of application rationalization as "you have exactly the right number ofapplications today to run the business the way that you run the business today." The corollary of this law isthis: If you remove an application from the live portfolio, you must somehow be changing how the businessworks. These changes could impact process workflow, roles or responsibilities. Therefore, applicationrationalization starts with process standardization and simplification, allowing equivalent changes to theapplication portfolio.

In most cases, we need process standardization and simplification to make the business case forapplication rationalization. The potential IT cost savings are not enough to offset the required investments,or at best they have a fairly long payback time (between four and six years). The additional business costsavings and revenue opportunities due to changed processes are essential for a positive business case.

Another consequence of this law is that an ITled application rationalization program is almost certainlydoomed to fail as the IT organization does not have the authority to drive meaningful change in a businessprocess. An application rationalization program must be led and owned by the business (see "InApplication Rationalization, the Number of Applications Is Irrelevant" ).

Reorganize, Refocus and Involve All Application StakeholdersMany IT cost optimization programs will start with the Level 1 and Level 2 activities shown in Figure 1.They can run for years before major opportunities on these two lower levels are exhausted, andincremental cost reduction is slowing down. Level 1 and Level 2 initiatives can generally be executed withinthe authority of the IT leaders with very little pushback from business managers since they see littlechange in how they work.

When an IT cost optimization program moves up to Level 3 activities (as is the case with applicationrationalization), it moves into the business organization. It will also involve and impact business processes,users, managers and other objects. Therefore, the authority and the governance of the program mustchange to cover the business organization as well. IT leaders must reorganize the IT cost optimizationprogram to include the additional stakeholders and refocus the program to look at opportunities from acombined business and IT perspective. This is especially the case with application rationalization as theseimprovements must be led and owned by the business.

An application has no "single owner." Instead it has multiple stakeholders with different interests and valueperceptions. Application governance teams can be used to engage all stakeholders. An applicationgovernance team is a virtual team (that is, not a line function) that brings together groups of stakeholderson a regular basis to monitor ongoing projects, evaluate applications, discuss improvements and considerfuture options.

It is not practical for each application to have its own governance team. In most cases, multipleapplications support a single business capability — include overlapping and duplicate applications — and




should be managed as a "cluster" of applications by one governance team. Structure the applicationclusters around business capabilities that have a common set of demandside stakeholders.

The three primary stakeholder communities (as shown in Figure 2) that must engage in the governanceprocess are:

Demandside stakeholders representing the business: These are the people who consume theservices delivered by the applications (the users). The demandside group should be led by thebusiness managers responsible for the capabilities that are automated and managed by theapplication. A key success factor for application rationalization is to assign a business process owner(or "czar") that has a mandate to drive business process standardization and simplification for thebusiness area.

Supplyside stakeholders representing the IT organization: These are the people who deliver theapplications. They include infrastructure and operations, application development, support andmaintenance, and project and vendor managers.

Enterprise architecture and project management office (PMO): Enterprise architects reflect theenterprise's strategic direction. The PMO informs stakeholders about the status of ongoing projectsand discusses future projects and timelines.

Figure 3. Composition of an Application Governance Team




In order to form an effective working team, it is necessary to identify a chairperson for the governanceteam. This person is responsible for bringing the stakeholders together and owns responsibility for thegovernance process and can, therefore, be considered the effective application owner (see "A Primer onApplication Ownership" ).

Application leaders that are asked to contribute to the IT cost optimization program by rationalizing theapplication portfolio must ensure that all stakeholders are engaged, and that governance is in place beforeproceeding.

The Eight Steps to Application RationalizationThe following steps will ready the IT cost optimization initiative and create the required ecosystem for asuccessful application rationalization.

Step 1 — Select the Target DomainsApplication rationalization requires considerable effort and attention. It is important to focus that attentionon those domains in the application portfolio that provide the biggest opportunity for rationalization. Selecta domain that consumes a considerable part of the application support budget, suffers from high



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application complexity, has duplication or overlaps, or has the highest chance to benefit from processstandardization or simplification.

Most organizations will find these opportunities in business capabilities for common — nondifferentiating —business functions that suffer from redundant or overlapping business processes across the organization(see "When Application Standardization Works, and When It Doesn't" ).

Step 2 — Create an Application Governance Team for Each Selected DomainApplication rationalization requires strong business engagement, business leadership and governance.Create application governance teams containing representation from the three stakeholder groups with asingle chairperson (see section above and "A Primer on Application Ownership" for more details).

Step 3 — Assess Application Portfolios With Fitness and Value ReviewsAn application fitness and value review examines the business, operational and technical robustness ofeach application to determine how well it supports the current mission, business process and technicalrequirements. The deliverable is a "degree of fitness" or "state of health" rating for the application.

The application's fitness information can be amended with information on the fitness of the businessprocesses it supports, and can include metrics for complexity, overlap and duplication.

A combination of data on application fitness and business process fitness will provide important input foridentification of opportunities for application rationalization (see "How to Assess Your Current ApplicationsUsing Fitness and Value Review Processes" and "Toolkit: Application Fitness and Value Review" ).

Step 4 — Get Detailed Data on Application Running CostsOne of the main barriers to effective cost optimization is poor transparency when it comes to total cost ofownership (TCO). This certainly applies to application rationalization. Many organizations struggle toprovide clear accounting for the TCO on a perapplication basis, especially for application support costs. ITshould be able to map its actual spending to application towers and to the appropriate business areas sothat the business stakeholders can understand the costs IT has incurred on their behalf. This informationis vital for engaging the business stakeholders, creating a sense of budget ownership, and motivatingbusiness decisions that optimize application spending. This information will also allow discussions withinthe governance team to identify opportunities and define target results (see "Improve BusinessStakeholder Engagement With an Executive Application Dashboard" ).

Most IT organizations track and manage IT expenses using easily identifiable categories, such as people,hardware, software and outside services. These categories cannot easily be linked to a business context.Instead, IT expense costs should be distributed and the costs associated with a particular applicationtracked and aggregated. What makes this task complex in IT is that many IT resources are shared amongmultiple applications (see "Run IT as a Business Using Six Pillars of EffectiveIT Financial Transparency"and "Business Application Chargeback 101" for more information on how toprovide transparency in application support costs).

Step 5 — Identify Opportunities for Cost SavingsThe application governance team reviews the information on application fitness, process fitness and TCO.Evaluation of the aggregated information will uncover opportunities for application rationalization and driveapplication support cost savings. They will have to look at the collected information from both anapplication perspective and a business process perspective. Ideal opportunities are applications with ahigh operational expense, a low application fitness and/or supporting low fitness business processes.










Gartner provides an approach that uses the fitness and value review information to assess and categorizeapplications. Applications are placed into the categories Tolerate, Invest, Migrate and Eliminate (TIME).See also "Application Portfolio Triage: TIME for APM."

In addition, the process fitness information can be used to identify opportunities for processstandardization or simplification, which can then lead to application consolidation and simplification.See"When Application Standardization Works, and When It Doesn't" for good reasons to standardizeapplications.

The application governance team will select opportunities for further investigation and subsequently createproposals for rationalization. There may be several opportunities and proposals, each competing forbudget and time. The "prospectus approach" can be used to select the best investment opportunities. Thisapproach is based on using option generation and evaluation to understand the potential alternativesolutions from the perspective of costs, benefits, risks and dependencies. It involves a series of rapiditerations that continuously refine and narrow the available options in moving toward a selection. One ofthe choices that is created must be a "do nothing" option to make clear what the costs and risks are whenthe application portfolio and business processes are left as is. See also "Use the Application ProspectusProcess to Revitalize IT Investment Management" and "Capability Assessment Tool for"Restructuring Your Application Portfolio."

Step 6 — Set Targets, Measure Results and Celebrate SuccessTargets must be set for each initiative and should be measured to monitor progress and success. The goalof an application rationalization initiative is to reduce the cost and complexity of the existing applicationportfolio. Reduction of complexity will have an indirect effect on application support costs.

Targets should be set for IT cost reduction. However, the target should not be set as a simple direct costreduction. This tells us little about the effectiveness of the initiative. The measure of progress should bethe extent to which the initiative is keeping the actual operational cost line trending beneath the previouslypredicted operational cost projection (as defined in Step 4). In other words, the target should be setagainst the operational costs in a scenario where you had done nothing.

Depending on the business case, targets can also be set for business cost savings and revenueopportunities due to changed business processes.

Progress and results must be measured and reported throughout the execution of the initiative. Celebrateand communicate success with all stakeholders and other governance teams. Success will create newopportunities in other business areas.

Step 7 — Initiate Application Migration or Consolidation ProjectsAfter selecting the best rationalization opportunity, the implementation project must be planned, fundedand started. Application rationalization is a businessled project that concurrently improves businessprocesses and the efficiency of the application portfolio. It is vital that project ownership and governancefully supports that dual nature.

Typical examples are:

Standardized business processes leading to consolidating applications

Simplified business processes leading to the removal of complex customizations

High risk or high application support costs leading to modernization of applications







Revisit Step 2 to ensure that application governance teams stay committed throughout the journey aschampions of the initiatives.

Step 8 — Decommission ApplicationsApplication rationalization activities like consolidation, migration and modernization will lead to redundantapplications. These applications must be decommissioned to lower the cost and complexity of anapplication portfolio. This is the hardest task in application rationalization.

Gartner strongly advises that you separate the project that will replace the application from the project thatdecommissions the application. Decommissioning is a specialist task that includes the actual final removalof all traces of the old application and handling the data retention following central policies and processes.

More importantly, taking decommissioning on as a separate project will drastically improve the chancesthat the decommissioning (and subsequent cost savings and complexity reduction) will actually happen.The traditional approach to decommissioning — where the project delivering the replacement application isalso responsible for decommissioning the old application — has rarely been effective because projectfocus and resources have always been overwhelmingly biased toward the replacement system(see"Decommissioning Applications: The Emerging Role of the Application Undertaker" ).

Be Prepared for the Long Haul and Ready to InvestThere are no quick wins in application rationalization. Real results will take time, effort and investment.

First, it takes considerable effort to make the required changes to the business processes and to theapplication portfolio. Careful planning is required with multiple stakeholders while allowing the business tocontinue to work and minimizing impact on the existing IT project portfolio. The planning and execution ofa rationalization initiative often takes one or more years to achieve its objectives.

Secondly, changing business processes and application portfolios require effort and upfront investment.Projects that are executed purely as part of an application rationalization program must have a budget.Ideally, an organization can use its existing IT project portfolio to drive application rationalization. In thiscase, regular projects will be used as opportunities to standardize or simplify business processes, but thiswill require additional budget as well.

In summary, be prepared for the long haul. Achieving real measurable results from an applicationrationalization program requires a multiyear perspective and upfront investment.

Case StudyIn 2012, BT Innovate & Design decided that, from a starting point of 2,500 applications, it would reduce theapplication portfolio by 10% per year over three years (see "BT Innovate and Design Simplifies itsApplication Strategy to Boost Agility and Innovation" ). Ashish Gupta, president global services portfolioand service design said: "This is easy to talk about, but quite difficult to implement structurally. A greatmany soft skills are needed when engaging your business partners and convincing them that you have anapproach and a strategy that will get them to a better place."

Gartner Recommended ReadingSome documents may not be available as part of your current Gartner subscription.

"IT Cost Optimization Should Be an Ongoing Discipline"






"Application Leaders: Stop Eating Profits and Capital With Unnecessary Operational Expenses"

"Best Practices to Drive Cost and Value Optimization in Application Support"

"In Application Rationalization, the Number of Applications Is Irrelevant"

"A Primer on Application Ownership"

"Run IT as a Business Using Six Pillars of Effective IT Financial Transparency"

"Business Application Chargeback 101"

"Application Portfolio Triage: TIME for APM"

"Decommissioning Applications: The Emerging Role of the Application Undertaker"









Documents

Gartner - Eight Steps to Application Rationalization