Application Portfolio Alignment as a Demand Management Strategy

“IT spending is going through the roof,” grumbles the CFO.

“But we’ve reduced costs,” counters the CIO.

They’re both right.

CIO View

CEO View

Increase

*Findings based on Compass analyses of IT operations of several hundred global organizations.

As the table illustrates, Compass data for the past six years indicate burgeoning demand for IT and growth of overall IT spend, coupled with an equally dramatic decline in IT unit costs. These trends reflect consistent and meaningful improvements in hardware costs, personnel productivity, acquisition practices, development productivity, and other factors.

But what do these trends reveal about how well the use of IT has been managed? On the one hand, CIOs can say they have greatly enhanced the efficiency of IT services, and the trend data for unit costs support that assertion. The CIOs rightly claim they are providing IT functionality at ever-lower unit costs and can do nothing about the continually increasing volumes generated by the users. The problem is, CEOs and senior management tend not to think in terms of unit costs. Senior executives see the increase in overall IT spending, but they do not dwell on the cause of the increase. What’s worse, they don’t see a corresponding benefit to the business resulting from that increased investment.

Cost and Usage Drivers

The introduction of more and more applications to support new product lines or services has obviously driven IT spending and volume growth. These applications tend to be functionally rich, which further increases infrastructure utilization. The increase in traffic and functionality has in turn fueled investment and innovation, helping to drive down unit costs and enhance efficiency.

On the management side, one of the key factors behind the growth of IT use has been the lack of any constraints to prevent that growth – IT is used simply because it’s there. The consumers of IT (business units) have not been held accountable for managing demand, and few if any mechanisms are in place to effectively define IT investment priorities. The result is a proliferation of supposedly strategic initiatives at odds with each other – such as, for example, a bank that suddenly discovers that it has a score of competing e-commerce initiatives.

Demand Management Strategies

Increased cost efficiency and growing IT volumes have clearly not produced a corresponding boost in business productivity. In fact, it could be argued that unconstrained growth of IT usage – without proven commensurate value to the business – reflects fundamental flaws in organizational structures and executive approaches to managing IT spend and development.

Many business executives today are recognizing this disconnect and taking steps to fill the gap in IT management oversight. Specifically, the skyrocketing use of IT resources is shifting management focus away from traditional cost reduction efforts toward strategies aimed at controlling IT demand.

One increasingly popular approach to controlling the growth of IT demand is the Application Portfolio Alignment approach, which allows management to define investment priorities through a quick assessment and categorization of software applications, as described below:

• High Strategic Value, Low Operational Impact: Examples could be data warehousing applications such as customer marketing databases. Introducing innovation to these applications is highly attractive, given the significant potential impact and low cost of failure. Such applications typically have relatively few users, but all are engaged in thinking about business strategy and future change. Investment here is therefore likely to pay off quickly, with specific recommendations for innovation that produce a measurable impact on the bottom line.
• High Strategic Value, High Operational Impact: These “mission critical” applications could include the billing functions of a mobile phone operator, a bank’s ATM network, or the check-in applications of an airline. They likely have the highest profile of any in the organization, and as such innovation can be highly rewarding. However, uncontrolled innovation in these areas is usually risky – airlines don’t try uploading flight control software patches in mid-flight, and a credit card company carries out a lengthy test procedure before upgrading key parts of its payment approval system. The cost of innovation will therefore be that much higher – with more examination of risk, and more questioning of innovation benefits.
• Low Strategic Value, High Operational Impact: Examples might be payroll, or even general ledger systems. Innovation in these applications will also be carefully scrutinized for risk, and the benefits are likely to be cost reduction rather than increased revenue. For many organizations, this application category is an ideal candidate for commodity software packages, so that the cost of keeping software both up to date and reliable can be amortized across the installed base of the software vendor.
• Low Strategic Value, Low Operational Impact: These applications might be departmental databases set up for teams of five or fewer, or ancient applications which are still in operation but are no longer relied upon. They provide little value on either scale. Often the most innovative thing to do with these applications is to ditch them as soon as possible.

By defining the relative importance of each application in terms of strategic value and operational impact, attention can be focused on areas where it’s needed. Identifying unimportant applications, meanwhile, facilitates demand management, by making it possible to scrap many of those applications. A Portfolio Alignment exercise can allow the business to set priorities and outline plans for innovation. As such, Application Portfolio Alignment can be a key management tool to more effectively leverage the potential productivity benefits of IT, and to address the spiraling demand for IT resources which we’ve observed over the last decade.

Nigel Hughes is Group Service Leader for IS Strategy and Value of IT for Compass, a global management consulting firm specializing in business and IT performance improvement.