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S LASH I NG COSTS WI TH APPL I CAT I ON PORT FOL I O OPT IMI ZAT I ON

THE C IO’ S GUIDE TO S I GNI F I CANT SAV INGS AND RAP ID MODERNI ZAT ION

WHY YOU NEED APPL I CAT ION PORTFOL IO OPT IMI ZAT ION

I N T RODU C T I ON

Too many IT organizations spend the vast majority—think 60–80%—of their budget on overhead and run costs, leaving only a sliver to invest in new features and innovative products that could drive more value to the overall business. From a cost optimization angle, application portfolio optimization (APO) is one of the most direct and effective ways to tackle the issue. APO refers to the process of moving a company’s existing technology applications toward more modern, flexible, and cost-effective solutions. It involves reviewing and aligning applications with business objectives, and ensuring that all of them provide necessary functionality at the lowest cost possi- ble, while still maintaining flexibility. Every application has an associated cost of ownership—think licenses, maintenance costs, staff time, related infrastructure— and technical debt piles on over the years. Consider: the average IT organization uses only half its apps on a daily basis; but even if unused, they still incur maintenance costs that increase over time and have a dramatic impact on overall IT spend—not to mention increased security risks.

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SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION I 2020 © WAVESTONE

WHY YOU N E E D A P P L I C AT I ON PORT FO L I O OPT I M I Z AT I ON

But when done successfully, APO will help an IT organization:

Achieve significant savings

/

/ Drive down future costs exponentially / Improve staff skills and capabilities / Increase productivity of tools and processes

In short, it has the power to enable substantial transformation within two or three years.

Client Story: How much can APO save?

One of the world’s largest tire manufacturers engaged Wavestone to optimize its application portfolio. The initial analysis revealed that upon implementation, a modernization effort would save between 4–7% of total IT spend, and reduce between 20–35% of application spend.

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THE BENEF I TS OF APO

/ Provides firms with increased control over IT spend, lowering overall costs

Cost control

/ Reduces breakages that lead to business risk and lost revenue

Risk mitigation

/ Eliminates exposure to functionality risks due to anti- quated technology that cannot be supported or re- placed in time

/ Simplifies IT application complexity, reducing support requirements by 15–20%

Reduced complexity

/ Identifies applications that are most aligned with business processes / Uses fewer databases, less software, better data, and higher enforcement standards / Increases transactional capacity and uptime, reduces volume of problem tickets, and lowers fix times

Efficiency

/ Defines strategies and time frames for replacing, upgrading, and integrating new technologies / Shifts resources from maintenance to more innovative development

Focused IT strategy

Unfortunately, APO is often considered a major transformation project that will simply cost too much for an already cash-strapped IT organization.

However, with the right assessment methods, sourcing strategies, and supplier partnerships, transformation can be achieved as part of “business as usual,” and completely transform a company’s bottom line.

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SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION I 2020 © WAVESTONE

PART I : HOW APO WORKS

APO is a multi-stage process that begins with a comprehensive analysis of each business application, followed by any required maintenance or development to achieve better alignment with the overall business. This includes refactoring or replacing outdated applications, though it could also mean maintaining status quo or retiring an application completely.

The objectives of APO are threefold:

1. To reduce overall technology costs through a reduction in applications, either by decommissioning or consolidating them 2. To understand a portfolio’s business value and effectiveness by carefully evaluating the portfolio’s user base, strategic fit, and associated infrastructure and operational costs 3. To achieve savings for each of the apps, employing strategies like replacement, decommissioning, and reinvestment In this way, IT leaders can make significant strides in cost savings and increase speed of operations, enabling the business to expand and grow.

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A FRAMEWORK FOR APO

Stage 1: Simplify

Stage 2: Modernize

Stage 3: Transform

/ Create inventory of IT applications

/ Determine renovation priorities

/ Lower IT operating costs and reinvest savings

/ Eliminate

/ Validate migration plans and roadmaps

redundancy

/ Increase asset utilization

/ Assess skill levels and retire or create replacement plans for apps lacking good skill-set support

/ Reprioritize service level agreements for strategic applications

/ Increase IT

responsiveness to business demands

Client Story: Five years, more than $60 million in savings

Wavestone analyzed the application portfolio of a top-ranked hospital in the US. Wavestone identified 1,470 unique applications and categorized the functions within 29 categories, targeting 10 for consolidation. Findings also revealed a total of 136 applications that should be retired. By pursuing APO, the client enjoyed projected cost savings between $7 million and $18 million annually. Additional consolidation opportunities saved the provider another $30–$70 million over five years of implementation— between $12 million and $29.5 million of that just from contract savings— ultimately adding up to at least $60 million in cost savings over five years.

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SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION I 2020 © WAVESTONE

WHAT DO E S AN OPT I M I Z E D A P P L I C AT I ON

APO lightens the heavy burden of technical debt because it moves applications from costly, outdated systems to cheaper, faster solutions such as cloud-based services. Moreover, transforming processes for application development and implementation has long- ranging benefits on IT’s agility and run costs.

PORT FO L I O LOOK L I K E ?

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2020 © WAVESTONE I SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION

WHAT DOES AN OPT IMI ZED APPL I CAT ION PORTFOL IO LOOK L IKE?

Area

Current challenge

Future opportunity

Group profile or persona-centric

Unique individuals

Data model

Self-service, omnichannel, and automated

Transactional and manual

Usability

Large mainframe footprint

Hybrid technologies

Platforms

Long release cycles (2–6 months or longer)

Continuous integration (in weeks)

Release times

Opportunistic integrations with packaged software

Cloud/XaaS-first strategy

Development philosophy

DevOps and value-add services

Incident management

Talent

Focused on “lights on”

Focused on value delivered

Cost

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SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION I 2020 © WAVESTONE

WHAT DO E S AN OPT I M I Z E D A P P L I C AT I ON

Outdated vs. Optimized Portfolios

In conclusion, an optimized portfolio favors applications that are able to drill down and provide one-on-one customer service for individual end-users. Applications will have omnichannel communication capabilities to enhance customer engagement across multiple interfaces. Automation will be used to speed up processes wherever possible; and software updates, fixes, and new integrations will be continuous, providing the bandwidth for IT staff to be proactive in adding value, rather than reactively fixing issues.

PORT FO L I O LOOK L I K E ?

Ultimately, an optimized application portfolio drives speed, cost efficiency, and has a greater impact on the business.

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HOW TO E VA L UAT E A P P L I C AT I ON S

Every application within a portfolio must be assessed for its business value, efficiency, and effectiveness based on these five criteria:

1

Strategic importance

2

Functionality

Data

3

4

Technology

Total cost of ownership

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SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION I 2020 © WAVESTONE

How does each application perform in these categories?

HOW TO E VA L UAT E A P P L I C AT I ON S

1. Strategic importance

2. Functionality

Revenue and revenue-growth support

/

Breadth and utility of current capability Adaptability to future business direction

/

Compliance and security risk

/

/

Business continuity risk

/

Availability

/

Strategic alignment with vendor

/

Usability

/

User base

/

Number of processes supported

/

Duplication

/

3. Data

4. Technology

Accuracy and quality

/

Scalability

/

Information security

/

Alignment with architectural standards

/

Recoverability

/

Internal skills availability

/

Integrity

/

External skills availability

/

Integration points

/

Source code quality and reliability

/

5. Total cost of ownership

Operations and support costs

/

Maintenance costs

/

Licensing costs

/

Training costs

/

Reporting costs

/

Interfacing costs

/

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2020 © WAVESTONE I SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION

HOW TO E VA L UAT E A P P L I C AT I ON S

Once the value of an app is understood, it becomes easier to decide what action to take on it. The two dimensions to consider when deciding on an action strategy are: 1. Business value 2. Technical obsolescence

Application Rationalization: What should you do with an application?

High

Reinvest in or replace the application,

Consider decommissioning

depending on the level of technical obsolescence

Re-evaluate and reposition the application,

Maintain application, fix if needed, and evolve to next phase

or phase out if not critical

High

Business Value

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SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION I 2020 © WAVESTONE

HOW TO E VA L UAT E A P P L I C AT I ON S

Once there is an understanding of the application ecosystem, and candidates for decommission are decided, an optimized portfolio can be produced by assigning the engineering team to perform one of four actions on every application that remains: remediate, revitalize, replatform, or replace. By tagging each app with one of these “four Rs,”, the process of modernization begins to resemble an iterative waterfall, with many things happening in parallel. There are rare instances when an IT organization should do nothing to an app, such as when the business is no longer strategic, and the goal is not to increase profits, but to maintain the status quo. However, based off this framework, a company can develop strategies to optimize its portfolio. For example, if an app is core to the business, but incredibly inefficient in its current form, it should be a priority to remediate or replace it with a better solution.

Client Story: Regaining competitive advantage

A Wavestone client, one of the largest retailers in North America, built a custom application to manage inventory. However, because all its competitors used packaged platforms, it put them at a competitive disadvantage since its custom-built software was more expensive and harder to maintain. By replacing this application, it alleviated the burden of future technical debt on one fell swoop—after all, a retailer should be in the business of providing a world-class omnichannel customer experience, not software development.

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2020 © WAVESTONE I SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION

HOW TO EVALUATE APPL I CAT IONS

HOW TO USE TECHNOLOGY ENABLERS Modernization enablers for the four Rs include a combination of API integrations, data lakes, creating containers with smaller footprints (instead of layering apps), DevOps, UI/UX improvements, micro-services, and the use of Agile processes and automation where applicable.

Here’s a quick summary of how to use them:

Utilize Agile principles to speed up application development, delivery, and time to market

Agile

Move application interfaces to web APIs such as REST and JSON. Integrate with API gateway projects to allow for improved data visibility to users

API integration

Use lightweight virtual environments to dynamically leverage IT infrastructure and improve performance

Containers

Improve performance and data quality by moving away from ETL processes to data lakes, and leverage real-time analytics to deliver insights

Data Lakes

Adopt continuous integration, automation, and delivery to optimize development and testing cycles, thereby reducing time to market

DevOps

Develop applications as a suite of small services, each communicating with lightweight mechanisms to improve data sharing and encourage loosely coupled components

Micro- services

Move away from mainframe “green screens” and design user interfaces to improve user experience and increase engagement and productivity

UI/UX redesign

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SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION I 2020 © WAVESTONE

PART I I : MODERNI ZE WHI LE MAINTAINING

Three critical sourcing strategies

Although it is unlikely any board of directors will hand out funding to modernize all at once, it is a myth that APO is a one-time transformation project that always requires millions of dollars in spend. APO can be achieved while maintaining “business as usual,” but one of the most critical factors is developing the right sourcing strategy. Success depends heavily on selecting the right suppliers and designing contracts with the right goals in mind.

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T HR E E C R I T I C A L S OUR C I NG S T R AT EG I E S

Three key points to remember:

1

Look beyond low costs

Chasing down the lowest prices when hiring doesn’t always yield the best value. When IT and procurement leaders are focused solely on driving down unit costs, they can lose out on skill and efficiency. A cheap developer may cost, say, $20 an hour, but you may need to hire more of them or pay for additional hours to get the desired result. In addition, hiring the cheapest labor with the lowest skill set could mean more hassle when it’s time to add new functionality. In the end, it may exceed the price of hiring one good developer from the get-go.

Evaluate potential vendors carefully

2

Every project that IT does should be self-funding. When it comes to sourcing, that means the savings achieved through transformation should offset the costs of engaging suppliers in the first place. To find the right partners, conduct extensive due diligence on all potential vendors. Establish evaluation criteria—consider everything from client references to business investments—and ask for their capabilities and thoughts around modernization. In addition, consider site visits, creating a competitive RFP environment, and perhaps even conducting a hackathon to get a true sense of how a vendor satisfies deliverables.

Ask yourself:

/ Can they think outside the box rather than just take orders? / Do they have the domain knowledge and expertise to deliver better solutions? / Do they have execution capability? / Can they anticipate future business needs? / Can they engage with relevant third parties and drive transformation for your organization?

The answer should be yes—to all the above.

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SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION I 2020 © WAVESTONE

T HR E E C R I T I C A L S OUR C I NG S T R AT EG I E S

Design outcomes-based contracts

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Unfortunately, outsourcing contracts are often focused on measuring transactions, rather than encouraging proactive, value-add results—but the latter is far more critical to successful modernization. For example, a traditional outsourcing contract dictates how many customer support issues should be fixed within a certain time period, and is structured based on volume of work completed, as measured by numbers of issues addressed and the speed of response to each. On the other hand, an outcomes-based contract doesn’t consider the number of issues, but rather, assumes it would be better if there were no issues at all. In this case, a supplier’s KPI would be preventing and reducing issues (i.e., cutting down issues by half), or solving problems on the first call, which has a more beneficial impact on the business. Pushing toward outcomes such as automating more processes, or reducing complexity of code without dictating how or how many hours it will take, is something suppliers also prefer. This way, they can innovate and leverage best practices of their own. In short, setting achievement-based KPIs in a contract increases efficiency and lowers sourcing costs. Designing outcomes-based contracts results in immediate cost savings, better alignment with business leaders, and enables the implementation of modernization as part of business as usual, rather than an expensive one-time transformation project.

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I MP L EME N TAT I ON AND B E YOND

After the sourcing strategy is set, an IT organization can move into the implementation phase, which should be centered around delivery and outcomes—ideally with an integrated, continuous feedback loop. This phase involves transition management, measurement and reporting, and governance. During APO implementation, there are additional opportunities to rethink the old ways of doing things. Focus on setting measures to improve productivity in app development, and nurture operating level agreements where multiple suppliers can win together. Make sure the suppliers who reduce the most technical debt are rewarded appropriately. To reduce transition risks, it may also be helpful to subcontract incumbents rather than transition them immediately. If restructuring is done right, with the right contracts in place, it will eliminate duplicative systems going forward and enable future cost savings that are off the charts. Ultimately, an optimized application portfolio means the number of suppliers will go down, while staff will become more responsive and skilled. The increased efficiency also results in additional funds left over to further modernize and innovate.

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SLASHING COSTS WITH APPLICATION PORTFOLIO OPTIMIZATION I 2020 © WAVESTONE

I MP L EME N TAT I ON AND B E YOND

Client Story: The impact of an outcomes-based contract

A leading healthcare provider engaged Wavestone to restructure and optimize its application portfolio. The client’s business units suffered from a fragmented sourcing approach. Poor alignment between supplier contracts and business needs further increased cost and complexity while limiting agility, quality, and overall value. Wavestone restructured the client’s operating model and partnerships to enable future savings with application rationalization. The result: 15% immediate cost savings over the base case by designing outcomes-based contracts and aligning contracts with actual business needs.

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WAVESTONE ’ S APPROACH

Wavestone US helps clients modernize their application portfolios, from rationalization and analysis to removing outdated, redundant items and defining the optimal environment going forward. We are experienced in advising companies on the best utilization of limited IT resources, and providing the greatest business impact at the lowest run cost. Learn more about how we can help you by visiting wavestone.us or giving us a call at (610) 854-2700 .

About Wavestone US

Wavestone US is the North American arm of global management and IT consulting firm Wavestone. We have supported the transformations of more than 200 Fortune 1000 companies across a wide range of industries, leveraging a strong peer-to-peer culture, offering a practitioner’s perspective on IT strategy, cost optimization, operational improvements, cybersecurity, and business management. It is our mission to help business and IT leaders successfully deliver their most critical transformations and achieve positive outcomes. We drive change for growth, lower cost, and risk, and create the trust that gives people the desire to act.

www.wavestone.com

In a world where knowing how to drive transformation is the key to success, Wavestone’s mission is to guide large companies and organizations in their most critical transformation projects, with the ambition of a positive outcome for all stakeholders. That’s what we call “ The Positive Way ”.

Wavestone brings together 3,000 employees across 8 countries. It is a leading independent player in the European consulting market. Wavestone is listed on Euronext Paris, and recognized as a Great Place To Work®.

2020 I © WAVESTONE

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