I’ve looked a lot at the constraints of the CIO and how to address these with some of the latest IT opportunities, both in terms of technology and process. While these opportunities exist, no one should drive forward without considering the balance of value against cost. I am neither an economist nor an accountant, but having worked in business applications for over 25 years I have observed that there are many points of view relating to this area. For example, Amazon Web Services has their cloud economics point of view for “Infra-as-a-Service,” supported by organizations such as by Apptio. In addition, analysts such as computereconomics.com have been looking at the concept of technical bankruptcy and how it can hold organizations back. While all these ideas make sense, they seem to be only part of the picture. Together with my collaborators, Paul Walton and Praveen Wickramaratne, we’ve developed what we believe to be a more complete picture, or at least a step in the right direction.

Application Economics.

Application economics addresses three key questions that focus on improving the delivery of value through business applications. These questions are at the heart of Capgemini’s ADMnext strategy of “Excel. Enhance. Innovate,” they are:

  1. How much does the application portfolio enable business improvement?

IT organizations are increasingly expected to be enablers of business growth rather than just stewards of cost control, resulting in a pressing need to ensure that IT spending, which on average is 3% of revenue, drives business value and financial performance rather than simply “keeping the lights on.” This requires a raft of new capabilities such as delivery at pace, increased automation, and applied innovation. These need KPIs based on responsiveness and effectiveness as well as productivity and compliance.

  1. Is the application portfolio aligned with business strategy?

The IT service portfolio is a catalogue of services that are typically easy to cost but challenging to align to business services and strategy. This needs business KPIs, a value management model, and an effective chargeback model. With this alignment, measuring portfolio cost and waste becomes easier.

  1. Is delivery efficient and reliable?

This is typically the starting point for any assessment of an IT service. Input metrics calculate the cost of delivery, with agreed service levels used to calibratre reliability and customer feedback in order to measure user experience. Multiple views are frequently required to effectively communicate and manage IT spending.

With these three questions at the fore, the next question is how to view the value of an application and its position within a portfolio. There are two ways of looking at this:

  1. A return on investment view

Approaching applications as assets is a frequently used approach and the concept works reasonably well. Many applications are capitalized on implementation and so the concept of value does exist even if it is intangible.

  1. A profit and loss view

An alternative approach is to define a P&L for each application. The cost side of the ledger is again reasonably straight forward; it is the definition of value and how it is delivered that is the challenge.

In both views the concept of costs is easier to visualize, for example:

Tangible costs

Within a cost center report for the IT department there will be typical costs that can be easily extracted. These relate to:

  • Infrastructure

The cost of infrastructure is obvious for the cost of new services or depreciation of legacy systems, hitting the ledgers on a monthly basis. For major business critical applications, dedicated hardware is reasonably easy to cost. However, when shared infrastructure is used, further analysis is required. Many tools exist that can undertake this analysis, providing valuable information when looking to reduce infrastructure costs.

  • Legacy applications

The costs associated with legacy applications follow a similar logic to that of infrastructure. Granular costs can be clearer than with infrastructure due to a one-to-one relationship between applications and maintenance fees (typically). SaaS-based applications add complexity. This “grey” IT can frequently lead to hidden costs that only become visible after some form of discovery. “Grey” IT can also lead to other intangible costs as described below.

Intangible costs

Intangible costs relate to lost opportunities or increased organizational inertia that will frequently delay the delivery of benefits or dissociate the alignment of benefits to costs. For example:

  • Slow processes

Slow application development processes can increase time to benefit and reduce bandwidth for delivering value back to the business. Slow applications management processes can lead to the creation of external workarounds and low customer satisfaction. Moreover, slow processes in the business can have various negative impacts on a number of different functional KPIs. Clarity in defining these costs is often easier in business processes, whereas close consideration of the FTE impact in AD/AM processes can increase the tangibility of certain costs.

  • Input-based commercial models

Input-based commercial models can often be linked to overspending or misspending of IT budgets. Moving to output-based commercial models focused on business benefits, expected outcomes, process availability, and performance tie the spending of the IT budget to clear business value.

Value, benefit, or “revenue” can be more difficult to define but it is the articulation of these, in a form that can be agreed upon, that is likely to return the most clarity in managing a portfolio effectively. Some examples include:

–       Total cost of ownership (TCO) reduction—Driving down TCO should be a continuous improvement activity. A continuous approach to release value from the platform can be a key enabler for funding other forms of transformation. Examples of initiatives to support this include:

o  Infrastructure-as-a-Service Migration—On-premise infrastructure is a high-cost, inflexible way to provision servers. A migration of existing infrastructure, with implementation of a cloud brokerage approach for future requirements, can release significant value as well as increasing flexibility and agility of response. If done correctly, it can free up further funds through buy-back options from some vendors.

o  Applications rationalization and consolidation—All organizations have more applications than they need to undertake their activities. Once maximum value has been extracted from exploiting IaaS and SaaS, consolidating applications down to a tighter portfolio delivers the next level of value by reducing maintenance costs as well as the need for the underlying infrastructure.

–       Increasing process efficiency—Process inefficiency is a key inhibitor of value across three key areas. Using improved processes and automation, it can deliver significant advantage, for example:

o  IT Process Automation—ITPA is just one component of an automation suite to improve IT process efficiency. Automated monitoring, chatbots, and self-healing all deliver benefits and releaze additional value. Driving towards a “silent-running” approach to the support of applications ensures that resources, people, and money previously wasted in maintaining applications can be reinvested appropriately.

o  Agile/DevOps—Change at pace is now essential to align to the demands of the business and to deliver value through initiatives such as Big Data, Digital, IoT and Artificial Intelligence. These should be delivered using a “learn fast” approach where previously a waterfall implementation approach and separate projects and support teams was sufficient. Well-implemented agile and DevOps improve quality and efficiency as well as pace and support a “zero-defect” intent.

o  Business Process Automation (BPA)—Application landscapes have evolved with the corresponding business processes. Much of this evolution has created divergent islands of information and applications. Without replatforming the whole organization, BPA can be used to provide an abstraction layer across multiple applications and drive efficiency. As with other opportunities these savings can then be used to fund other more transformational activities.

–       Focusing on value creation—Traditionally, minimizing change also minimized risk, which meant that the application portfolio could be kept stable and available. But there is an increased demand for change so an increased focus on proactivity can add increased value, benefit or “revenue” into the picture. Examples include:

o  Process Improvement—Continuous service or process improvement has been a key requirement for many years, but with the increased prevalence of analytics, big data and now artificial intelligence with cognitive abilities, the ease of use and potential benefits are greater. An inside-out approach of process mining and monitoring is a proven way to identify areas of focus for improvement. In addition, data mining, text analytics, and applications monitoring can be used to analyze the incoming stream of problems users face to improve customer service or even fix problems before they occur.

o  Innovation as-a-Service—More and more an outside-in approach to improvement must be adopted with the inclusion of an innovation stream into any application strategy. Formalizing an externally focused innovation stream is essential to introducing value that might not be obvious from internal reflection.

An application economics lens on the application portfolio provides a more complete picture than traditional approaches. So, there are five key principles to consider in managing a portfolio:

  1. Applications must earn their right to be in the portfolio. This is not just at a point in time but they must make a positive ongoing impact.
  2. New applications should only enter the portfolio if they can make a positive overall improvement. The road to technical bankruptcy is littered with applications that didn’t provide an overall impact.
  3. Transformational efforts should continue to drive both cost reduction and value creation. Focus on one and not the other risks an increase in the technical debt and bankruptcy.
  4. As with the second principle, any project or change should only be approved if it can positively impact the overall portfolio.
  5. The portfolio as a whole should be considered, not just the individual applications in it, to ensure that the entire portfolio is optimized.

Finally, the overall direction is clear and application economics is the foundation for the roadmap. But, for each individual organization, the steps along the roadmap will be different. Without doubt, the first organization to “Excel. Enhance. Innovate” will be ahead of the competition.