How does an enterprise move IT money from support and maintenance, which can devour up to 80 percent of its IT budget, to innovation?
HP has found a way. “We’ve developed a different way to look at the applications in a corporation’s portfolio. The goal is to align the applications to the business’s overall strategy so it can maintain its needed applications and still have funds for innovation,” explains Rajesh Radhakrishnan, Vice President, Applications and Portfolio Engineering, HP Enterprise Services.
The HP methodology helps the CIO and the CFO work together, “even though they view IT differently,” the HP executive explains. The CFO typically believes IT is a cost center that it must control. Radhakrishnan says the HP view allows everyone to see and understand how each application aligns to the business.
The business problem
Radhakrishnan reports up to 80 percent of many corporations’ IT budgets go to supporting IT activities. He explains that an application’s value changes over time, which could “hamper its ability to stay aligned with the business,” he says. In addition, enhancements to meet new business requirements often increase the complexity of a client’s applications. The result ultimately is the IT staff devotes more and more time to maintaining the application as the years go by.
This becomes a severe challenge during economies like the current one when the CFO says, “Cut your budget.” The HP executive says this forces the CIO to play defense by slashing the only funds he or she has available: those slotted for innovation.
Radhakrishnan believes that is not an optimal IT outcome for the business. “Coming out of this recession, companies need to innovate. If they don’t, their competition will race ahead of them,” he says.
Another challenge: How do you know where to cut? Radhakrishnan says it was not uncommon in 2008 for a CFO to tell a CIO to cut the IT budget 10 percent in 90 days. “The only way you can effectively do that is to have a real knowledge of what applications are important to the business,” he says.
Not all applications are born equal
HP arrives with a proprietary model to help companies objectively restructure their IT portfolios up front and ongoing. The goal is to reduce the maintenance spend to free up dollars for innovation. The HP executive points out this is not a “one and done” alignment. “Continuous alignment and dynamic portfolio management are our biggest differentiator,” he says.
The HP approach evaluates every application to determine its value to the company by giving it an Applications Value Ratio score. (HP developed this ratio based on its nearly 50 years’ experience managing applications with input and validation from Forrester.) “This assessment helps companies identify where they are spending more on an application than they are receiving business benefit. Not all applications are born equal,” says Radhakrishnan.
For example, one application can be high cost but also provide high value. Others can be high cost but low value. For these applications, HP helps the company improve the economic value of the “applications whose costs are out of whack.”
But how do companies know which is which?
HP Applications Value Ratio: determining an application’s value-to-cost ratio
Determining an application’s value. HP calculates this number taking into account four factors:
- Does the application provide a competitive advantage?
- Is the application business critical?
- What is its revenue impact?
- Does it have customer visibility?
Determining an application’s cost. Radhakrishnan says two aspects ultimately determine an application’s cost: its complexity and its levels of service.
Complexity, for example, drives up costs for legacy applications if the engineers who developed them have left the company and little documentation exists. In contrast, modernization can take complexity out of an application.
Complexity considerations include:
- Is the application written in a legacy language?
- Is it critical to the business?
- How many interfaces are there?
- Is the application stable or volatile?
Levels of service can increase costs if they are at the highest levels. The HP executive says one of the easiest ways to cut costs is to reduce the service level agreement (SLA). “Changing the SLA saves money quickly and simply,” he says. At the same time, HP ensures these decisions allow the client to meet its business needs at the lower level. “Right sizing or re-calibrating investments is the key,” he says.
Answers to those questions go into a computer model to determine the Applications Value Ratio. HP does this analysis during the contract negotiation phase.
Radhakrishnan says the program can reduce maintenance costs by up to 60 percent. “If companies agree to lower the SLA and modernize their applications, we will commit to a lower price,” he says.
The resulting Applications Value Ratio makes the business contribution of an application more transparent,” Radhakrishnan explains. HP creates an online portfolio scorecard after it creates cost/value numbers for each application.
The service provider can assess a client’s entire application portfolio as well as a subset of applications. This can be valuable “because one business unit may have to cut costs while another needs to grow,” explains the HP executive.
How 7-Eleven benefitted
Radhakrishnan reports HP launched this solution in 2007 and has deployed it successfully to multiple clients in various industries. One is 7-Eleven. HP currently is supporting about 175 applications for the retailer.
The convenience store company had a hybrid support model, according to Chris Alexander, Senior IT Manager, Customer Care & Operations. 7-Eleven’s internal staff supported some applications while a third party took care of the remainder. “We decided to outsource and consolidate under one service provider,” he explains. In addition, the IT department wanted to “relinquish the overhead relating to resource management so we could focus on more strategic initiatives like continuous improvement,” Alexander continues.
The senior IT manager adds 7-Eleven did not have a clear idea of the total cost of ownership of each application, which hindered his department in planning and budgeting. “It was difficult to plan a project without being able to project the true cost,” he says. Finally, it was tough to convey the true cost of an application to its users.
Alexander says there were quite a few surprises after each application got its value-to-cost score. “We discovered we had deemed some applications enterprise critical that really didn’t need as much operational support as we thought. We were getting unnecessary monitoring that wasn’t worth paying for. And there were some applications we thought were a luxury that turned out to be much more valuable,” he reports.
The biggest surprise: the convenience store operator discovered applications it didn’t even know existed. “That was an eye-opener,” Alexander says.
This knowledge allowed 7-Eleven to “readjust our prioritization of support.” The IT department chose to support some applications at different levels. The changes “did not affect the business operations in any way,” he adds.
The end result: the retailer achieved a 25 percent cost reduction, according to Alexander.
Many customers report they cut their maintenance ratios up to 50 to 60 percent of their IT budget, says Radhakrishnan. “Now they have time and money to focus on innovation and growth. That’s exciting.”