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A new framework helps companies assess the true cost of legacy applications.
Connie Winkler, CFO Magazine
January 1, 2006
For the past several years IT departments the world over have been tightening their belts. But before you can rein in costs, you must gain control over them, and that can be difficult.
Enter consultants from Cambridge, Massachusetts-based Sapient Corp., who have developed what they call the Application Investment Management (AIM) framework. Its goal is to help companies abandon the machete in favor of the scalpel, trimming IT costs wisely based on business needs and key metrics.
Recently, Sapient teamed up with the Kellogg School of Management at Northwestern University to review the framework with organizations. "In really complicated environments, the fundamental question for executives is, 'How do I rationalize IT? How do I make the best investments?'" says Mark Jeffery of the Kellogg School. "AIM is about how to rationalize the run-the-business portion of the IT portfolio, to make sure you get the most bang for your buck." Jeffery, who is associate professor of technology at Kellogg's Center for Research on Technology and Innovation, equates the process with portfolio management, a hot topic in IT these days. But there is one critical difference: portfolio management generally evaluates future investments, which account for about one-quarter of most IT budgets. The AIM framework targets existing applications, which not only consume the lion's share of the cash but also are often so embedded within a company that calculating the costs and maintenance effort needed to keep them running is nearly impossible.
AIM is best suited for large, complex, global organizations that spend tens of millions of dollars (or more) on IT; have gone through a fair amount of mergers and acquisitions; or rely on dozens of enterprise resource planning, human-resource, or E-mail systems. Such organizations usually have several dozen, hundreds, or even thousands of applications and complex business processes that span many product lines and geographies. Collectively, all that technology amounts to what Sheldon Monteiro, vice president of the Business & IT Planning Center of Excellence at Sapient, calls an "ominous black box." CFOs and CIOs, he says, "throw up their hands and say, 'I can't manage this, so I'm just going to use some very blunt tools.'" Out comes the machete, with no consideration for the impact on existing business or future strategy.
In essence, AIM tries to crack open that black box by first relating (or mapping) business processes, such as sales forecasting, to the specific IT application or applications that support it. A variety of metrics are used to define the business value of applications (transactions per second, inventory turns, or soft measures such as customer satisfaction). These are then mapped to the total cost of the application, everything from the salaries and benefits of IT staff to software licenses to hardware-lease payments to real estate (see "Mapping Costs to Results" at the end of this article).
By connecting the dots between costs and business value, companies can uncover high-performing applications, phase out resource hogs, and optimize future spending. Even a quick pass can shine light on redundant systems and reveal ways to improve operations. One finance firm, for example, had 10 different loan-origination applications in various business units, but by comparing them on two key transactional and operational metrics, the firm was able to flag the winners and abandon the others.
Something to Talk About
Other potential benefits of AIM include the ability to spot well-performing applications that can be scaled to other parts of the organization; identify processes that can be outsourced; and give CFOs and CIOs a common platform for discussing IT systems and investments.
That common language may be the biggest benefit of the framework. "The IT department can't do this alone," Monteiro says. "They will have to collaborate with the business to understand the linkages between business processes and IT."
"When things get very technical, it is often hard for financial people to really understand what's important, what's nice to have, and — frankly — what we don't need," says Bob Jackson, CFO at American Century Investments in Kansas City, Missouri, and a former Sapient customer. The AIM framework enables a company to understand why it is doing certain things and to value those things appropriately, Jackson explains. After all, he says, how can you push to have certain applications dropped when you don't really know which ones matter most?
There is little doubt that a stronger finance-IT partnership pays off. At Norcross, Georgia-based Rock-Tenn Co., a manufacturer of packaging and merchandising-display products, the accounts-payable department recently asked for a number of changes to a financial system. The company's IT department priced the work at $250,000. But when finance and IT worked together to more clearly define the costs and benefits of the project, the ultimate solution cost only $50,000. Rock-Tenn CFO Steve Voorhees compares the big-picture view that the AIM framework encourages to the company's Six Sigma quality initiative, in that both rely on a cross-functional project team to guide the company toward consistent improvement.
The AIM framework is a proprietary approach developed by Sapient. The tools and consulting help offered around it can spare companies much of the grunt work involved in parsing the many costs that go into an application and assessing its ultimate value. Creating the process map or "system context diagram" that links applications to processes, for example, is quite complicated. Companies have used alternative methods to address the same issues — British Telecommunications Plc, for example, had used activity-based costing when it learned about the AIM framework from Jeffery at Northwestern. Martin Bevan, BT's financial controller for IT, says one lesson his company learned is that it's very easy for a business case and its associated technology project to become disassociated.
"You may get a five-year business case that budgets $3 million to develop an application, and maybe a fraction of that to maintain it year after year," he says. "But you will likely have to replace the hardware, upgrade the operating system, or make other changes that increase that maintenance amount substantially." By that time, he explains, the system is ensconced, but its business value be-comes more dubious day by day.
"People tend to focus on the front end of projects. But even if, over time, you reduce an application's use by 90 percent, eliminating that last 10 percent is a grind. And you still need 100 percent of a box to run it." A proper framework can uncover such issues and help companies decide when to put an application out to pasture.
Connie Winkler is a Seattle-based writer who covers technology management.