Cost optimization is not a one-and-done deal. It is a semi-regular practice for most companies and is usually driven by market and economic needs rather than internal controls. Reactive cost optimization may lead to immediate gains, but it can set the glide path toward future inefficiencies.
These inefficiencies often become the calcified remnants that are the most difficult to improve down the line. Some of the most well-run enterprises have inadvertently made this a habit by rationalizing applications in an annual or a bi-annual exercise based on a good return on investment. And, though this regular hygiene maintenance keeps the costs in line with the business, it looks over some hard-to-reach pockets of inefficiency.
One way to streamline the enterprise application footprint is to move from an episodic approach to a continuous approach. A few modern enterprises have an established cost optimization center of excellence (CoE) that helps keep them from straying from the business-optimal application footprint.
Rationalizing applications is a very effective means of optimizing costs in line with enterprise needs. According to the 2023 ISG Buyer Behavior Research Study, only 50% of enterprises fully manage half their applications footprint and technical debt; this means a total of 26% of their spend is in control, leaving lots of room for improvement. (See chart below). Despite their best efforts, many cost take-out, cost optimization and even continuous optimization processes fail to yield the expected benefits. This is due to the hidden cost of inertia.
Inertia in application rationalization keeps enterprises from realizing the full value (ROI) of their optimization initiatives.
Figure 1: Proportion of Cost Metrics Actively Managed
To get the cost benefits of application rationalization, you’ll need to allocate resources to it and accurately calculate the ROI. The true cost of unrationalized applications is not just the immediate cost of running them but the drag effect they have on the whole enterprise business-aligned-technology posture.
When we factor the cost of inertia – or the drag effect – against the projected cost of change, more areas of the enterprise technology footprint become visible for closer examination. Then a cost optimization initiative can take a more holistic approach; the enterprise architecture, security posture and customer experience emerge stronger after the exercise.
How to Make Application Rationalization Part of Cost Optimization
Application rationalization can be a key component of cost optimization. Because application lifecycles do not often line up with cost optimization exercises, many cost savings opportunities are punted down the road.
A less than ideal way to overcome this mismatch is to force applications to be rationalized when the optimization cycle kicks in. This approach costs more and reduces ROI because it culls some of the useful life of the application. This also disrupts application users and operators, which is the antithesis of business-aligned cost optimization.
A better approach is to interweave the application rationalization and cost optimization efforts to maximize the benefits from each. The regular cost optimization efforts or the dedicated CoE identify the application rationalization targets as part of the cycle. These are fed into the application lifecycle monitoring process and rationalization exercises. The business, application users and operators can then plan on any changes based on the application lifecycle rather than the externally imposed optimization angle.
The cost optimization CoE will benefit immensely from an automated mechanism that
- Discovers and refreshes the applications inventory
- Quantifies performance metrics
- Tracks the business value produced
- Recommends dispositions of the applications based on the above
Current state-of-the-art technology can reduce the effort required, improve the quality of findings and make it cost-effective to do repeatedly. Tooling in this area is still evolving.
Addressing Enterprise Technical Debt
Technical debt is a catchphrase that people use to describe tradeoffs application owners make in favor of short-term benefit over long-term value realization. This debt could be accrued in categories like architecture, development, documentation or testing. The operators of individual applications have a keen sense of where their applications have taken design shortcuts and how to address them operationally or during the application lifecycle. This does not take into account the debt accumulating at the integration points, the common interfaces and the enterprise architecture as a whole.
Adopting a systems-thinking approach to enterprise-wide technical debt allows us to categorize types of debt and their costs holistically across applications, interfaces, integrations and aligned to overall business needs. Then individual applications can be handled on a case-by-case basis by the types of debt they carry. All applications and integrations can be quantified in terms of total impact and the cost to address the debt. Such a tabulation is a very effective exercise in prioritizing the efforts. The ordering of certain improvements or replacements will be impacted once we view them via the enterprise-wide lens.
The Cost of Application Project Work
The cost of project work includes maintenance, enhancements, more integrations to future-state architecture and normal day-to-day operations. Any project work performed on applications that should have been optimized just perpetuates the inefficiency. Include any planned cost of project work on applications slated for optimization in the optimization ROI calculation.
The Risks of Unrationalized Applications
Applications that are not regularly pruned introduce many types of risk that are not typically factored into the costs when contemplating rationalization or optimization. Some risks are obvious, and some are very insidious. The various types of risk are:
- Cybersecurity risk: Legacy applications expand the footprint to protect and necessitate older cyber tools to be renewed, so they add to cybersecurity costs.
- Customer experience: clunky user experiences lead to adverse outcomes that often go untracked and unaddressed.
- Brand risk: closely allied with customer experience is the brand risk that accompanies the usage of legacy applications. While it may be cost-effective to run an application as is, it must be considered in comparison to the state-of-the-art in CX for the enterprise. If a particular legacy application is very visible, consider rationalizing it.
- Morale: employee satisfaction and engagement suffer when legacy applications are maintained rather than refreshed.
Increasingly, we see successful optimization efforts that include application rationalization and pay close attention to the various factors of the cost of inertia. ISG helps companies build a joint cost optimization and application rationalization business case so they can make big gains in modernizing their IT environment. Contact us to find out how we can get started.