What is the problem?
Many companies are finding that 60-80% of their IT budget is required just to ‘run’ the business. As a result, growth and innovation initiatives struggle to get the required funding. Most CIOs know this high costs is a result of complexity in the IT environment. Because of this complexity, it costs a lot to support current IT, and costs of implementing new projects increase.
Simplifying technology environment is necessary to create the financial capacity to support growth initiatives.
Why is IT so complex?
Most CIOs struggle to answer a simple question like ‘how many applications do you have? A typical IT shop can have hundreds of applications. Large application portfolios result from legacy systems, mergers and acquisitions, organisational silos, urgency leading to tactical solutions, and vendor over promising.
The issue is then further complicated by multiple technology platforms, some new and others legacy. There is usually a proliferation of servers with unique configurations to run these applications.
Strategies such as ‘best of breed’ can also increase complexity. As different solutions from different vendors (using different technologies) are acquired and integrated over time, the overall complexity keeps growing.
Duplicate or multiple systems
Companies go through mergers and acquisitions. Each acquired company brings some unique business processes, and rules and systems, which support these. This invariably creates an increase in applications that do similar functions, but are different or need a different technology platform. New interfaces are needed to bring the information together from these systems. In these cases getting accurate stock information is very difficult. Complexity thus leads to reduced accuracy.
At other times, different departments have their own sales tracking or customer management systems, which largely do the same function. In large organisations, due to silo decision-making processes there can be multiple such duplications. A company I worked in had 26 different payroll systems.
In some companies there are many applications, but only a limited funding for maintenance. As a result of budget and inertia, most applications are not upgraded for years. They become unsupported, and the company must rely on old technologies. By avoiding or deferring the upgrades, we create a ‘technology debt’, which increases over time like a snowball. This means that when upgrades are required (e.g. year 2000) these become expensive. Application functionality also gets out of date and new functionality cannot be quickly leveraged. Newer applications and more interfaces are then created, thus compounding the problem.
Abundance of Interfaces
No CIO intentionally wants to increase the complexity of IT. New applications are acquired for new initiatives and business expansion. Many start as stand-alone applications, however, over time interfaces are built between new and existing applications.
As the increase in interfaces is proportional to the square of the number of applications, the total number of interfaces quickly multiples. Many of these interfaces are inefficient, as they are trying to connect two systems with different processing rules, data structures. and data meaning. As the number of interfaces increases, their quality decreases further. Daniel Lebeau – Group CIO of GlaxoSmithKline has called interfaces the ‘cancer’ of IT.
High cost of complexity
Other than the high IT cost to run a company’s business, complexity brings about other costs. When business processes are fragmented across multiple applications, it becomes difficult to get right data. Unsupported technologies increase the risks of failure.
Perhaps the biggest cost of complexity is the reduction in a company’s ability to take advantage of new opportunities presented by the new digital economy. Taking advantage of these opportunities needs streamlined business processes, accurate master data, and a robust foundation of systems. An IT environment that is complex and fragmented with a mix of technologies, and applications is vulnerable to hackers.
Complexity can be justified in some cases. It is usually justified when complexity allows the business to differentiate its offerings to create value.
Three benefits of simplicity include reductions in operating costs, increases in agility, and the lowering of risk. As Tim Schaefer, CIO at Northwest Mutual, explains:
“There are actually three types of value that we are generating out of the simplification effort. First and foremost, we want to create dollars that can be invested in growth opportunities. Second is the value we get around risk reduction, and in particular, how we can increase the agility of the company. Finally, by simplifying our technology environment, we are actually opening up room and capacity for newer technologies.”
Strategies for the Simplification of IT
It is not easy to cut IT complexity, a sustained and multi-pronged approach is needed. We recommend three key strategies. These are
1) Rationalisation of applications;
2) Standardisation of infrastructure; and
3) Effective governance.
1. Rationalisation of Applications
For many companies scope for application rationalisation is large. Boston Consulting Group (BCG) estimate that reductions of up to 40% in the number of applications, and 15-20% of IT costs is often possible.
Application rationalisation involves consolidating duplicate/redundant applications and the progressive decommissioning of replaced applications. Without decommissioning, the cost reductions will only be minor.
Successful rationalisation has three prerequisites:
- Top team agreement – As the rationalisation is a longer term initiative and not a quick fix, strong commitment from the top team for the simplification agenda is necessary.
- Proper funding for the job – Often the business case for the rationalisation does not seem attractive in the short-term. Ensuring proper and sustained funding is necessary.
- Tracking progress – Disciplined measurement of progress is necessary to make sure that goals of rationalisation are being achieved. Aligning IT Executive incentives to the reduction in applications is also recommended (e.g. 5% reduction each year).
2. Standardisation of Infrastructure
BCG suggest that reducing “infrastructure patterns” (configurations of software, hardware, and middle-ware) should be reduced to a smaller number of standard configurations. Typically the patterns can be cut down by more than half. The recent growth in the adoption of virtualization technologies has broken the ‘one application, one server’ rule, which makes the rationalisation process somewhat simpler. Reductions in these patterns cut maintenance costs, enable better deals from the vendors, and cut provisioning time.
BCG reports that one company had 9,000+ applications and over 1,700 technology patterns. All of these required maintenance. This company eventually determined that just 7 patterns would support 80% of the application needs. This level of standardisation enabled cost savings of 40% over three years.
3. Effective Governance
Effective IT governance is needed to make sustained reductions in complexity. If business units continue to make decisions in a silo way, and little thought is given to impact on other systems or other business units, complexity will start to grow again.
A clear governance framework and agreed blueprint describing target architecture are essential. Simplification principles should become part of this governance framework to prevent building new complexity. Strict governance enables effective portfolio planning and the optimisation of IT architecture. This is a key to reducing complexity in the longer term.
In most companies IT complexity grows with time. Tactical systems, mergers and acquisitions, and new technologies all lead to a more complex IT environment. The result is fragmented business processes, lack of correct business data, higher costs and risks, and lower agility. The bulk of the IT budget then gets consumed in keeping the business running.
IT simplification is not easy, but the benefits are large. It frees financial resources, reduces risk, and improves agility. Reducing the number of applications in the portfolio and reducing infrastructure patterns will simplify the IT environment. Success depends on a strong commitment from the top team and effective governance.
Written by: Hemant Kogekar