Application Portfolio Management

According to many industry assessments, the typical IT organization spends as much as 80 percent of its human and capital resources maintaining an ever-growing inventory of applications and supporting infrastructure (Serena 2007). Although no one argues with the importance of maintaining applications (after all, they do run the business), everyone is concerned with rebalancing the IT budget allocation to increase the discretionary spend by decreas- ing the maintenance spend, ensuring that the set of applications is well aligned with business needs, and positioning the organization technologically to respond to future initiatives. Collectively, this activity has come to be known as “application portfolio management” (APM).

Formally, APM is the ongoing management process of categorization, assessment, and rationalization of the IT application portfolio. It allows organizations to identify which applications to maintain, invest in, replace, or retire, and it can have signifi- cant impact on the selection of new business applications and the projects required to deliver them. The overall goal of APM is to enable organizations to determine the best approach for IT to meet business demands from both a tactical and strategic perspective through the use of capital and operating funds allocated to building and maintaining applications. APM typically includes an analysis of operating and capital expenses by application, demand analysis (i.e., assessing business demand at the application level to determine its strategic and tactical business drivers), and application portfolio analysis (i.e., the current versus the desired state of the application portfolio in terms of both technology and business value).

Although APM is not a new idea, it may be one whose time has come. There are many espoused benefits of APM, including reduction of the cost and complexity of the applications portfolio, reduction or elimination of redundant functionality, optimization

1 This chapter is based on the authors’ previously published article, McKeen, J. D., and H. A. Smith. “Application Portfolio Management.” Communications of the Association for Information Systems 26, no. 9 (March 2010): 157–70. Reproduced by permission of the Association for Information Systems.

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of IT assets across different applications and functions, greater alignment with the busi- ness, better business decisions regarding technology, and an effective means of commu- nicating the contribution of IT to the overall organization.

This chapter begins by examining the current status of IT applications in organizations. It then examines the notions of a portfolio perspective as it applies to applications (in contrast to a portfolio of financial assets) and outlines the specific ben- efits of such a perspective. Implementing a successful APM initiative requires three key capabilities—strategy and governance, inventory management, and reporting and rationalization—which are described in detail. The chapter concludes with some key lessons learned by organizations having invested in APM.

The ApplicATions QuAgmire

Born of autonomous business-unit-level decision making and mergers and acquisitions, many IT organizations manage multiple ERP applications, knowl- edge management systems, and BI and reporting tools. All are maintained and periodically upgraded, leading to costly duplication and unnecessary complexity in IT operations. Left unchecked, the demands on the IT organization to simply maintain its existing inventory of applications threatens to consume the capacity to deliver new projects. (Serena 2007)

The proliferation of application systems within organizations is legendary. Built over time to serve an ever-changing set of business requirements, such systems span generations of technologies (e.g., hardware, software, systems, and methodologies), many of which are now obsolete and unsupported by the vendor community, are host to countless “workarounds,” remain poorly documented, depend on the knowledge of a rapidly retiring workforce, and yet continue to support the key operations of the organization. Some (if not many) of these application systems have never been revisited to ascertain their ongoing contribution to the business. Based on decisions made by separate business units, many applications duplicate the functionality of others and are clearly redundant, and others have become unnecessary but have managed to escape detection. Accounts of organizations continuing to pay licensing fees for decommis- sioned software and supporting 27 different payroll systems all attest to the level of disarray that typically exists in large organizations. The full impact of such a quagmire becomes apparent either when virtually the entire IT budget is consumed by mainte- nance and/or when an organization attempts to integrate its suite of applications with those of an acquiring firm—whichever comes first.

Cause and effect are straightforward. The number of applications grows due to the practice of continually adding new applications without eliminating old ones. As it grows, the number of interfaces increases exponentially as does the number of complex and often proprietary enterprise application integration (EAI) solutions to “bridge” these disparate systems. The combined effect is to increase the frequency of (and costs of supporting) redundant systems, data, and capabilities across the orga- nization. As their number and complexity grow, so does the workload and, without expanding IT budgets and headcounts commensurably, so does the portion of the IT

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budget devoted to maintenance and operations. From a management perspective, organizations are left with shrinking discretionary funds for new IT development and find themselves unable to assess the capability or measure the adequacy and value of current application support structures, track dependencies of business processes on applications, determine where money is being spent, and map IT investments to busi- ness objectives. Thus, in many organizations, the suite of IT applications has become unmanageable.

But while the cause and effect are identifiable, remedies are not easily obtained. The first obstacle is resources:

The practice of continually adding to the IT burden while holding IT budgets and head counts relatively flat is obviously problematic. Yet that’s exactly what many companies have done since the early 2000s. And this practice is one of the reasons why many CIOs feel that they simply don’t have enough resources to meet inter- nal demand for IT. (Gomolski 2004)

A second barrier is that few business managers want to give up any application once it’s installed. In their minds, the agony of change is clearly not worth the rewards. “Some applications are so old that nobody remembers who ordered them” (Gomolski 2004, 29).

The third impediment, and perhaps the most severe, is the fact that IT often lacks the political clout to make business managers engage in an exercise to rationalize appli- cations across the enterprise in order to decommission some applications.

The BenefiTs of A porTfolio perspecTive

A part of the application dilemma is the lack of a portfolio perspective. Historically, organizations have opted to evaluate applications exclusively on their own merits—a practice that can easily promulgate unique systems across any business unit that can justify the expense. One manager claimed that this practice results in “a stream of one- off decisions . . . where each decision is innocent enough but, sooner or later, you are in a mess . . . sort of like walking off a cliff using baby steps.”

In contrast, adopting a “portfolio” perspective means evaluating new and existing applications collectively on an ongoing basis to determine which applications provide value to the business in order to support decisions to replace, retire, or further invest in applications across the enterprise. The portfolio approach is universal in finance and provides a point of comparison. Boivie (2003) presents the following analogy:

Just imagine you bought stock a decade ago for a lot of money, a good invest- ment at the time, but then you did not review its value over the intervening years. Merely sitting on the stock may have been the right thing to do. Then again, you may have missed opportunities to invest more profitably elsewhere if the company was not doing well, or to invest more in the stock if it was prof- itable. Obviously this is not a wise way to handle your investment, but it’s exactly what many companies are doing when it comes to investments in their IT applications!

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Kramer (2006) concurs that application portfolio management is similar to the approach used by portfolio managers at money management firms where “invest- ment officers continually seek to optimize their portfolios by assessing holdings and selling off assets that no longer are performing.” It is suggested that “the same approach can be used by technology executives, especially when evaluating the applications in their portfolios and deciding which ones to continue funding, which to pull back on, and which to sunset or kill.” One firm highlighted the similarities between investment portfolio management and applications portfolio manage- ment (see Table 17.1) in order to advocate for adopting a portfolio approach for IT applications.

The focus group suggested that the requirement for all new investments (i.e., IT applications) to be evaluated relative to all existing (i.e., past) investments within the portfolio is arguably the critical benefit provided by adopting a portfolio perspective. The group urged caution, however, due to the differences between a portfolio of financial assets (e.g., stocks and bonds) and one of IT applications. With the former, we assume a degree of independence among assets that rarely exists with applications. According to one writer (Anonymous 2008), “while financial plan- ners can sell an underperforming stock, CIOs will likely find it far more difficult to dispose of an unwieldy application.” Applications are rarely stand-alone; business

Table 17.1 Managing IT applications as a Financial Portfolio

Investment Portfolio Management application Portfolio Management

Professional management but the client owns the portfolio.

Professional management but the business owns the portfolio.

Personal financial portfolio balanced across investments in • equities • fixed income • cash

Application portfolio balanced across investments in • new applications • currency (maintenance, enhancements,

upgrades) • retiring/decommissioning

Client directs investment where needed (e.g., 50% equities, 40% fixed, 10% cash).

Business directs investments where needed (e.g., 40% new applications, 30% currency, 30% decommissioning).

Client provides direction on diversity across investments (e.g., investment in one fund would exclude/augment investment in other funds).

Business provides direction on diversity of investment (e.g., investment in one business capability might exclude/augment investment in another).

Client receives quarterly updates on its portfolio health and an annual report.

Business receives quarterly updates on application portfolio health and an annual report.

New investments are evaluated on their impact on the overall portfolio as well as on their own merits.

New applications are evaluated on their impact on the overall portfolio as well as on their own merits.

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functionality is often delivered by an integrated web of applications that cannot be separated piecemeal. As a result, diversification strategies can be difficult where IT assets are highly interdependent and deliver returns only collectively (Kasargod and Bondugula 2005).

A portfolio perspective forces the linkage between the set of existing applications (i.e., the applications portfolio) and the set of potential applications (i.e., the project port- folio). The linkage is bidirectional—that is, potential applications must be evaluated against existing applications and vice versa. Caruso (2007) differentiates these as follows:

• Application portfolio. The focus of the application portfolio is on the spending for established applications, trying to balance expense against value. These applications may be assessed for their contribution to corporate profitability and also on nonfinan- cial criteria such as stability, usability, and technical obsolescence.

• Project portfolio. Management of the project portfolio focuses on future spending, attempting to balance IT cost-reduction efforts and investments to develop new capabilities with technology and application upgrades.

The focus group suggested that organizations have focused most of their attention on new projects which has, in part, resulted in the applications quagmire previously described. The focus of this chapter is on application portfolio management. It argues that the effectiveness of the project portfolio can be enhanced substantially by managing the application portfolio much more judiciously. This linkage is made explicit later in the chapter.

The benefits to be realized by adopting an applications portfolio perspective are significant. The focus group was polled to solicit the benefits that their organizations had identified. These benefits were then grouped into the three categories, as suggested by Caruso (2007) and are presented in Table 17.2.

The list of benefits is impressive. To put them into perspective, a number of com- ments are in order. First, if the benefits to be realized are this substantial, why haven’t organizations moved more aggressively to enact APM practices? The short answer is that APM has been difficult to fund and, once funded, represents an enormous man- agement challenge. Second, the majority of these are “anticipated” benefits as they have yet to be reaped by focus group firms. Third, APM requires the development of a number of related activities (described in the latter sections of this chapter). Although benefits are realized during individual activities, the most significant benefits are not realized until most, if not all, of these capabilities have been completed. Finally, APM involves a different way of approaching IT investments—a collective view of all IT applications across the enterprise—which has cultural and political ramifications for organizations. The good news is that organizations that are well advanced in APM have realized significant benefits. We highlight one such firm in Table 17.3.

mAking Apm hAppen

Application portfolio management presents a significant management challenge and success requires the commitment of considerable organizational resources. The focus group suggested that APM involves the development of three interrelated capabilities. The first capability is the articulation of a strategy including goals, deliverables, and

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Table 17.2 a list of aPM benefits

1. Visibility into where money is being spent, which ultimately provides the baseline to measure value creation a. Increasing the ease of determining which legacy applications are to be retired. b. Simplifying the technical environment and lowering operating costs. c. Reducing the number of applications and optimizing spending on application

maintenance. d. Increasing the predictability of measuring service delivery for project selection. e. An enterprise view of all applications allowing for ease of reporting (e.g., How many

applications use Sybase? How many systems support sales reporting?) f. A common view of enterprise technology assets improving reuse and sharing across

the enterprise. g. Clarity over maintenance and support spending. h. Ability to manage and track business controls and regulatory compliance of all

applications.

2. Prioritization of applications across multiple dimensions, including value to the business, urgency, and financial return a. Funding the right application effort by providing quick access to validated information

in support of business cases for investment. b. Providing better project solutions by identifying available capabilities for reuse. c. Providing criteria to drive application rationalization and monitor impacts. d. Providing an “end state” view for all applications, which helps direct roadmaps and

enables progress reporting. e. Expediting prioritization discussions and executive decision making. f. Driving IT refurbishment initiatives.

3. A mechanism to ensure that applications map directly to business objectives a. Aligning business and IT efforts with business processes by providing (1) clarity of the

application landscape, leading to synergies across different business units, and the pur- suit of a global systems architecture; and (2) insight into gaps or redundancies in the current portfolio, thereby enhancing the ability to manage risk effectively and efficiently.

b. Enabling productive discussion with senior management regarding IT’s contribution to business value.

c. Identifying the strategic and high business value applications, thereby allowing the redirection of some of the funding previously used for nonstrategic applications.

d. Enabling easy and effectively analysis of impacts to applications from changing business conditions.

e. Improving the focus and direction of investments. f. Developing a vehicle to drive the technical portfolio to the “right” mix, based on strategy,

architecture, TCO, and internal skill sets. g. Prioritizing efforts and focus for IT delivery—ensuring the right skills are in place to

support business requirements.