In reality, IS is simply a microcosm of larger economic forces. Today’
s businesses
are striving to respond to rapid change by creating flexible, modular business processes that can be quickly implemented and reengineered as necessary. To support these types of processes, IS organizations are moving beyond traditional transaction processing into new areas and deploying rapid development and client/server architectures. But if the IS function is merely trying to learn to perform systems development with new technologies, it is missing the larger challenge.
Although emerging technologies such as objects, client/server, and the Internet bring exciting opportunities to create new types of business solutions, it is legacy systems that hold the major key to future success. Legacy applications dominate IS
resources, represent trillions of dollars of investment, and present the leading obstacle in more than half of reengineering efforts. In many cases, the IS
organization itself is a legacy issue, tied to mainframes and old-world processes in a time of rapid change. Faster business change and faster technology change challenge IS managers to integrate business-driven development with legacy perspectives, processes, applications, and infrastructures.
THE LEGACY CHALLENGE
Recent estimates show that the current installed base of mission-critical legacy applications would cost $3 trillion to replace. Because of the magnitude of these expenditures and their business impact, IS organizations must move carefully yet decisively. Even basic maintenance of legacy systems costs huge sums of money, leaving managers with only a small fraction of their budget for critically important new applications.
These cost pressures will intensify in the future for three main reasons: first, CEO
have invested in Information Technology for many years and are demanding accountability for results; second, budget increases have been limited to the rate of inflation for most of the recent past; and third, in an increasingly competitive world, companies continue to demand cost reductions and better returns on investment from every segment of the business. As a result, several challenges confront the IS
organization:
§ At least 80 percent of most IS budgets is spent on legacy systems, with a declining residue left for new development. At the same time, each new application is more complicated, costing more to develop and maintain.
§ Because much of the focus of legacy maintenance is on corrections, minor enhancements, and preventing catastrophe, legacy investments quickly reach a point of decreasing marginal utility: each additional dollar buys fewer and fewer benefits, especially when compared with each dollar spent on new solutions to business problems.
§ The accelerated pace of technological change means that systems are superseded more rapidly than they were when technologies were more stable.
§ As Exhibit 1 illustrates, too much of the effort expended on legacy systems is fundamentally non-value-added; studies show that more than 50 percent of the effort is devoted to understanding a legacy application and then retesting the application after a change.
Exhibit 1. Legacy Maintenance (From GUIDE Study on Legacy Maintenance.)
§ As a result of the intensive effort made to change a legacy application, about 25 percent of legacy time is spent on testing. A more intelligent, planned, and focused approach should provide adequate testing with less effort.
§ This year’
s new application becomes next year’
s legacy, typically increasing
the installed base of legacy systems that must be maintained.
These challenges have several implications for IS managers. Managers must break the cycle of an ever-increasing yet fractured installed base that drives an ever-larger annual maintenance expense. New systems have to be funded by gains in IT
productivity and an accumulation of small cost savings rather than by increasing infusions of corporate capital. As with many business reengineering efforts, IS
transformation will have to be quickly self-funding.
PORTFOLIO MANAGEMENT OF IT ASSETS
Yesterday’
s sequential planning approach, which provided the IS function with sufficiently long lead times to meet business objectives, no longer exists in today’
s
rapidly changing business world. Although business change drives the integration of process and technology, ineffective communications are causing the gap between business strategy and IS delivery to continue to widen. As IT becomes a major engine of change, it redefines what is strategically possible and gets further embedded into every business process, including electronic commerce, computer-integrated manufacturing, investment program trading, and supply chain optimization. The future of IT therefore requires a holistic understanding of business strategy and processes.
In stark contrast, many decisions regarding legacy systems are episodic, tentative, and trapped in a pattern of inertial spending. To address these tendencies, IS
managers should evaluate legacy systems in much the same way as sales territories, personnel, or the corporate image are evaluated. Looking at IT assets as business resources provides IS managers with two main evaluation criteria: 1. How effectively does a given system or suite of applications support business objectives?
2. How efficiently does the system perform its support tasks?
This orientation highlights a pair of key points. First, both business and technical perspectives are necessary to assess a portfolio. Business objectives are derived from evolving business processes and evolving strategy, and this can be a difficult process. IT assets are mapped against these objectives and evaluated using a comprehensive set of metrics. Second, the portfolio must be examined in meaningful pieces. Individual elements of the portfolio fit together like puzzle pieces to support a critical business area or process. Even though individual elements may appear to be valuable, the overall business results may be considerably weaker because of critical shortcomings in the way the various parts fit together.
The results of this assessment are then mapped within a grid called the 4R portfolio assessment matrix (Exhibit 2).
Exhibit 2. Portfolio Assessment Matrix
The 4R Portfolio Assessment Matrix
The 4R portfolio assessment matrix contains four categories with suggested actions
— the four Rs — that guide decisions. Sorting assets into a differentiated portfolio reduces the magnitude of the legacy problem with a strategy of divide and conquer.
IS managers who understand the relative scale, size, and investment in each of the applications acquire insights that guide future action.
Category 1: Low Business Value, Low Technical Condition; Action: Retire.If a system performs a function of questionable value unsatisfactorily, why is it running in the first place? These systems, which constitute about 25 percent of the North American legacy base, are excellent candidates for early retirement or benign neglect. If they must be kept alive, IS managers should consider installing a graphical user interface on top of the character-based screen. Selective system improvement is another option, but only if the cost can be justified with business results.
Category 2: Low Business Value, High Technical Condit ion; Action: Reassess IS managers should reassess why a high-performance system is contributing so little to the business. These systems, only about five percent of the installed base, may not have been well justified with an adequate case for action. Alternatively, over time a justification may have become outdated. In other cases, rollout may have been mishandled. IS managers should consider moving these assets to more critical applications if they still are capable of providing business value and to a phased retirement if they are not.
Category 3: High Business Value, Low Technical Condition; Action: Redevelop About half of legacy systems fall into this category. These systems may require pampering; yet the business still depends on them. IS managers should strive to maintain business support, retain asset value, and improve functionality where appropriate — all while reducing cost. This can be done in many ways, for example, by extracting business rules from operational systems, developing value-
based cases for action that support replacement, or developing a strategy for gradually substituting new functionality for old.
Category 4: High Business Value, High Technical Condition; Action: Renew About 20 percent of legacy systems are in this ideal asset state of delivering tangible business value and being in good technical condition. It is an unfortunate truth that most applications started off in this quadrant or were targeted to start in this quadrant but have since fallen out of it. The organizational mission regarding these systems is to preserve asset value by allowing them to migrate forward as business goals and technologies change.
After assessment, IS managers can look beyond the immediate and see the problems with legacy systems as products of root causes. Rather than viewing legacy applications as fragile and redundant, the IS function can move to extend the useful life of these legacy assets. By addressing the causes of these problems — which are often not technical issues — IS managers can move to prevent the all-too-rapid decline in business value and technical condition experienced with most applications.
Institutionalizing Portfolio Management
For all of its benefits, portfolio assessment as a one-time event will not deliver lasting gains. Although it identifies some improvement opportunities that IS
managers should act on promptly, over time a one-time assessment rapidly degrades into architectural shelfware. Instead, portfolio assessment must be the first step in a process that lets IS managers continually manage the portfolio by reevaluating the linkage between IT assets and the evolution of business needs. The life span of current technologies is a fraction of that of mainframes; expecting an assessment to drive a three-year plan inevitably leads to mounting questions about its relevance and growing disappointment with its effectiveness.