Cost analysis is a crucial step in early-stage application rationalization, helping organizations identify opportunities to reduce expenses and improve the efficiency of their application portfolio. By understanding the costs associated with each application, IT leaders can make informed decisions about which applications to keep, retire, modernize, or consolidate.
9.5.1 Why Cost Analysis is Important
- Identify Cost Drivers: Gain visibility into the direct and indirect costs of maintaining the application portfolio.
- Prioritize Rationalization: Focus efforts on high-cost, low-value applications to maximize savings.
- Support Business Cases: Provide data to justify decisions about rationalization, modernization, or retirement.
- Optimize IT Spending: Free up resources for innovation by reducing unnecessary expenses.
9.5.2 Key Components of Application Costs
To conduct a basic cost analysis, consider the following components:
- Direct Costs
- Licensing Costs: Annual fees for commercial software or subscriptions for SaaS applications.
- Infrastructure Costs: Expenses related to servers, storage, networking, and cloud resources used by the application.
- Support and Maintenance Costs: Vendor support fees, upgrades, and patch management.
- Indirect Costs
- Internal Resource Costs: Time spent by IT staff on support, troubleshooting, and updates.
- Training Costs: Expenses for user training or onboarding for complex applications.
- Opportunity Costs: Resources tied to maintaining legacy systems instead of focusing on strategic projects.
- Hidden Costs
- Integration Costs: Expenses related to maintaining integrations between the application and other systems.
- Compliance Costs: Ensuring the application meets regulatory requirements (e.g., GDPR, HIPAA).
- Security Costs: Mitigating risks associated with outdated or vulnerable applications.
9.5.3 Steps to Conduct a Basic Cost Analysis
- Gather Cost Data
- Use existing records, such as invoices, contracts, and budgets, to compile cost information for each application.
- Engage with finance teams, application owners, and vendors to fill in any gaps.
- Estimate Total Cost of Ownership (TCO)
- Add up direct, indirect, and hidden costs to calculate the TCO for each application.
- Example formula: TCO=Licensing Costs+Infrastructure Costs+Support Costs+Resource CostsTCO = \text{Licensing Costs} + \text{Infrastructure Costs} + \text{Support Costs} + \text{Resource Costs}TCO=Licensing Costs+Infrastructure Costs+Support Costs+Resource Costs
- Normalize Costs
- Break down costs on a per-user or per-transaction basis for comparability across applications.
- Example: Divide the total annual cost of an application by the number of active users.
- Compare Costs to Business Value
- Evaluate whether the costs of an application are justified by the business value it provides.
- High-cost, low-value applications are prime candidates for rationalization.
- Categorize Applications by Cost
- Group applications into categories, such as:
- High-Cost, High-Value: Consider for modernization or optimization.
- High-Cost, Low-Value: Prioritize for retirement or replacement.
- Low-Cost, Low-Value: Assess whether to keep or retire based on usage.
- Low-Cost, High-Value: Retain and monitor for potential enhancement.
- Group applications into categories, such as:
- Validate Findings
- Share cost analysis results with stakeholders for validation and additional insights.
- Address discrepancies and refine cost data as needed.
9.5.4 Common Challenges in Cost Analysis
- Incomplete Data
- Challenge: Not all cost components may be documented or readily available.
- Solution: Use estimates for missing data and refine as more information becomes available.
- Hidden Costs
- Challenge: Costs such as internal resource time or compliance expenses may be overlooked.
- Solution: Engage with cross-functional teams to uncover hidden costs.
- Complexity in Allocation
- Challenge: Allocating shared costs (e.g., infrastructure or support) to individual applications can be difficult.
- Solution: Use approximations or cost allocation models to ensure reasonable accuracy.
9.5.5 Tools and Techniques for Cost Analysis
- Spreadsheets: Use simple templates to track and calculate application costs.
- Entry-Level Financial Tools: Leverage basic IT financial management tools for cost tracking and reporting.
- Automation: Use lightweight discovery tools to gather infrastructure cost data automatically.
9.5.6 Examples of Cost Analysis Insights
- Duplicate Applications: Identifying two or more applications serving the same purpose, with combined costs exceeding their business value.
- Underutilized Licenses: Discovering that an application’s license count significantly exceeds its active users, leading to unnecessary expenses.
- Legacy Systems: Highlighting high maintenance and infrastructure costs for outdated applications compared to their minimal contribution to business processes.
9.5.7 Using Cost Analysis to Drive Rationalization
- Retirement Decisions: Applications with high TCO and low business value are strong candidates for decommissioning.
- Consolidation Opportunities: Applications with overlapping functionality but high combined costs can be merged or replaced with a single solution.
- Optimization Plans: High-value applications with high costs may benefit from optimization or migration to cost-efficient platforms (e.g., cloud-based solutions).
9.5.8 Best Practices for Cost Analysis
- Focus on High-Impact Applications: Start with the most expensive or widely used applications to maximize initial savings.
- Engage Stakeholders: Collaborate with finance, IT, and business units to ensure comprehensive data collection and validation.
- Keep It Simple: For early-stage rationalization, avoid overly complex cost models; focus on key cost components and trends.
- Update Regularly: Treat cost analysis as a living process, updated periodically to reflect changes in the portfolio.
9.5.9 Outcome of Basic Cost Analysis
A well-executed cost analysis provides a clear understanding of the financial impact of the application portfolio. It enables IT leaders to make informed decisions, prioritize rationalization efforts, and communicate cost-saving opportunities to stakeholders. This foundational step sets the stage for more advanced financial optimization in later stages of APM maturity.
