Current economic pressures have created the strongest driver for streamlining software portfolios and replacing aging systems since the year 2000, according to Compass Management Consulting. At the same time, Compass warns that corporates rushing to outsource their software development to make short term savings risk significant long term losses in productivity.
Studies of operations where the full life cycle of application development has been outsourced have shown productivity drops of up 60% as poor knowledge of the business function affects efficiency of the development. These losses are particularly high when development is outsourced to an offshore location.
Whilst some of lessons in the rush to offshore applications development have been learnt, productivity losses in development activity alone can still account for deficits of up to 20 percent due to staff attrition in offshore locations and other factors, according to Compass.
This means that while the personnel costs may be 40% lower in offshore locations, the decision to migrate development, when you include additional management control, increased infrastructure spend, employee attrition, language, and cultural issues, can end up costing up to 20% more than current in-house operations.
“In particular the loss of functional expertise – people who understand the business function the software is supporting – has a negative effect on the productivity of application development. With lower productivity in many offshore locations and currency movements that are working against UK buyers, it is important to outsource the right type of development project and ensure that business analysis skills are kept in-house in order to make any savings,” said Nigel Hughes of Compass.
Compass points out that the productivity of development is only one element of cost in corporate application management and that current economic pressures are an opportunity to evaluate broader opportunities for streamlining their software environments.
“Complexity of the application environment is a major driver of overall cost escalation in IT and 2009 is the best chance since the year 2000 issue to make radical change. Top performing organisations are already taking advantage of the economic crisis to replace legacy systems, modernise the application portfolio, streamline operations and reduce costs,” said Nigel Hughes.
According to Compass, many organisations are overestimating the level of savings that outsourcing or offshoring can deliver. The firm claims that a more complete analysis of the software estate can often identify opportunities for consolidating applications that have built up after mergers, improving operational productivity through better applications and improved management of support and maintenance tasks. Compass claims that these changes can be cash generative within less than 12 months.
“More than 70% of a typical software budget is spent on maintaining legacy systems. Top performers are clear that they cannot run a 21st century operation supported by 20th century technology. Organisations choosing to effectively rationalise their application portfolios are reducing overall spend by 20-40% within 12 months, which delivers cash to the bottom line or frees up budget to implement modern and cost-effective solutions," says Nigel Hughes.
Compass says that the best performing companies discriminate between different types of development work and do not automatically outsource everything in a bid to make savings. The firm claims that outsourcing can still yield savings if the decision to outsource elements of software development is based assessing criteria in terms of strategic importance, criticality, complexity and stability of the applications and the organisation’s in-house capability to support, maintain and develop them.
“These criteria may seem simplistic but they are effective in synchronising the application portfolio with appropriate sourcing. Non-strategic, non-critical and low complexity application, for example, can readily be developed using outsourced services. For the strategic, complex and business critical applications, it makes more sense to retain the analysis skills that will drive the innovation and value in-house," said Nigel Hughes.
