The Economics of Application Management

Samenvatting van een volledige publicatie van Machteld Meijer en Mark Smalley op ASL BiSL Foundation

Market research shows that one third of IT budgets is spent on management of applications, and that this part is increasing. It is therefore not surprising that there is growing attention for the economic aspects of both demand management (business responsibility) and application management (technical responsibility). This article describes the dynamics of costs and benefits in this domain and how they can be positively influenced. The subject is approached

from an economic perspective. Next the division of roles between the three management domains (demand management, application management and technical management) is discussed. After presentation and explanation of market research figures we go into the key question of how organisations can get more grip on costs and benefits. Professionalisation of demand management and application management using the management models ASL and BiSL can make a significant contribution to getting the economic aspects under control.

Introduction

Application management takes up a substantial and increasing part of available IT budgets. Organisations are concerned about these costs and ask themselves how they can get a grip on both costs and the benefits of application management. This subject has kept us, the authors of this article, intrigued for several years. We have incorporated our insights in a contribution to a four-day postgraduate course on the Economics of IT-management, which has been organised under auspices of the Faculty of Economics of the University of Groningen. In this article the essentials from this course in relation to economical application management are expounded.

Firstly the application management related costs are dealt with, in order to underline the importance of it. Then different economic aspects are discussed, focussing on their relevance to application management. As for financial aspects, these are mainly costs and expenses, whereas the non-financial aspects are categorised as the positive and negative contributions. Next the three domains of management are discussed: demand management, application management and technical management. Demand management is the delegated representative of the business and contract partner for application management and technical management. An underlying assumption in this article is that the business should bear the costs of IT support and also profit by it. We elaborate on the contents of the three ITmanagement domains, the way in which they interact and the main economics that play a part.

On the basis of figures from market researchers and our own insights, the costs are allocated to demand management, application management and technical management.

Finally, we give insight into the aspects that influence costs as well as the benefits of ITmanagement and the way in which professionalisation of IT-management contributes to improved economic management of applications. Examples of professionalisation are the appliance of the ITIL method for technical management, ASL for application management and BiSL for demand management. As this article focuses in particular on application management, more attention is given to demand management and application management than to technical management.

Economics

What are the different economic aspects and which of these are relevant to applications management? The economic science looks at economics from two points of view, on the one hand benefits and costs, on the other hand financial and non-financial aspects.

Looking from the financial point of view, it is about revenue and expenses, which determine the result (profit or loss). The change in liquidity is also a relevant aspect (this is equal to receipts minus payments). A contribution is spoken about at the non-financial side, which can be positive or negative.

In order to determine the economic aspects that are important for applications management, it should first be decided from which perspective this should be looked at. We emphasize that this is not from an IT-department point of view, but from the business that is supported by information systems and related services. It is the business that benefits from IT and also bears the costs. It is impossible and senseless to try to translate the benefits to for example application management in terms of “these benefits are for 23% the merit of application management”. It can however be said that costs are incurred while executing application management, that actual expenses are made and that application management to a certain degree contributes to the business processes.

Positive contributions to the bottom-line that can be expected from professional application management are for example: reduced risks to the productivity of the business and a contribution to the improvement of either the efficiency, the effectiveness, the innovative ability or the flexibility of the business [Drift 2002]. Within a company that has chosen efficiency as dominant market approach (that presents itself as specialist in products and services that are the economical choice in terms of consumers’ organisations), there will be a maximum support of the business when IT helps to reduce costs. A company that is successful as ‘best buy’ supplier, will benefit from IT support that contributes delivering better products and services. In addition to this contribution, cost reduction is possible as well, no one will complain, but this is not the company’s strategic success factor. Comparable examples can be imagined for companies that depend on their innovative capabilities and therefore constantly supplying new or renewed products and services. Or for companies that are successful by adapting decisively to a dynamic external environment (flexibility). A drawback of professional IT management can manifest itself when there is a large

difference between the level of maturity of IT management in relation to the business’ level of maturity. This shows itself in the perception that the information provision can be tailored to their requirements less quickly. This is because the information provision function gains a better view of these requirements and confronts the business with all kinds of ‘tricky’ questions. A good support of the business can minimise this effect.

IT-management paradox

A short comment on the extent to which a contribution from management is possible, is called for [Berghout 2001]. As became clear earlier on, most expenses of information systems occur during the management phase. Furthermore all benefits are realised in this stage. From an economical perspective the management stage seems of great importance. This proposition should however be differentiated when we consider the extent to which the benefits and expenses can be influenced in this stage. A study at the University of Delft shows that only about 10% of the costs and benefits can be influenced in the management stage. The general conclusion is therefore justified that principles of economical management should be applied early in the lifecycle of an information system. Thus, there is some kind of IT management paradox, as Berghout puts it. During the design stage it is still possible to adjust an information system, but there is great uncertainty about the desirability of the different possibilities. During the management stage the wishes with regard to the information system are much more clear, but there are only limited possibilities to change these characteristics of the information system. Put another way, by the time one knows where one stands, the design can hardly be adjusted. Only intensive sharing of knowledge between design and management can reduce the negative consequences of the management paradox. Although these disciplines are generally separated, as regards content they are sentenced to each other.


Influencing costs

Specifically for application management the costs can be influenced by paying attention to the quality of the product and the quality of the processes, and by timely anticipating the gap between system and business process [Drift 2003]. These factors have a strong influence on the most important cost drivers of application management:

– the quantity of knowledge and capacity of resources needed for the realisation of application management;
– the number of failures in (the immediate vicinity of) the application;
– the number of change requests, particularly as a result of changes in the business rocesses;
– the degree of support application management should provide to demand management and technical management.
– Possibilities to influence application management
Of course there are also factors within application management that determine the efficiency of executing application managementMost of the costs related to application management are staff costs (internal or external staff). Other costs are for the (computer) facilities necessary for carrying out the work. Beside this direct work there are also indirect activities. One of the most important activities in this category is acquiring and maintaining the required knowledge of the application. The amount of knowledge required is considered as a given (for this is mainly determined during application development): what is important now is how efficiently application management is executed. Of all efforts for application management, 15% to 50% or even more is spent on acquiring enough knowledge to carry out the work. The most important factor that determines the extent of the costs, is the frequency of the replacement of staff. Often replacement happens at an employee’s request, as part of his or her career. Knowledge should be prevented from residing with just a few employees: this leads to unacceptable risks for continuity when the employees involved drop out or abuse the created dependence.

Experience tells us that when employees consciously choose for application management as a profession, this is beneficial to staff retention. This argues for organising application management as a separate activity instead of something that should be executed along with development. Another way to promote retention is creating varied work.

Another aspect of the costs of application management concerns the efficiency by which calamities and peaks in the workload are dealt with. A recommended strategy is to make staff versatile. This means organising the work in such a way that it is possible to involve other colleagues outside a permanent core team for management of a certain application, without it taking much time. This demands instilling a cooperative attitude into the team leaders so they are prepared to share their ‘own’ team members with other teams.This versatility can be integrated in different dimensions:

being competent on different technical platforms, e.g. being able to program both in Delphi and .NET;
being able to perform a wide range of tasks (selecting and training staff with an all round profile);
being able to serving different client environments. This approach has the added advantage that this kind of work is varied, which helps employee satisfaction and retention of staff.

Influencing benefits

An organisation benefits most from having its’ primary business processes supported optimally. IT plays a growing part in this: at e-commerce companies the complete primary process depends directly on the quality of IT support. Imagine what could happen when IT fails. Business projects are slowed down when IT does not finish on time, and the market share can be lost when a competitor is able to launch or deliver first; failing of IT leads to production losses; errors in IT lead to loss of company image and as a result of this, loss of customers. Benefits in the management phase of the applications’ lifecycle can therefore mainly be found in preventing or reducing losses by improving both the alignment of IT with the business and the quality of IT support both within the organisation and by external suppliers. So benefits can be achieved by investing in:

– alignment of information provision with the business processes;
– motivation and competence of users, who are after all trained and supported by demand management;
– usability of the application (attractive, user-friendliness – especially for e-business), so it can be used effectively and efficiently;
– qualified demand managers; demand managers and information managers who are pro-active and in tune with the business, together with business managers, recognise new possibilities for improving the system;
– effective justification (business cases) of investments in the applications. his will lead to:
an improvement of efficiency, effectiveness, innovative capability or flexibility of the business processes;
more certainty with regard to the productivity of the business. The above enumeration shows that the influencing of benefits is especially granted to demand management. We have therefore focussed on the question when demand management is economically successful and have formulated the statements below, which a good demand manager should be able to pronounce without blushing:
“I know what the information provisioning costs and whether that is normal.”
“I know what users think of it.”
“I know what users want.”
“I know what business wants, today and tomorrow.”
“I know what budget is available.”
“I purchase at a competitive price.”
“I have an answer to most user questions.”
“I act as the owner of the system.”
“I have clear agreements with my IT partners and suppliers.”
“I work efficiently.”

The question is of course how to reach all this ideal state. The remainder of this article attempts to answer this question. Follow this link to the ASL-BiSL foundation.

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