Application Modernization: Money in the Bank

Published: January 12, 2009

by Dan Burger

You might think that the combination of do-more-with-less business planning and the dire economic reports that dominate the daily news coverage would cause IT budgets to fizzle like last year's uncorked bottle of champagne. That's not exactly true, even though three out of four organizations are targeting IT spending as a good place to make cuts. You can't forget about the one in four companies that are moving their business plans ahead by investing in IT.

Investing in IT is something a lot of companies aren't very good at, if you add the word "strategic" to describe the investing. At least that's the viewpoint of some industry veterans like Tim Pacileo, a principal consultant at the IT management and consulting firm called Compass, which has its global headquarters in the United Kingdom and its North American headquarters in Chicago.

Pacileo has been in the IT business for more than 30 years and he says too many companies are in the position of running applications that are 20 or 30 years old. Rather than modernize, they have made adjustments and fixed old code, and they have the idea that they've saved a lot of money by taking this approach. This was most recently apparent during the years leading up to Y2K.

"The reality was that companies got through Y2K, but since that time there's been an information revolution," Pacileo says. "Companies were able to get their 20-year-old applications into the next century and now those applications are 30 years old and companies are still running their organizations on those. They believe they've saved tons of money by putting off modernization projects. But there are many cases where those companies are losing market share and IT costs are going through the roof because they are supporting all this legacy stuff and because they've added all this application spaghetti around their core applications to get them to look and think like modern applications."

Although the need for businesses to be faster and more agile has been talked about for years, Pacileo says it is becoming paramount for organizations to survive going into the next 10 years or so. The biggest reason is competitive pressure. Start-up companies and those that are taking advantage of fresh technology are competing against companies with 30-year-old technology.

"We're witnessing the best opportunity since Y2K to address problems in how companies use business critical applications," says Pacileo. "Top performers are recognizing they can't run a 21st century business on 20th century technology."

Who has the risk tolerance for IT investment when the economic forecast is colder than a Rochester, Minnesota, well-digger's elbow? Who's going to choose 2009 as the right time to reassess and transform their operations to gain a competitive advantage when the economy recovers? Pacileo says, "Businesses can't afford to put off application modernization until a bull market returns."

In a related item, back in December, McKinsey & Company released it third annual survey on information technology strategy and spending. The survey was conducted in October, so it reflects the thinking of executives who have taken into account the worsening economic environment.

Although only 23 percent of those included in the survey say they will increase operating costs in 2009 (and 43 percent say they will reduce operating costs), more than 40 percent expect to increase IT investments and 17 percent say investments will remain on par with 2008. According to the report, "This suggests that many companies are prioritizing new IT investments even when a sizable share are cutting operating expenses. That's a significant change from past downturns, which were marked by drastic cuts in discretionary IT investment."

The McKinsey survey also revealed an established emphasis on improving business performance through IT and using it for competitive advantage. Gains in this area were reported, but expectations for more effectively applying these capabilities in order to derive better value are not quite materializing yet. In other words, the full value that IT is delivering at this time is falling short of goals. Noteworthy achievements are not particularly rare.

Pacileo claims Compass has recently shown a company how it can save $30 million dollars by modernizing its applications. He says this is not because the apps aren't doing what they were made to do, but because they don't talk to all the other applications. He says companies continue to have profits eroded because of systems that don't interface and as a result redundancies are created. "Updating and streamlining applications would eliminate it," he says.

"A few years ago, I worked with a company that had been part of a number of global mergers and acquisitions," Pacileo says. "This was a Global 100 organization. But when it did an enterprise view of all its applications, it had 400 different payroll systems, and 75 percent of them could be thrown away."

An example of competitive advantage that Pacileo uses involves General Motors. GM automated its assembly lines, and automated so that each line could be configured to assemble a certain product. Toyota took the approach of using the same equipment and technology, but configured it so it could manufacture any product line. "This was not a technology issue," he points out. "It was a business decision. GM did not make the right decision. Toyota had the foresight to know its product line was probably going to change every three to five years or, in some cases, even every 12 to 18 months."

The marketplace doesn't allow manufacturers to make the same product for the long periods of time that once was the standard way of doing business. It used to take seven years to design an automobile. Now it is done in months because of computer-aided design. Pacileo's point is that technology needs to be applied to long-term thinking and for the benefit of the entire enterprise rather than individual business units.

"There is really a three-tier system in most organizations as it relates to technology," he says. "You have the business requirements that are conveyed to the application architects. They then talk with the infrastructure team. The business team says keep the IT costs low, but these the applications I want need to be up and running as soon as possible. So the app team dictates to the infrastructure team what they need for hardware and software solutions. But the infrastructure team can't take advantage of newer solutions and technology such as virtualization, storage area networks, and others, because of the way the internal funding mechanisms work or the business decisions are made."

"The challenge," says Pacileo "is educating the business leaders that if this is viewed from an enterprise view versus a business unit perspective, it's possible to take some of the dollars that are being invested in maintenance and start driving change and improvements into the business unit through modernization projects."

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