In-Depth

To Cut IT Costs, Manage Resources Like an Investment Portfolio

Organizations are starting to organize applications, hardware, and even network assets, into portfolios, managing them as though they were part of an investment portfolio. Besides cutting costs, using the portfolio approach can provide a more-disciplined approach to application development investment.

• By Stephen Swoyer
• 03/16/2004

Sounds fantastic, you say, but what is an IT portfolio and how does one go about managing it? The notion of portfolio management has become increasingly popular among many business thinkers, and some companies are starting to organize their applications and projects—along with their hardware and network assets—into portfolios. The idea, experts say, is to manage these resources in much the same way that you would an investment portfolio.

“The key is to think of them not as individual projects, or as things that have strategic value all by themselves, but as part of a portfolio, and this is similar to how you would look at an investment portfolio,” said Cathy Benko, a partner with Deloitte Consulting and co-author of a book about project portfolio management, in an interview last year.

Like an investment portfolio, an IT portfolio should mix prudence with risk, proponents say. “Just as people or corporations invest in municipal bonds to ensure that a portion of their portfolio will have slow, steady growth, while another portion of the portfolio is invested in high-risk stocks with great growth potential, enterprises must balance infrastructure, enhancement and innovation in their IT plans,” wrote researchers Jim Duggan and Matt Light in a Gartner Inc. research bulletin late last year.

With respect to IT project management, for example, Benko says you should take a look at your portfolio and ask yourself one simple question: In the case of a budgetary contraction, which projects would you accelerate, maintain, slow down, or stop? Most of your projects should be of the kind that you would maintain or accelerate in either scenario, she notes.

At the same time, she concedes, because it’s a portfolio, and because you’re managing risk in tandem with potential rewards, it’s understandable that you will have some projects that are overly dependent on certain business conditions. The key is to balance both: “This makes you more aware of (a) how invested you are in today's reality and (b) what are those investments that you're making that are more fundable than some of your other investments, which are more dependent on the current set of business conditions,” she argued.

One of IT portfolio management’s biggest selling points is, of course, it’s potential to trim costs—often by a wide margin. Phil Murphy, a principal analyst with Forrester Research, says that the potential upside to such savings is significant. “Seventy-three percent of application budgets go to maintenance, and if I can shave 10 or 15 percent off of this, that’s real money I’m saving,” he points out.

But Murphy and other proponents say that effective portfolio management has other advantages as well. “Application portfolio management strategies can reduce IT costs, but, more importantly, they can provide a more-disciplined approach to application development (AD) investment,” write Duggan and Light.

Application Portfolio Management = Cost Savings

If there’s one area where portfolio management can pay big dividends, it’s with enterprise applications. By 2008, say Duggan and Light, organizations that implement disciplined application portfolio management strategies can reduce their IT expenses by 20 percent. Moreover, they write, organizations can cut the costs of future application transformations by 30 percent.

With this in mind, Duggan and Light outline two different approaches to IT portfolio management. “A top-down approach aligning business initiatives with enterprise IT architectures and investments increases the involvement of business process owners, prioritizing IT investments in line with business strategies,” the researchers write. “A bottom-up approach identifies opportunities to rationalize the established application inventory and can reduce IT costs, thereby increasing AD efficiency.”

Proponents say that effective application portfolio management balances two extremes: Investment in new applications (or enhancements to existing applications) and improvements to the efficiency of infrastructure and utility applications. Ideally, companies will invest in both; given budgetary limitations, however, that’s often not possible.

“Enterprises can't focus solely on new investment decisions or ignore their AD costs, nor can they focus simply on cost reduction, leaving important e-business decisions to chance,” Duggan and Light argue.

To what extent are companies today practicing application portfolio management? Forrester’s Murphy says that the discipline is still in its nascent stages in many enterprises. “Right now, it’s a graveyard,” he confirms. “But that’s starting to change. They’re starting to say, 'Let’s align IT to the business people, let’s give developers tools to figure out what it is.' It’s starting to change.”