How to Manage Rising Software Costs

Develop the discipline of application cost management by using four modelling tools.

If you work for a medium to large enterprise, chances are there are hundreds, if not thousands, of applications in your organization. Software is vital, but it’s expensive. Not just to subscribe to, develop or license in the beginning — it keeps costing money over the whole of its life.

Most organizations spend a major share of the IT budget on applications. With the challenges and opportunities of digital business demanding more software, IT organizations need to develop a much better understanding of the costs associated with running software over the entire life of a system.

Most organizations spend a major share of the IT budget on applications.

Andy Kyte, vice president and Gartner Fellow, said it isn’t enough to know the big numbers.

“The CFO is not likely to be impressed by an application leader who says that they know that they spend $85 million running all the applications, but they don’t know how that is distributed between individual applications,” Kyte said. “How can one person possibly understand cost allocation across a portfolio so big and complex?”

Application leaders already feel rushed off their feet with all the work that they have to manage, and many of them believe that the task of trying to develop cost granularity for a large estate of applications will be the straw that breaks the camel’s back.

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“Such a defeatist attitude serves nobody well,” Kyte said. “It’s true that managing software costs requires time, resources and tools. Rather than seeing the problem of understanding cost distribution as impossible, the problem needs to be broken down into manageable improvement steps.”

Where to start

Instead of trying to understand the costs of 1,000 applications, start by modelling the costs of the 50 largest and most expensive applications. There’s no harm in using a simple spreadsheet. There are four models that can be applied to software costs to maximize value for money.

  1. Current-year cost modelling: This is the outlay associated with providing the live operational application in the current financial year. These costs should be broken down into operations, support and corrective maintenance for fixing software bugs.
  2. Current-year nonrecurring application costs: Application costs vary from year to year. Some costs are reasonably constant, such as the cost of operations, support and corrective maintenance, while others will vary, such as license variations, upgrades and enhancements. It’s important to report these nonrecurring costs separately from recurring operational costs.
  3. Expected future costs: Large and complex application software tends to become more expensive to operate, support and maintain as it gets older, but few IT organizations have any real idea of the future cost of managing their current applications. Failure to understand these costs simply stores up problems for the future.
  4. Total cost of ownership: Calculate the expected total cost of ownership (TCO) of the application by using whole-of-life cost modelling before investing in a new application. Include the cost to go live; annual cost to operate; annual cost of support and maintenance; predictable nonrecurring costs (upgrades); potential future enhancements and extensions; and post-decommissioning regulatory data retention costs.

No one role or individual can take ownership of all application cost activities. Effective cost management is the responsibility of all management and technical staff, but without common models, there can be no sharing of data and best practices.

Gartner clients can read more in A Primer on Application Cost of Ownership by Andy Kyte, et al.

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