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Assess IT rationalization projects from business and financial perspectives

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The first step to rationalize your IT landscape is to get a clear view on how well your IT systems support the business.

An IT portfolio management (ITPM) practice helps you inventory your assets and assess them from multiple perspectives. This approach has become increasingly popular among IT leaders, because it allows them to correctly evaluate the business value of their IT assets. By modeling the links between business activities and the applications that support them, you can understand the value and performance of each application accurately and clearly, thus helping you make the right decisions to streamline the application portfolio.

An ITPM practice also incorporates business capability maps that help you understand how applications support the business and identify redundancies as well as applications requiring attention. By obtaining this information, you can better plan required applications and technologies over time, and future investments. With this comprehensive understanding of how business operations impact IT resources, IT departments become a value-added partner in the business.

As a second step, you can assess IT rationalization projects based on a financial perspective.

Once you have evaluated your IT assets, you can start planning IT transformation projects. For example, you may want to eliminate two local CRMs stemming from recent acquisitions and deploy the corporate CRM instead.

Let’s suppose this project requires an initial investment of $200K to deploy the corporate CRM, and costs $100K in maintenance and $50K for the infrastructure per year. With this upfront investment, removing the two local CRMs will help you save $250K per year.

Let’s look at the numbers for this example :

 

Project Cash Flows

Year

0

1

2

3

4

5

Total

Costs (K$)

$  200K,

 $  150K

 $  150K

 $  150K

 $  150K

 $ 150K

 $ 950K

Benefits (K$)

 

 $  250K

 $  250K

 $  250K

 $  250K

 $ 250K

 $ 1,250K

Cash Flow (K$)

$ (200K)

 $  100K

 $  100K

 $  100K

 $  100K

 $ 100K

 $ 300K

 

To assess this project, we used net present value (NPV). This method calculates the cash flows generated by the project, year over year, and discounts them by an appropriate rate. If the sum of the discounted cash flows is positive, then the project should be on your target list for completion, unless other projects have higher NPVs.


Discounted Project Cash Flows (discount rate of 10%)

Year

0

1

2

3

4

5

 Total

 Costs (PV) (K$)

$ 200K

$ 136.4K

$ 124K

$ 112.7K

$ 102.5K

$ 93.1K

$ 768.6K 

 Benefits (PV) (K$)

 

$ 227.2K

$ 206.6K

$ 187.8K

$ 170.8K

$ 155.2K

$ 947.7K 

 Cash Flow (PV) (K$)

$ (200K)

$ 90.9K

$ 82.6K

$ 75.1K

$ 68.3K

$ 62.1K

$ 179.1K

 

The last cell, $179,080, represents the NPV of the project. Again, with a positive NPV, the project should be undertaken.

In summary, IT departments have to identify the right projects to rationalize their IT systems in order to reduce costs. One way to identify the most important rationalization projects is to analyze how well applications support the business. For a more complete evaluation, you should also assess these projects from a financial perspective.

By doing these analyses, you’ll have a clearer picture of those that will generate cost savings and those that won’t. You can then feel more confident in pursuing those with the highest NPV. Other criteria, such as risk deadlines, strategic alignment or business impact, should always be considered when deciding whether a project should be executed because they will provide another important perspective.

Wants to know more? Watch our video to see how to streamline your application portfolio & align IT assets with your business priorities.

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MEGA

The first step to rationalize your IT landscape is to get a clear view on how well your IT systems support the business.

An IT portfolio management (ITPM) practice helps you inventory your assets and assess them from multiple perspectives. This approach has become increasingly popular among IT leaders, because it allows them to correctly evaluate the business value of their IT assets. By modeling the links between business activities and the applications that support them, you can understand the value and performance of each application accurately and clearly, thus helping you make the right decisions to streamline the application portfolio.

An ITPM practice also incorporates business capability maps that help you understand how applications support the business and identify redundancies as well as applications requiring attention. By obtaining this information, you can better plan required applications and technologies over time, and future investments. With this comprehensive understanding of how business operations impact IT resources, IT departments become a value-added partner in the business.

As a second step, you can assess IT rationalization projects based on a financial perspective.

Once you have evaluated your IT assets, you can start planning IT transformation projects. For example, you may want to eliminate two local CRMs stemming from recent acquisitions and deploy the corporate CRM instead.

Let’s suppose this project requires an initial investment of $200K to deploy the corporate CRM, and costs $100K in maintenance and $50K for the infrastructure per year. With this upfront investment, removing the two local CRMs will help you save $250K per year.

Let’s look at the numbers for this example :

 

Project Cash Flows

Year

0

1

2

3

4

5

Total

Costs (K$)

$  200K,

 $  150K

 $  150K

 $  150K

 $  150K

 $ 150K

 $ 950K

Benefits (K$)

 

 $  250K

 $  250K

 $  250K

 $  250K

 $ 250K

 $ 1,250K

Cash Flow (K$)

$ (200K)

 $  100K

 $  100K

 $  100K

 $  100K

 $ 100K

 $ 300K

 

To assess this project, we used net present value (NPV). This method calculates the cash flows generated by the project, year over year, and discounts them by an appropriate rate. If the sum of the discounted cash flows is positive, then the project should be on your target list for completion, unless other projects have higher NPVs.


Discounted Project Cash Flows (discount rate of 10%)

Year

0

1

2

3

4

5

 Total

 Costs (PV) (K$)

$ 200K

$ 136.4K

$ 124K

$ 112.7K

$ 102.5K

$ 93.1K

$ 768.6K 

 Benefits (PV) (K$)

 

$ 227.2K

$ 206.6K

$ 187.8K

$ 170.8K

$ 155.2K

$ 947.7K 

 Cash Flow (PV) (K$)

$ (200K)

$ 90.9K

$ 82.6K

$ 75.1K

$ 68.3K

$ 62.1K

$ 179.1K

 

The last cell, $179,080, represents the NPV of the project. Again, with a positive NPV, the project should be undertaken.

In summary, IT departments have to identify the right projects to rationalize their IT systems in order to reduce costs. One way to identify the most important rationalization projects is to analyze how well applications support the business. For a more complete evaluation, you should also assess these projects from a financial perspective.

By doing these analyses, you’ll have a clearer picture of those that will generate cost savings and those that won’t. You can then feel more confident in pursuing those with the highest NPV. Other criteria, such as risk deadlines, strategic alignment or business impact, should always be considered when deciding whether a project should be executed because they will provide another important perspective.

Wants to know more? Watch our video to see how to streamline your application portfolio & align IT assets with your business priorities.