As the severity of the financial crisis revealed itself, appeared to disappear and now threatens to lift its ugly head again, survival remains the chief priority of practically every organisation. The new financial order puts the spotlight on strategies to return to profitable growth in a considered and sustainable way. It is clear that ‘business as usual’ will no longer make the grade. Action is required and business transformation activities, notably merger and acquisitions (M&As), are on the rise.
Business transformation puts ‘how’ we do business under scrutiny, with M&A activity in particular focusing on the value delivered by the people, processes and technology within merging organisations.
Business runs on IT, so any business transformation now has to involve technology transformation. Technology has changed the nature of the world today: a world in which we carry out transactions, build relationships, reach customers and expand into new markets using in-house systems, enterprise applications and the internet. Delivering business change of the magnitude of M&A activity without transitioning technology is simply not possible for a modern business. This is a concern that is as relevant to financial professionals as their IT colleagues, particularly those engaged in making sure that post-M&A organisations are integrated across people, processes and technology.
Enterprise Applications – Survival of the Fittest
The enterprise applications that underpin business activity are the heartbeat of the economy, processing around 80% of all business transactions worldwide. They have typically been built over many years and have evolved alongside the organisations they support. These applications hold the key to competitive advantage and offer unique differentiation for businesses. Often referred to as the ‘secret formula’ to the company’s success, they are vital in meeting business performance goals and objectives. However, there’s a perception among IT professionals and their counterparts in finance that enterprise applications are too expensive to update sufficiently to meet the need and speed of change after two companies with different processes and technical environments come together.
Integrating two or more application environments post-merger presents some interesting challenges. For example, it’s not always the case that the acquiring party, or the largest partner in a merger, has the best-fit systems and applications to take the new business forward. One thing is certain: doing nothing is not an option. The fact is that organisations heavily rely on technology for day-to-day operations, as well as generating competitive advantage. Failing to make IT planning a fundamental hub of business planning is going to harm the successful outcome of the merger in terms of survival, let alone profitable growth.
The Darwinian principle of ‘survival of the fittest’ applies here – and fittest does not necessarily mean the biggest or even the best. From a business context, adaptability and the ability to deliver change when required are more important. This isn’t to deny the fact that transforming the technology landscape is a major undertaking. Integrating different technologies involves analysing where you are now, where you want to be in terms of business results, and how to get there: the strategic and tactical directions you need to take.
The implication of technical change goes beyond the IT department, however. What may, at first glance, look like the chief technology officer’s (CTO) headache actually represents the enterprise’s opportunity to make substantial savings to the cost of operations and position the company for future growth – something that finance professionals have been quick to recognise.
For many organisations, the impetus to modernise existing applications has come from the chief financial officer (CFO) and has proved to deliver the agility necessary to achieve the growth and competitive objectives that the M&A promised, while at the same time significantly reducing the cost of IT operations. Organisations, whether undertaking M&A or not, that are not considering application modernisation strategies to enable business transformation risk falling behind competitors who see these strategies as key to continued success.
Enabling Business Transformation Through Application Modernisation
Application modernisation strategies are the primary way to achieve sufficient business agility to deliver the changes required to drive business growth, competitive advantage and strengthen the corporate position. They provide a low-risk, low-cost alternative to other strategies that promise business transformation, such as rewrites or packaged solutions.
This has particular relevance for organisations facing the challenge of integrating different applications, often based on different mainframes, post M&A. Similarly, companies that are gearing up for acquisition (buying or selling) can use modernisation as a springboard to more agile environments, making it easier to expand into new technologies such as mobile computing and the cloud. This forward-thinking approach makes them a more attractive purchasing proposition or more capable of integrating with another company’s applications and technology post-merger.
Choosing a Modernisation Strategy
Organisations looking to modernise face a range of choices. They can re-engineer or rewrite (often referred to as ‘rip and replace’) – once a favoured approach until it became apparent that the majority of re-engineering projects fail completely or run massively over both time and budget, and deliver little or no value because the requirement has moved on in the time taken to rewrite.
Some opt to replace mission-critical applications with off-the-shelf packages. These invariably entail sacrificing business logic built over years as well as vital competitive differentiation for ‘convenience’. Organisations become compelled to do business in the manner dictated by the package’s functionality, or to spend significant amounts of time and money configuring the implementation. Often this means losing workflow that is fundamental to the way a business operates and always involves complex data remodelling and retraining. Many package implementations are also either never fully completed or significantly late and over budget.
There are plenty of well-publicised horror stories of replacement systems, whether rewrites or packages, that promised the earth but ended up costing it in terms of system downtime, missed opportunities, damaged reputations and plummeting share prices. There’s no escaping the expense of these approaches, not just in monetary terms, but in the disruption caused to business and the potential loss of intellectual property and competitive differentiation.
Taking the opposite approach, the ultra low-risk alternative of modernising mainframe-based applications while continuing to deploy them on the mainframe simply does not return the kind of cost saving potential that CFOs want. There has to be a balance between risk and return that keeps everyone happy. That can only realistically be achieved by exploiting alternative lower-cost environments to test and run the applications.
The answer lies in application migration and modernisation.
Modernising key applications, or migrating them from mainframe environments completely, dramatically lowers hardware and software costs and provides a low-risk, high-return alternative to application re-writes or package implementations. In turn, these can extend into new technologies such as mobile and the cloud, where and when appropriate, presenting a path into the future for many companies without having to commit to what might be unproven strategies.
It’s important to guard against a change-frenzy that merger and acquisition activity may spark. There can be a desire to overcome technical differences by either re-writing applications to address new technology or by implementing packages. Rather than implementing change for change’s sake, modernising and migrating existing applications is a logical and pragmatic business approach, maximising existing assets and providing the initiative for further improvements to the business’s enterprise applications.
To put it simply, application modernisation and migration represents the intelligent choice for the continuous evolution of your enterprise application portfolio – whether that involves incorporating another company’s business process and technology post-M&A or gearing your own enterprise for future growth.
Modernise and Migrate to Save Costs
Application modernisation and migration delivers a number of benefits to the enterprise, not least the significant cost savings that can be achieved. By redeploying the complete portfolio, or a subset of applications, to lower cost platforms, companies can postpone or completely avoid impending mainframe hardware and software upgrade fees. These can be substantial, particularly when bringing two disparate systems together. Similarly, by moving some or all applications to a new environment, annual mainframe hardware and software leasing fees can be reduced or even eliminated. Using less of the in-house mainframe for development and testing, for example, means lower annual maintenance and support fees for all hardware and software used to develop, test and deploy applications.
Companies following this strategy have enjoyed substantial cost savings. One financial organisation moved development off its mainframe and saw productivity improvements equivalent to 30 days per developer per year. It also achieved significant enhancements to its products through 15% more development time, and invested the savings of US$8m per year in product innovation and thus future growth.
It’s not just development that can be moved from the mainframe. Another financial organisation moved pre-production testing and developer tasks off the mainframe and onto a PC environment, creating a replicated production test environment on Windows. The company was able to save 400 MIPS of processing power that had been allocated to testing, saving some US$400k per year. In addition, greater performance led to increased productivity in every quality assurance (QA) and test individual, which returned an additional US$800k per year. The investment in mainframe offloading was recouped within just 10 months and the company continues to save US$1.2m per year.
While on the subject of success stories, a leading US distributor of healthcare products was looking to modernise its existing, business-critical enterprise resource planning (ERP) system and retain the unique business logic that contained its competitive advantage. The company also wanted to release money to reinvest in customer-led improvements to its products – a pretty tall order.
By migrating its customised system off the mainframe and onto Windows, the organisation reduced its IT infrastructure costs by approximately 77% a year – a staggering amount that it was able to reinvest in the business, increasing its focus on customer service initiatives. The new, more accessible platform helped reduce the number of customer contact layers from 25 screens to 5-10, resulting in increased throughput, a better customer experience, more productive staff and overall efficiency gains. All the while, this company retained and was able to enhance the 20 years invested in its business process and the competitive advantage contained within its systems.
So, as many IT executives are considering how to design systems to allow IT to respond much faster to new business requirements, professionals with a financial responsibility are recognising the value that application modernisation and migration can return. Instead of being hampered by the monolithic nature of applications and the lack of cost-effective technology to deliver the capabilities needed, application migration is giving organisations the ability to:
- Integrate faster and consolidate systems on lower-cost, more open platforms.
- Use contemporary and cost-effective technology to implement a service oriented architecture (SOA).
- Exploit web services and SOA to respond to new opportunities faster and more cost effectively than competitors.
The key to successful migration projects is minimising change: the greater the changes required, the greater the risk. Minimising change avoids unnecessary risk during the initial migration project, while moving to an environment that supports business agility for the future.
The benefits of migration are compelling in any business transformation, but the throes of M&A integration means that minimising or avoiding risk is of paramount concern. It is therefore vital to ensure the solution is going to achieve desired results for the new business, matching or exceeding the types of performance levels necessary and creating an infrastructure that delivers the reliability, availability and serviceability (RAS) levels demanded by the business. In addition, it has to provide an architecture that enables IT to rapidly respond to new business demands, particularly while the structures of the post M&A business are in flux.
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