Application portfolio management: Treat software as a valuable asset

Application portfolio management helps businesses track their important business apps, making them less intangible and their value more visible.

I've been thinking about an idea that emerged from recent conversations with application portfolio management (APM) experts: Key software applications are among any organization's most valuable assets, but they are rarely managed that way. In fact, many are barely managed at all.

Jennifer LentJennifer Lent

Essentially the software equivalent of financial portfolio management, APM lets organizations oversee the applications that run their business much the same way investors track stocks and bonds in their portfolios. A crucial first step in APM is compiling a comprehensive list of applications in production. The value of managing an application portfolio comes not from generating the list itself but from the decisions the list enables you to make: Which applications are redundant and can be eliminated? Which ones warrant deeper development? Which ones are too costly to maintain relative to the value they return?

What applications do we manage again?

U.K.-based Gartner analyst Andy Kyte told me that most organizations he works with would be hard-pressed to quickly produce a list of the applications their business depends on. CEOs take for granted that their CIOs could pull such a list out of their back pockets, Kyte said. They are "gobsmacked and amazed" to learn that the list doesn't exist. "How could this be? The CIO has no inventory of the applications that are running the business?"

Kyte said this situation is absurd and that organizations should apply the same careful attention to key software applications that they do to managing fixed assets, such as land, buildings and manufacturing equipment. "If you ask the CEO, 'Does your business own any buildings? Who looks after them?' he can quickly produce a detailed account for each fixed asset," he said. Any CEO can tell you when the asset was acquired, how much the company paid for it, what it's worth today and so forth.

APM is to the intangible asset portfolio what fixed asset management is to tangible assets.

Andy Kyte,
analyst, Gartner

Why can't we do the same thing for software? How it is that applications that are directly tied to an organization's livelihood -- software that business relies on to place orders, track inventory and deliver service -- aren't treated as the valuable assets that they are?

Software: The intangible asset

The short and unsatisfying answer as to why organizations have done such a poor job of managing key applications is that from a financial perspective, software is considered an intangible asset. As Intellectual property, it can be protected by copyright, patent or other legal measures. But because software does not physically exist in the same way as a machine or a building does, it has never been tracked the way fixed assets are, Kyte told me. Keeping that in mind, Kyte defines APM like this: "APM is to the intangible asset portfolio what fixed asset management is to tangible assets."

Estimating the cost of applications

A second reason business-critical software applications haven't been properly accounted for is that they emerge and grow over time. So keeping track of what they cost is a more complex process than itemizing expenditures for equipment. How do you determine the value of software? Some expenditures are easy to identify: licensing costs for off-the-shelf applications; the cost of engaging application vendors or consultants to maintain or customize the software for your organization. Others are harder to assess: the cost of building an application from scratch, or using in-house developers to customize packaged applications.

The project focus

Gartner's Kyte suggested another reason why organizations have failed to account properly for the applications the business depends on: IT shops long ago adopted a project mind-set, and that culture is difficult to change. "IT is very project-centric. It's a front-of-brain activity for IT managers," he said. A project approach makes it easier to manage the wide range of activities IT shops engage in. But it also keeps them from developing the crucial big-picture perspective of how software applications serve the business, he said. "After 40 years of running [software development] projects, IT is left with a huge number of artifacts that were produced by these projects." Managing application portfolios is really about caring for and nurturing the artifacts of these projects -- figuring out which ones warrant deeper investment and which ones don't, he said.

Is your organization struggling with application portfolio management? Let us know what challenges you face and we'll find the experts that can answer your questions.

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