Lets look at the fundamental problem today. Lets take as an example a typical Fortune 500 corporation. This company might gross $40 billion a year and have an IT organization with a budget of about $1.1 billion and about 6,000 employees.
Out of that budget, a figure of merit is the breakdown between dollars spent sustaining existing services (legacy costs) versus dollars spent in new services. The dollars in the second category are the ones associated with growth and business innovation.
Because of competitive pressures, and in spite of the economic recovery thats going into the fifth year, typical IT budgets have remained flat or growing slowly, while the cost of legacy tends to grow with the company. Left unchecked, the cost of legacy will overwhelm the IT budget.
One strategy to lower the cost of legacy is through outsourcing/ offshoring and the ensuing cost arbitrage. The arbitrage can be geographic and taking advantage of lower salary scales in some countries. Or through division of labor, where an efficient, specialized firm delivers a service such as payroll at a lower cost than the in-sourced cost.
Offshoring entails a learning curve and cost bump where the transition negotiations take place and consultants from the service provider are brought in. There is an initial cost decrease after the transition due to staffing reductions.
Although lower initially, legacy cost follows a steeper slope because salaries in Bangalore are growing much faster than salaries in the United States and Europe. Eventually, a new stasis is reached when the cost of the outsourced service plus overhead reaches parity with to the in-sourced cost.
And not every service can be outsourced. Outsourcing a companys core activities might lead to loss of intellectual assets and collective knowledge that will limit an organizations growth potential. Outsourcing could also impact customer satisfaction, quality-of-service and employee morale that might hurt the organization in the long term.
Technology refreshes provide an alternative. These refreshes have a deflationary effect. A strategic emphasis to aggressively adopt emerging technologies will lead to reductions in capital outlays and cost of labor. Every refresh slides the cost line down.
These transitions are not without risk and must be managed carefully. However, the rewards can be very attractive. For instance, investing in server consolidation increases a systems capability to handle bigger workloads with minimal data center new investment.
SOA & Legacy
SOA adoption brings more fundamental change, lowering the legacy curve and its growth. Moreover, SOA does not exclude outsourcing and technology adoption. In fact, it might provide a more rational framework for their application, with clean interfaces to mix and match in-house and outsourced composable services with feedback based on business outcomes.
The adoption of SOA becomes attractive if it can be shown that it leads to a structural and permanent reduction of the current 70% legacy cost by 10- to 20-percent. Through elimination of redundancy and breaking silos, SOAs should bring increased operational simplicity allowing dialing cost increases to a sustainable rate.
The elimination of redundancy and a 15% increase in efficiency would be equivalent to hiring 1,000 staff without actually increasing headcount, accomplished through the use of standardized platforms, simplified operating environments.
The adoption of SOA wont be without pain. Many job descriptions will change. An overall strategy requires an EA governance structure, consolidation of projects into fewer and deeper activities, and more consumption of reusable components. This transition will take time.
The cost curve will continue running its course for a while, and eventually tapers off as an increasing proportion of applications are brought up under a SOA framework.
When the processes have been institutionalized, this 1,000 headcount truly represents the resource that gets freed up from legacy work to contribute to an organizations growth.
Enrique Castro-Leon is currently an enterprise architect and technology strategist for Intel Solution Services with 22 years at Intel. He has taught at the Oregon Graduate Institute, Portland State University, and has authored over 30 papers. Castro-Leon holds Ph.D. and M.S. degrees in Electrical Engineering and Computer Science from Purdue University.