Sourcing

White paper

Strategic Sourcing
of the Application Portfolio
How CIOs bring focus to their sourcing policy
By Alex van den Bergh MSc, Joost Okken MSc

Introduction
Fueled by business changes and changes in IT, application portfolios have become increas-
ingly heterogeneous. A growing demand from the business and a decrease of supply in the IT
labor market pose new challenges to the CIO.

Now that external sourcing options for application services are maturing, a growing number of
organizations take a more structured approach to application sourcing. Boldly outsourcing the
entire application services portfolio; or ad-hoc solutions like hiring more external contractors,
seldom provide a sustainable and satisfactory solution. Contrary to infrastructure, application
portfolios tend to benefit from a more differentiated sourcing approach. It is time for the CIO
to make strategic choices regarding the application portfolio and bring focus to the sourcing
policy.

D a r e t o c h a l l e n g e
Application Sourcing
In practice one finds that the term sourcing is often confused with outsourcing. Mistakes like
these are known to raise eyebrows in certain situations so it is important to be clear on what
is meant with the term.

Following most definitions, the key to sourcing is creating and sustaining access to goods and
services through internal and external providers. When applied to application services, the main
subject is the portfolio of application services. Considering this scope, we will use the following
definition for application sourcing:

‘Application sourcing is provisioning and managing application services using the optimal set of
internal and external providers, in pursuit of business goals’.

Sourcing is conceptually related to procurement in general and more specifically to ‘aligned

procurement’ (Kraljic, 1983). Aligned procurement and sourcing converge on the principle that
all purchasing decisions should be based on business alignment logic (e.g. long term business
goals) and performance logic (e.g. value for money and time-to-value). As we will show in this
whitepaper, application sourcing goes beyond procurement (a ‘buy’ option in sourcing terms)
as it applies the same logic to internal assembly (‘make’), collaboration (‘ally’), trade (‘barter’),
and consequently considers more dimensions relevant in decision making. These additional
dimensions include properties of the application services portfolio itself, HR-aspects and the
strategic impact on relationships with service providers.

The Sourcing Challenge

The increased tension on the labor market for qualified IT personnel in most countries makes it
ever more challenging for IT departments to deliver. While the intake of personnel is under
pressure, the demand for execution power increases. IT departments have internal costs to
maintain an evermore heterogeneous portfolio of applications. Because of existing legacy systems,
new system development and business changes such as mergers and acquisitions the number of
platforms an IT department needs to support is rising. In addition, the volume of the demand often
increases. The current marketplace requires an increased pace of innovation and stronger
collaboration with customers. To facilitate these requirements there is a need for increased
flexibility of IT skills, better alignment with suppliers and a need for portfolio consolidation.

External IT service providers seize the opportunity by offering services to organizations. They
use a variety of delivery models ranging from temporary contractors for IT, to full service
outsourcing. Due to globalization such options are becoming more feasible, adding interna-
tional parties as viable providers of IT. These developments pose new challenges to internal IT
departments, as they involve managing two strategic risks.

1. Strategic Dependency
The first risk is associated with strategic dependency. To meet the extra demands on the
application portfolio in the short term, organizations tend to focus on acquiring resources
from external service providers. Although often meant as a temporary solution, in practice it
turns out that this approach establishes long term dependency on external service providers.
While external resources cover a larger part of the work, knowledge is leaving the
department and external dependency only increases more.

Acquirement of external resources is not a bad thing in itself. Especially on areas where
quick up- and downscaling of resources is needed, external providers can offer help.
Similarly external resources may be useful in training internal personnel or bring temporary

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 specialist knowledge. However, for strategic services, it is
The CIO should consciously
advisable to keep the ratio of external versus internal
managing external resourcing to
resources small. The CIO should consciously manage external
avoid strategic dependency
resourcing to avoid strategic dependency.

2. Loss of Competitive Edge

The second risk is the loss of competitive edge of the IT department vis-à-vis external
market parties. With an emergence of more external sourcing options, the internal IT
department should define its competitive edge. The technical skills of IT departments have
no inherent competitive edge. For instance external service providers usually are the best
partners for developing, testing or operating certain technical platforms. So in what area
does the internal IT department have a competitive edge over external service providers?

Sometimes internal IT departments refer to their specific knowledge of internal applications

as a competitive edge; however, this is a dangerous misconception. Although specific
application knowledge is usually indeed unique, it is often not tied to the IT department as
a whole but to a small group of employees. It is therefore more of a risk than a benefit to the
department, especially considering that some of these employees might actually be (or
become) external contractors.

Even if specific application knowledge is of such nature that it can be considered a

competitive edge, leveraging this is questionable. The IT department would not be posi-
tioning itself as the party capable of delivering solutions for new, competitive edge and
strategic business domains but would in effect signal to the business that its ‘cutting edge’
is within the preservation of legacy applications. This is the opposite of a future-proof
strategy for the IT department and it will not provide the business with the best IT delivery.

The Need for Strategic Sourcing

Addressing the described sourcing challenges requires a long term vision. In order to maximize
both the effectiveness of internal and external IT delivery, the CIO should define a sourcing strategy.

Focus
First of all, the CIO must bring focus to the sourcing policy. A
it is not a question of whether
focused sourcing policy forces organizations to make choices and
to source externally, but what
aim their internal capacity at the areas where they have the most
and how to source externally
added value. That means that external delivery potential must be
used on the remaining areas. In the current challenging IT market,
external sourcing is not just a matter of having the most effective delivery, but it is also a bare
necessity to meet the growing demand. In the current market it is not unusual for IT
departments to have areas where the majority of personnel consists of external contractors.
That means that a significant part of the delivery capacity is in fact already implicitly externally
sourced. By applying focus, the CIO makes an explicit choice about what to source internally
and what to source externally. In other words: it is not a question of whether to source
externally, but what and how to source externally.

By divesting the delivery of non-core areas to external suppliers, organizations can lower
overall costs. Internal capacity can be focused on core activities trying to best support core
business needs. By targeting solutions with the highest impact on the business, the IT de-
partment strengthens its competitive edge and thereby secures its added value to the com-
pany for the future. Another benefit of strategic sourcing is that it allows for a long-term sus-
tainable HR policy, for example by strengthening strategic areas through targeted hiring of new

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 personnel and retraining of existing internal resources. Furthermore, by providing clarity on
long term sourcing matters, and making fundamental choices regarding the application
landscape, the IT department creates momentum for introducing standards, consistency and
consolidation of the application portfolio.

The Competitive Edge of the IT Department

specific business
The IT department needs to focus on its competitive edge. This
knowledge and
competitive edge should not lie in its knowledge of specific applications,
customer intimacy
but in other areas. In practice, specific business knowledge and customer
intimacy (be it physical, organizational, cultural or otherwise) are the most potent distinguishing
characteristics of the IT department. Consequently, the services that benefit most from these
characteristics are those where internal IT maximizes its competitive edge. Services that
support core business processes, and services that involve business interaction, customer
intimacy and/or innovation to a large degree, usually fall into this category. It is this specific
added value that defines the raison d'être of the IT organization and will demonstrate to be the
most future proof of assets. Supporting the core business processes and innovation should
therefore be the focus of internal IT.

The Competitive Edge of the Market

External IT service providers have other competitive advantages, examples are: a broad portfolio
of IT skills; economy of scale; expertise in rare technical niches like certain migrations; ability to
use global sourcing opportunities; broad experience in a certain vertical markets; and a better ability
to up- and downscale in their delivery capacity. Business intimacy is something that is build-up
over time, it is a characteristic that is typically not directly present at external service providers.

Common Problems with Sourcing Strategies

The success and effective outcomes of application sourcing strategies vary. Why is this so?
A common group of pitfalls exist:
· Vagueness: Mission and vision statements are too often defined in ambiguous and
immeasurable terms, like ‘achieving quality leadership’. Elaborating from an unclear vision,
strategic choices inherent to this ambiguity become phrased in vague contours (‘we need
more innovative technology’). While there is nothing against a broadly defined ambition, a
strategy should be able to lead to concrete and workable implementation.
· Inability to make choices: In a complex and politically charged environment, IT executives
have a hard time making choices: everything seems core and vital to the company. When this
happens, the strategy will not bring about change and will lack the required focus.
· Over-Quantification: Some approaches to strategic planning are drowned in quantitative
analysis of the past and extrapolation to the future. These kinds of approaches take a
multitude of dimensions into account. An assessment is performed to get the numbers for
each dimension, a calculation takes place (often involving lots of magic coefficients) and
then: presto! The sourcing strategy just rolls out of the system. However, as experience
shows, successful strategies are not just about following a trail of numbers and calculations.
Numbers and projections are needed as a supporting factor but in the end a strategy will
also require intelligent and visionary decision making.
· Introversive focus: IT sourcing strategies tend to fail because the business perspective is not
sufficiently taken into account. If an IT organization defines its mission as supporting the
business as effectively as possible, then the IT sourcing strategy should strongly align with
business interests. Including the business perspective in the definition of a strategy has an
added bonus: knowing what is core to the business is a strong tool to help IT executives
make choices.

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The Building Blocks of Sourcing Strategy
The methodical approach to strategic sourcing of the application portfolio is based on a set of
building blocks.

Application Services
As main subjects in defining the application sourcing strategy, we will use application services.
An application service is a clearly defined concept from both a technical perspective as well as
a business perspective. Technically, an application service is a discrete set of application assets
combined with specific means of delivery. In business terms, an application service is a function
that is supportive of one or more business processes. By using a focal entity that can be
understood by both business and IT, the precondition is satisfied that the sourcing strategy
aligns with business interests.

The Dimensions
As noted the first and most strategic step in a sourcing strategy, is to create focus. This means
choices will have to be made about what and how to source externally. At the same time this
is a choice of what and how to source internally. In the case of an application sourcing strategy,
application services are primarily judged by two dimensions, the strategic business value and
the alignment to the IT domain strategy.

The Strategic Business Value

Strategic business value is about the value of the application service
Strategic business value is
to the business in the long term. It is a broad notion, not limited to
not necessarily about
quantitative output but also including qualitative issues at the strategic
mission criticality
level or issues such as regulatory compliance. Strategic business
value is not necessarily about mission criticality. Mission criticality such as required availability
or budgetary impact are not the main strategic business issues with regards to sourcing. For
example the application services supporting the provision of electrical power generally require
a near perfect uptime which makes them critical; however they are rarely core to the business
or a differentiator and are therefore not regarded as being of strategic importance. Similarly
maintaining an application infrastructure for tracking and tracing of goods may be a very costly
venture, but that does not necessarily make the service of strategic importance to the
organization.

Examples of application services with a high strategic business value are those services that
support processes that play a pivotal role in growing or maintaining market share and/or appli-
cation services needed to support distinguishing business processes. Usually these applica-
tion services are unique and do not exist outside of the organization.

Alignment to the IT Domain Strategy

The second dimension deals with the main non-business, IT-attributes of the application serv-
ices, the IT domains. Usually IT domains are platforms such as Java, SAP, .net or Cobol. But if
needed, the dimension can be broadened or lifted to a more abstract level such as ‘off the
shelve tools’, ‘interfacing services’, ‘client-server applications’, ‘web-applications’ et cetera.

Where business value has an inherent ordering (low towards high), IT domains in itself are an
unordered set (i.e. SAP is not an inherently ‘higher’ or ‘lower’ IT domain than Java). However,
IT departments will have an IT strategy that orders the IT domains strategically; something we
refer to as the IT domain strategy.

Whether an IT domain is more strategic than another IT domain is a relative notion by definition.
Several drivers might influence the decision to consider an IT domain strategic or not. Usually
one finds that more modern IT domains, used for new development, are considered to be more

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 strategic than others. Older IT domains, especially ones that depend on
IT departments are
obsolete tools or extremely rare skills - sometimes referred to as ‘burning
advised not to try
platforms’ – are considered to be non-strategic IT domains. However, even if
sourcing all IT
not all domains are easily strategically ordered, IT departments realize that
domains internally
they are not able to source all IT internally. With current sourcing challenges IT
departments are advised not to try sourcing all IT domains internally but to
make choices in their IT domain strategy. This forces the CIO to make choices between IT
domains and thereby apply focus to the strategy.

Alignment between demand and supply

The strategic business value is about the added value to the organization. It is about defining
whether an application service is considered strategic from a demand point of view. On the
other hand the IT domain strategy is about the supply point of view. It is about whether the
application service is provided within an IT domain that the IT department can strategically
supply.

As noted, to maximize its competitive edge, the IT department should focus on services that
require the highest levels of intimacy with the business and business knowledge. This means
that the CIO should concentrate on investing in what is most core to the business and con-
sider divesting non core areas to the market. The CIO should optimally align the (IT) supply with
the (business) demand. The basic rule is ‘if it is strategic to the business, it should be strategic
to IT’. The CIO is in an excellent position to define his IT domain strategy in such a way that it
is maximally aligned with the business strategic value.

The framework to achieve Focus in an Application Sourcing Strategy

In order to focus the application portfolio strategy of the CIO, Quint Wellington Redwood em-
ploys a framework that enables alignment within the two main dimensions. It is only after the
focus has been determined that other dimensions fall into place and the rest of the sourcing
strategy can be laid out.

Framework
Central in this framework is a matrix
that relates the two dimensions and
links them to standard sourcing
scenarios for each quadrant. This
provides a basis for making strategic
High
sourcing decisions. While supported
Strategic by quantified data and best practices,
Value it leaves ample room for intelligent and
visionary decision making.

The vertical axis of the matrix shows

the business value ranging from a low
Business strategic value to a high value. The
Value horizontal axis ranks the IT domains
needed for the application services,
or-dered according to the IT domain
strategy. The application services are
plotted on this matrix.

Low
Strategic
Value

IT Domain
Low Strategic Value High Strategic Value
Strategy

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Business Alignment
In the matrix, alignment is presented between supply and demand using the strategic business
value versus the strategic value of the IT domain of the application service. The lower left
quadrant and the upper right quadrant represent the aligned area between these dimensions.
It is in these quadrants, where strategic business value is aligned with the IT domain strategy,
that sourcing decisions can be made with relative ease.

The upper right quadrant: scenarios for the core

The application services in the upper right quadrant need to be protected. The strategic busi-
ness value of these services is high and the IT domain needed for the service is of high
strategic value to the IT department. Sourcing decisions within this quadrant should focus on
creating the sourcing mix that best protects these vital application assets. The organization
needs to make sure that effective IT delivery is protected for the long term and has the quality
to sup-port these core business processes.

High
Strategic Core Quadrant
Value

Business
Value

Low Non-core Quadrant

Strategic
Value

IT Domain
Low Strategic Value High Strategic Value
Strategy

Strategic dependency should be avoided while long term delivery, customer intimacy, intel-
lectual property and agility need to be secured for the application services in these core busi-
ness processes. Usually these application services are sourced internally. IT departments are
advised to focus on the IT domains needed to deliver these services and draw on their unique
vicinity to the business to prove they are the best partner to do so. Does this mean that
application services in this quadrant should always be sourced internally? Not necessarily. A
relationship with a vendor, for instance through contracted labor or advice, might be the best
way to protect and sustain the application service for the long term. When an external party has
certain skills that make it beneficial to consider outsourcing these core systems this will usually
lead to a vendor relationship that extends to a partnership where time-to-market, quality of
delivery, mutual benefits, trust and independence precede cost-cutting.

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The lower left quadrant: non-core scenarios
The lower left quadrant contains application services that are not core to the business and that
require non-strategic IT domains. Application services in this quadrant are therefore prime
candidates for either divestment.
IT investments in these assets are not warranted by a business strategy. Given the limited
strategic value of the IT domain, the external market is probably better at providing the service.
Replacement of the application service is also a viable scenario. Considering the low strategic
business value, the application service is probably not unique and might be replaced by existing
external solutions. As for sourcing, all models that imply divestment have to be considered,
including piecemeal outsourcing. Usually a relationship in this area will not require an in-depth
partnership and may have a large focus on cost-cutting as well as other areas.

The Unaligned Quadrants

The upper left and lower right quadrants are the areas where the strategic value of the IT
domain is not aligned with the strategic business value of the application services. These
‘unaligned’ quadrants leave more diverse strategic scenarios as there is a need to both effec-
tively source and align them simultaneously.

High
Strategic IT Deficit Quadrant
Value

Business
Value

Low
IT surplus Quadrant
Strategic
Value

IT Domain
Low Strategic Value High Strategic Value
Strategy

The Upper left Quadrant: the IT deficit quadrant

The upper left quadrant is a problem area for the internal IT department. Although the applica-
tion services delivered in this quadrant are core to the business, the strategic precedence given
to the required IT domain falls short. This is a serious matter as the IT organization will restrain
the business in achieving its strategic objectives. It also means that other (external) service
providers will probably do a better job at delivering these services and would thereby maneuver
themselves in a position where they supply core services to the business. In other words: if the
IT department does not consider the required IT domain to be strategic, the business will look
for market alternatives to keep the core processes running smoothly.

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 Make the IT domain more strategic
(make another IT domain less strategic)

Protected Outsourcing

Application Migration
Business to other IT domain
Value

IT Domain
Low Strategic Value High Strategic Value
Strategy

So what can be done to counteract erosion of the IT department’s services portfolio? The IT
department has two choices to keep the ball in their court: either invest in the IT domain and
give it precedence over other IT domains or migrate the application services in this domain to
a more strategic IT domain. Both scenarios require a significant investment and do not add any
business value. However, the scenarios strengthen the ability of the IT department to deliver
core services to the business and are therefore of strategic interest to the IT department it-self.

Increasing the strategic value of a IT domain is not an easy option. The

one simply cannot
number of strategic IT domains an IT department can support is limited;
consider every IT
one simply cannot consider every IT domain to be strategic, especially not
domain to be strategic
in today’s competitive and dynamic market for IT solutions. Considering
one IT domain as strategic, means diverting attention from another one. It will also require a
long term effort to educate, hire and maintain knowledge of the IT domain.

The other option is the migration option. The effectiveness of this option varies depending on
other dimensions, such as the complexity of the system and the cost and technical viability of
a migration. In a best case scenario, a migration is a one-off investment with limited impact re-
sulting in a maintainable application service in the desired technical platform. But if not properly
managed, such a scenario may turn out badly. For instance the migrated service might be even
harder to deliver and support because of degraded quality of the application (due to the
extensive technical changes made while migrating).

Next to the internal options of investment in the IT platform or application migration, an organi-
zation can consider external scenarios. However, if application services in this quadrant are
outsourced to an external service provider, it requires special attention. Since the strategic
business value is high, the long-term delivery and quality of the service needs to be protected
without compromising customer intimacy and agility of the service.

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The lower right quadrant: the IT surplus quadrant
Although the lower right quadrant is an unaligned area, it does not so much represent a prob-
lem as well as a possible inefficiency in the alignment between business and IT. The internal
resources allocated to these application services are not working on services that are strate-
gic to the business. For the IT domain in question, this can be regarded as an over capacity of
internal capacity; after all, it is allocated to services that are not strategic. One can consider
withdrawing these internal resources from these less strategic application services to appli-
cation services in the upper right quadrant within the same (strategic) IT domain. As with the
upper left quadrant, this requires an investment without direct business value. However, the
investment is easier since personnel will already have knowledge of the IT domain. Limited
training or handover of information will be required but the long term benefits to the strategy
of the IT department are significant.

A rearrangement of capacity will help protect the more business strategic application services.
Delivery capacity that leaves application services in the lower right quadrant can then be
compensated by using external resources.

High
Strategic
Value Withdraw
internal Use
Capacity over-capacity
to compete in
marketplace
Business
Value

Outsource

Low Or keep as a reserve

Strategic
Value

IT Domain
Low Strategic Value High Strategic Value
Strategy

In case there is no shortage of internal capacity in other quadrants, two significant options
remain. The simplest option is to do nothing. The current situation does not pose any direct
problems and may not require special attention. In fact, this scenario allows in some way to
have a reserve capacity of this IT domain in-house, which makes it easier to upscale and
downscale internal resources if/when they are needed for strategic applications in this IT do-
main. The over capacity will then function as a buffer for future strategic needs.

The second option is to use the internal over-capacity for different purposes. If the business –
the customer of IT - has no interest to use this capacity for their core service, it might be time
to look at another customer that is interested. Organizations and/or CIOs with a sense of
entrepreneurship that grows beyond the current business strategy, might consider marketing
this over-capacity outside the company. They can for instance use their internal supply over-
capacity to create a competence centre for outside demand. In that case, CIOs may choose to

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use their strategic IT domains to compete in the external marketplace when this can be
adopted in the business strategy of the company as a whole.

The HR perspective
When making sourcing decisions based on the described matrix, the HR perspective is of piv-
otal importance. More specifically the ratio between internal and external resources will de-
termine the feasibility of a certain sourcing scenario. A low internal-external ratio indicates that
a group of application services is effectively sourced by external personnel; reducing the
impact of a possible future outsourcing scenario. Application services with a high internal-
external ratio will be easier to protect internally since most of the personnel is currently inter-
nally sourced. An outsourcing in the case of a high internal-external ratio will have a greater
(internal) HR impact.

The following example shows one IT domain with application services plotted on the matrix (a
service is represented as a circle). The size of an application service is denoted by the size of
the circle. Since HR is pivotal to sourcing, size is determined by the required manpower (FTE)
per service; the more manpower needed, the larger the circle. In this example the
internal- external ratio is indicated in the pie chart below the domain.

The IT domain in question is regarded as being of high strategic value, it is therefore posi-
tioned on the right half of the horizontal axis. Some of its application services are considered
to be of high strategic value to the business (the circles positioned in the upper right quadrant)
and others of low strategic business value (circles in the lower right quadrant). As noted before,
Several standard sourcing scenarios can be considered for application services in these
quadrants. To illustrate how the internal-external ratio influences the choice for sourcing
scenarios, consider the following two cases:

Case 1 a low internal-external ratio

In Case 1, only 40% of the resources in the IT domain are internally sourced, resulting in a low
internal-external ratio. With a low number of internal resources there is no over-capacity in this
domain. Without over-capacity the option of externally marketing this IT domain is not an
option. The low internal-external ratio means that there is a high risk for strategic dependency
on external suppliers for the application services of high (business) strategic value.

The most eligible scenario to follow is to rearrange internal capacity from the application
services of low strategic value to the application services of high strategic value. This will
decrease strategic dependency for the application services of high strategic value. The inter-
nal-external ratio of the application services of low strategic value will decrease even more
making them candidates for outsourcing.

— 11 —
 Withdraw
High internal
Strategic Capacity
Value

Business
Value

Low Outsource
Strategic
Value

Low Strategic Value High Strategic Value

IT Domain
40% internal
Strategy
60% external

Case 2 a high internal-external ratio

In Case 2, 80% of the resources in the IT domain are internally sourced, resulting in a high in-
ternal-external ratio. The 20% of external resources can usually serve as a buffer for up and
downscaling in the IT domain and should therefore not be considered as a cause for strategic
dependency.

With adequate capacity of internal resources in this domain, there will be no need to rear-range
these internal resources. Therefore organizations are advised to consider the scenario in which
the internal capacity on the low strategic application services, is either kept as a reserve or
transformed into a competence centre that can be market externally.

High
Strategic
Value

Use
Business over-capacity
Value to compete in
marketplace

Or keep as a reserve
Low
Strategic
Value

Low Strategic Value High Strategic Value

IT Domain
80% internal
Strategy
20% external

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Other Dimensions
Even in this first and most important step of an application sourcing strategy, it is not all about
a quantified approach. External factors and market shifts beyond the internal IT and the busi-
ness, will also influence the IT domain strategy and therefore the focus. For instance direct
links to (application services) from other organizations, compliance laws and regulations, cul-
tural issues, market maturity, ability to maintain governance, major technological advance-
ments and/or extraordinary skills in the market will influence decision making.
The framework gives the main direction and during the moments of decision making, these
other factors are considered to optimize sourcing decisions.

Maximizing Business Alignment by Applying Focus

As discussed, the primary focus of IT departments – or IT service providers in
strategic application
general for that matter – is alignment with the business. Strategic application
sourcing helps to
sourcing can be used to assess the current alignment and the resulting
steer the IT domain
sourcing options, but more importantly, strategic application sourcing helps to
strategy
steer the IT domain strategy. The strategic business value of applications is
usually determined by market movements and business strategies that have already been
formulated. To maximize business alignment, CIOs take the given business perspective as a
starting point. In practice that means that the strategic business value of application services
are determined first. The CIO can then adjust the IT domain strategy in such a way that
business alignment is maximized.

An example
The example below shows a whole portfolio of application services plotted on the strategic
business value axis. There are six IT domains needed to provide the application services (six
different colors). The size of an application service is denoted by the size of the circle. Since
resources are essential to sourcing, size is determined by the required manpower (FTE) per
service. Since there are a lot of application services there is some overlap in their business
value (literally).

High
Strategic
Value

Business
Value

Low
Strategic
Value

— 13 —
In order to apply focus and make the best use of both internal and external resources, the IT
domain strategy needs to be determined. Part of this can be done on the present availability of
skills within the organization and part of it is done by setting strategic (IT domain) goals. In
other words: the CIO has room to make some decisions about which domains he wants to
focus on and which not.

One possible IT domain strategy is shown in the figure below:

IT IT IT IT IT IT
Domain Domain Domain Domain Domain Domain
3 2 1 6 4 5
High
Strategic
Value

Business
Value

Low
Strategic
Value

IT Domain
Low Strategic Value High Strategic Value
Strategy

Note how IT Domain 5 is considered to be of high strategic IT value. Perhaps this has been
decided because all systems serviced in that IT domain are of strategic value to the business.
In contrast, IT Domain 2 is not considered very strategic, perhaps this might be done because
a lot (maybe even most) of the applications within this IT domain are of low strategic value to
the business. Considering the relative strategic business value of ‘their applications’, IT Domain
4 is of high strategic (IT) value and the strategic value of IT Domain 3 is regarded to below.

If we set out to address the consequences of this IT domain strategy we will find that there are
some challenges ahead. These challenges become apparent when looking at the unaligned
quadrants, especially the upper left quadrant: a lot of application services need IT domains that
are not strategic to IT. To keep these application services within the strategic IT domains, a
serious migration effort is needed. A couple of very large applications in IT domains with low
strategic value (such as IT Domain 2) exist, that are strategic to the business.

— 14 —
Large migration
effort needed.

IT IT IT IT IT IT
Domain Domain Domain Domain Domain Domain
3 2 1 6 4 5
High
Strategic
Value

Business
Value

Low
Strategic
Value

IT Domain
Low Strategic Value High Strategic Value
Strategy

Furthermore it might be interesting to have a second look at the current ratio of internal versus
external personnel. Since there are no application services with low strategic business value in
the highly strategic IT domains (domains 4 and 5), there will be no additional internal per-
sonnel to relocate to the more business strategic application services within this domain.

So what can be done to achieve better alignment? By using quantitative analysis techniques,
alternative IT domain strategy can be found. One that might be considered is shown in the
following figure:

IT IT IT IT IT IT
Domain Domain Domain Domain Domain Domain
5 3 1 6 2 4
High
Strategic
Value

Business
Value

Low
Strategic
Value

Low Strategic Value IT Domain High Strategic Value

Strategy
— 15 —
In this case, IT Domain 2 is considered to be much more strategic than before. This is in line
with the strategic business value of some of its application services. The fact that a lot of ap-
plication services in this IT domain are not strategic, is not really a problem. Any internal over
capacity of personnel or skills, can be used to further protect the services that are of high
strategic business value (i.e. internal capacity moves from the lower right to the upper right
application services).

The fact that IT Domain 5 is placed as non-strategic may seem strange at first. However, due
to the small size of the application services, a relatively small, one-time migration effort might
be considered (for instance to migrate them to IT Domain 4 or IT Domain 2). This will not only
move the three applications back into the realm of the IT domains with high strategic IT value,
it also reduces the overall portfolio of domains: IT Domain 5 will not be needed anymore. This
simplifies the portfolio and is an added benefit to the IT domain strategy in this example.

Relatively small
migration effort needed
High
Strategic
Value

Business
Value

Low
Strategic
Value Internal capacity can be
moved to more strategic
applications or can be used
as a reserve
IT Domain
Low Strategic Value High Strategic Value
Strategy

Next steps
Now that the focus in IT domains has been created, the most important first strategic step has
been taken. Choices have been made for the sourcing of IT domains and maximal strategic
business alignment has been ensured.

The next steps will revolve around other dimensions as described before, to define the de-
tailed sourcing consequences. These will include rearranging internal capacity (mostly from the
lower right quadrant); finding viable partners for the services that might be divested; finding the
best strategic partnerships to protect services of high strategic business value; migrating
certain areas and adjusting relevant policies (such as HR, architecture, vendor management et
cetera).

— 16 —
Conclusions
With current sourcing challenges and opportunities, CIOs are advised to explicitly define their
application sourcing strategy. The first and most strategic steps of the process – the steps
where focus is applied – have been presented in this whitepaper. The success of the strategy
lies in its ability to incorporate business demand versus supply capabilities of the IT de-
partment and external service providers. The portfolio of application services, the business
needs, the IT domains, the HR-aspects and the underlying drivers and constraints of all these
aspects, have a central role in this approach.

Failure to timely and adequately address the sourcing challenges ahead will decrease the
added value of the IT organization. In turn this will decrease the quality of IT services and will
ultimately impact the abilities of the business itself. Therefore the time has come for the CIO
to explicitly define the strategic sourcing of the application portfolio.

About the authors

Alex van den Bergh MSc (a.van.den.bergh@quintgroup.com) is senior consultant and practice
leader Application Sourcing at Quint Wellington Redwood. With a background in cuttingedge
reverse engineering, migration and software consulting followed with multiple years of
experience in application strategy and sourcing, he supports leading organizations with their
application sourcing challenges. Besides these activities, he is a regular speaker at forums,
associate in scientific research and is author of several publications in his profession.

Joost Okken MSc (j.okken@quintgroup.com) is senior consultant at Quint Wellington

Redwood. Joost employs his expertise in strategy, innovation, sourcing and alliance
management to address the core issue of how an organization can shape its future, thereby
translating best thinking insights into best practice and best process solutions. He delivers his
knowledge and experience in various advisory and transformational roles, including analyst,
strategist, advocate, programme manager and coach.

— 17 —
 Quint Wellington Redwood: specialist IT management queries
Quint Wellington Redwood – or ‘Quint’ – is an independent organization consultancy firm
entirely dedicated to resolving IT-related organizational challenges. We provide our services all
over the world from branches spread across four continents. Quint focuses on strategy,
sourcing and implementation of processes. Within this sphere of action, Quint supports its
business relations using consultancy, measurement and education.

Quint’s clients are leading profit and non-profit organizations strongly dependent on IT. We
assist our business relations in the creation of integrated management of the business and IT
domain, thus achieving strategic advantage with regard to their competitors. In doing so, we
commit to result-oriented execution of the advice

Our motto in all this is ‘Dare to Challenge’. Our people constantly challenge themselves and
each other to achieve better performance and greater creativity. We also challenge you on the
manner in which you organize information technology and supply IT services to your
customers. In doing so, Quint presents itself explicitly as a service provider daring to take up a
different position…

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shown to third parties without prior written consent of The Quint Wellington Redwood Group.'

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