5 Ways to Optimize Application Sourcing Costs in an AI-Enabled Market | ISG

In today’s uncertain environment, many organizations are under pressure to optimize IT spend without compromising the digital capabilities that drive business value. Application sourcing —software, support, labor and managed services — presents a prime opportunity to reduce spend and improve value realization.

Most organizations have seen their application environments grow and become more complex over the last decade. These seemingly ever-expanding environments have become expensive to operate and manage. However, with AI-enabled delivery models and maturing SaaS and cloud economics, enterprises have a unique opportunity to reshape their sourcing strategies for greater cost efficiency and agility.

Key Drivers for Optimization

Enterprises most often look to optimize their applications so they can control rising annual costs and maximize the strategic value of their application investments. The most common drivers for application optimization initiatives include:

• Portfolio complexity: Mergers and acquisitions, decentralized purchasing and cloud growth create redundant tools and underutilized capabilities.
• Inefficient delivery models: A sub-optimal mix of employees, contractors and managed services partners drives inefficiency and higher costs.
• Ineffective vendor management: Complex contracts and limited resources within vendor management teams result in increasing software spend and inflexible commercial models.
• Labor market shifts: Global delivery talent pools are in flux, presenting new cost/quality trade-offs.
• Underutilized licensing: Ineffective consumption and spend management results in license overpayments and shelfware.
• AI adoption: AI tools can drive efficiency within an organization but can also lead to increasing software spend and require implementation effort to realize automation opportunities.
• Business demand for faster change: Sourcing strategies must support agility as digital business priorities accelerate.

5 Actions to Optimize Sourcing Costs

To address these challenges and capture savings and value, organizations should take an integrated set of actions across five dimensions:

1. Application Portfolio Rationalization

• Assess and rationalize the application landscape to eliminate redundant, obsolete or low-value apps.
• Standardize platforms across business units where feasible (e.g., ERP, CRM, analytics).
• Replace legacy apps with modern cloud-native or SaaS solutions that offer lower operational costs.

2. Optimizing Labor and Managed Services Mix

• Rebalance delivery models between internal staff, contractors and managed services providers.
• Determine the optimal global delivery footprint — onshore, nearshore, offshore — based on value, risk and skills.
• Leverage AI Ops and automation to reduce manual support costs (tickets, alerts, L1/L2 activities).
• Select optimal pricing models to drive value and outcome-based models for each service.

3. Contract Optimization and Vendor Management

• Conduct detailed contract reviews across major software and services providers.
• Benchmark pricing and terms against current market data to identify negotiation opportunities.
• Consolidate vendors to gain scale and improve governance.
• Implement effective vendor performance and commercial governance to sustain savings.

4. Cloud and SaaS Spend Management

• Implement SaaS management platforms to track usage and eliminate shelfware.
• Conduct license right-sizing and renewals aligned to actual demand.
• Apply FinOps practices to cloud spend — driving efficiency in IaaS, PaaS and SaaS consumption.
• Negotiate flexible contracts that reflect evolving needs and usage patterns.

5. Embedding Governance and Continuous Optimization

• Establish application and sourcing governance boards to prevent cost creep.
• Define standards for new sourcing decisions that are aligned to enterprise architecture.
• Regularly track KPIs such as cost per user, run cost vs. change cost, sourcing mix and user satisfaction.

What To Do Now to Take Advantage of Market Conditions

The current market is especially favorable for driving cost optimization:

• AI Ops and automation can reduce manual run and support costs by 30-58%.
• Vendor competition is intensifying, creating negotiation leverage for well-prepared buyers.
• Global delivery costs are more dynamic than pre-pandemic, with many nearshore locations offering favorable rates and talent availability.
• Contracting innovation (pods, outcome-based models) can drive better value for complex application services.
• Boards and executives are increasingly receptive to transformation programs that deliver both cost and agility.

Application sourcing optimization is one of today’s most actionable levers for IT cost and performance improvement. But fragmented approaches won’t capture full value. Organizations need an integrated approach across applications, labor, contracts and delivery models — supported by strong governance.

Those who act now, with the right advisory and execution support, can achieve 30%+ sustainable savings, increase agility and position themselves to take full advantage of emerging AI-enabled operating models.

Capturing this value requires expertise and market intelligence. ISG help enterprises optimize their application sourcing. We have the world’s largest sourcing benchmarking database to help find right-fit partners and put in place governance that keeps those relationships healthy and safe. We understand the application services market trends and help companies design AI Ops and automation strategies that serve their specific business needs.