Burdened by high costs for application development and maintenance (ADM),¹ many businesses have offshored up to half of their application development to low-cost locations, renegotiated rates on outsourced projects, and tightened the governance of new projects. In spite of these efforts, the costs of developing and maintaining applications now account for about half of the average IT budget and continue to rise. Labor costs make up more than 80 percent of application development, so many organizations have already reduced head counts or labor expenses where possible. Now they must begin to focus on improving the productivity of their development and maintenance staffs. In the past companies tried many methodologies, with mixed results (see sidebar, “Software-development productivity: Traditional methods”). Companies that apply the time-tested principles of lean manufacturing, which hunt for and eliminate waste from the production process (Exhibit 1), are seeing a significant impact within a matter of months.

Although lean principles were originally developed for manufacturing environments, they are increasingly (and successfully) being applied to service businesses, especially those with many routine processes.² Application development and maintenance is a prime candidate...