What are the Hidden Costs of Legacy Systems?

PwC Luxembourg I 12:18 pm, 2nd May

CIOs are caught up in a constant need to balance old and new technology, systems and processes. Within the last two years, a pandemic situation focused technology leaders on investments into remote access, digitalization of business services as this was vital for the business survival.

CIOs are caught up in a constant need to balance old and new technology, systems and processes. Within the last two years, a pandemic situation focused technology leaders on investments into remote access, digitalization of business services as this was vital for the business survival.

But what is a legacy system?

There is no standard definition. Numerous sources mention a system that is business critical and has the following characteristics: old age, outdated languages, lack of documentation, limited support capability and capacity, high maintenance costs and lack of appropriate architecture to evolve.

Investing in new technology usually requires CIOs to justify how their legacy systems can no longer deliver. An assessment that includes economic and quality factors should be conducted in order to make a decision on the best option to manage obsolete systems. Possible solutions should be consulted and supported by a wide range of stakeholders within an organisation (not only by a technical staff). The organisational culture and resistance to change should also be considered as a factor. While there could be certain benefits associated with maintaining legacy systems, it’s hard for an enterprise to scale up without new systems and processes. Most IT companies might find themselves in a bind when it comes to collaborating and integrating modern practices with their legacy system. Proving which system works best for their business can take time before a final decision can be made.

Dealing with a legacy system that is still in functional condition might be harder to eliminate. TechTarget published an article* mentioning an example of a grocery store chain that used a mainframe to handle financial operations. The technology was obsolete, however it still worked efficiently and quickly. The business process was still valid, therefore it didn’t qualify as a legacy system. Knowing the various hidden costs behind maintaining these systems might help CIOs rethink and plan their budgets for new technology accordingly.

Within the last few years, while conducting the annual PwC CIO Pulse Survey, we observed an increase in regulatory compliance requirements for financial services, most of them related to opening internal resources for remote work, protection from cybersecurity attacks, vendor management, as well as new sanctions for non-compliance.

Maintenance costs for older systems keep rising

As with most products, the price of maintaining a legacy system depreciates once it reaches its end- of-life phase. At a certain point, the price of maintenance plateaus, which seems like a viable option for continued use. However, by running the same systems beyond their production line, the fees become higher as the parts become scarcer. While sticking with legacy systems might seem like a cheaper alternative in the initial stages, it’s sure to run up the bill eventually. By some estimates, banks and insurance companies globally spend 75% of their IT budget on maintaining existing systems**. This means that only a quarter is left for innovation and keeping up with emerging threats. Legacy systems may pose a major security and compliance risk, as best practices cannot be adopted in their security protocol. A data breach can have enormous financial and reputational impact on a company.

PwC interviewed 45 firms based in Luxembourg in a survey “2020: Out of the shadows: CISOs in the spotlight”*** which reveals that the frequency of cyber attacks is at an all time high given the pandemic and with the employees of most organisations on almost a fully remote work model. 33% of interviewed CISOs/ISOs saw their Information security staff count increase over the last few years (40% expect this increase to be year-on-year in the future).

Exorbitant environmental costs

Newer systems are known to be more environmentally friendly as they consume less power. This of course makes sense as they  have been designed to suit present sustainability goals unlike legacy systems. A new system is not only more economical, but also emits less heat than its older counterpart. ICT usage by companies contributes significantly to the global carbon footprint, making up nearly 2 % of global CO2 emissions today - about the same level as the entire airline industry. However, Digital Technology can cut global emissions by 15%. The biggest role that Digital Technology can play is in contributing to more effective and transformative solutions to other sectors and business units, influencing consumer and users behavior and leading the transformation of energy systems.

Retaining your legacy systems shoots up your power consumption and related costs, which can, in turn, affect your organisation’s efforts towards sustainability.

Higher cost to retain technical staff

The older something is, the harder it is to find people who are skilled at it. With legacy systems, the technical knowledge required to handle it becomes more scarce. Outsourcing was seen as one of the solutions for managing legacy systems, however engaging external resources for a critical business system seems questionable. With the availability of people with skills to manage obsolete systems is in decline, it is not a sustainable option. Most staff members and IT managers are skilled in newer technologies and do not know how to operate and maintain legacy systems. Much as in of scarce goods, niche skills demand higher salaries. To hire a specialist, you need to invest more money in your workforce.

As we are all aware, the health crisis gave birth to the rise of a remote freelance workforce, a trend that will not be ignored. According to Forbes, 71% of hiring managers in the US plan to maintain or increase their use of freelancers in the next six months. This shows how much people’s mindset has shifted from a traditional permanent contract to a way which allows them to have more freedom in choosing the assignments or firms they want to work for. As expected, it is easier to find a workforce with skills dedicated to modern technologies. Technical debt of a legacy system makes onboarding of a new employee very difficult. If we add documentation in a local language or lack thereof, we can find ourselves in a pickle.

Similarly, legacy systems are limited in their ability to deliver modern results which could lead to the investment in more resources.

Risking the chance of incurring opportunity costs

Training employees on legacy software is a tedious and time-consuming process.  It also prevents you from gaining new skills. By adopting newer systems, your resources can train in next-gen disciplines to improve the overall skill sets they can bring to your company. In turn, working with resources that possess expertise in various new fields could lead to more opportunities for you, and it certainly will for people who work for you.

Attrition can mean that resources knowledgeable about your legacy systems may wish to move on. If you ask a person born in the 2000s about VHS / cassette tape or fax machine, they might be confused. Imagine now asking them to use those objects and devices on a daily basis.

Make an informed decision

While there may not be an immediate need to upgrade your system, it helps to know what you stand to gain by doing so. For CIOs this decision cannot be made lightly, but with the right research it can lead to higher returns on such investments.

There is no universal solution to legacy system modernisation even though CIOs may be facing similar challenges and constraints. However, there are best practices which should be followed for an efficient and successful system modernisation. Innovation should be promoted through a culture of continuous exploration and the creation of business capabilities.

“Business has recognised IT and the extensive effort towards digitalisation as the  successful response to COVID-19.  Now CIOs have credits for the next step... 

...to move away from legacy systems towards further digitalisation and innovation at scale. Those are the future focus points.” - Krzysztof Jaros-Kraszewski, Director, PwC Luxembourg


* Replacing vs. maintaining legacy systems

** Banks’ ageing IT systems buckle under strain

*** Out of the shadows: CISOs in the spotlight!

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