Legacy System Modernization, a Barrier to Transformation?

In our previous blog post, we talked about emerging business models in the utility industry. In this article we will be taking a look at legacy system modernization strategies that will enable growth and the  digital transformation for your business.

So, first off what is a legacy system and what does it mean to modernize it?  

Well, in broad terms it is any system that no longer meets the demands of a business that would like to stay competitive.  It usually refers to software or hardware (more than 10 years old) that has been superseded but is still being utilized by a company.  Most medium to large companies probably have at least a few legacy elements in their systems and are faced with the dilemma of updating their platform and how to do so with minimal disruption to their existing business processes.

There are many issues that companies face with their legacy platforms but in a nutshell, the outdated systems are essentially unable to efficiently support new IT platforms. Integration with newer technology is cumbersome and legacy systems often lack the ability to run multiple applications or provide support software. This hinders innovation and the company’s ability to scale, as mainframe legacy systems are not compatible with more modern, flexible platforms and as a result are unable to integrate new technologies. Furthermore, the lack of regular software updates and vendor support for a legacy system increases security risks and the possibility of cyber-attacks.

There are different schools of thought on the subject, each with associated challenges and costs. 

Some organizations, mainly in the manufacturing or government sectors, continue to rely heavily on legacy systems and seem to be lagging behind in the modernization trend. However, the majority of companies utilize a mix of legacy systems combined with a variety of new software that they run on, updating their system piecemeal, on an "as-needed" basis. This is an arduous approach but perhaps the only one that makes sense both logistically and financially.

There are legitimate concerns regarding the legacy system modernization. 

Budget constraints and vendor lock-in can incur substantial costs for the organization. Migration to a cloud-based service reduces security risks, improves efficiency of your processes and also lowers operational costs.  

Cloud migration and vendor lock-in is one of the biggest challenges in the adoption of cloud computing as the interoperability of data and applications is extremely difficult. However, there are solutions like Open Virtualization Format (OVF)) and data migration (e.g. Amazon S3 API) that help mitigate this by increasing technology implementation and portability.
 
Company culture may be resistant to change or be "risk-averse". This is something we discussed in a previous blog on transformation and how this mentality often hinders growth. The organization often have unrealistic expectations regarding the ease of updating the system when the time finally does come.
 
This approach is understandable, as it initially may seem cheaper, easier and less risky to keep things as they are but it doesn’t make sense if you want to stay in business. While the costs to modernize the legacy platform may have prohibitive up-front costs you need to consider the long-term costs of not doing so:

Cost of ownership: It is more expensive to host software on-premise due to administrative/maintenance costs than it would be to host it on the cloud

Outsourcing costs: The need to outsource IT support for legacy system modernization becomes an expensive necessity as older engineers retire, and new engineers do not always have the skill set required to work with legacy systems. Retraining engineers on a modern system is expensive but training new developers to work on legacy systems is counter-productive - even if you can find ones that want to work with outdated technology

Domino effect: Changing one application on a legacy system impacts everything else due to its monolithic architecture. This makes it extremely difficult to use new technologies that would enable you to scale your business and stay competitive

Unstructured data: Business with several legacy systems do not have one centralised data source and often is faced with data redundancy. This makes it difficult, expensive and time consuming to reorganize data in order to extract accurate reports and statistics.  

Regulatory requirements & compliance: It is difficult for legacy systems to remain compliant as regulations are constantly changing. The fines associated with non-compliance can be staggering

Technical updates: Legacy systems lack technical specifications that would otherwise enable the creation of a new version of the same system

One approach would be to update and modernize the legacy system in one go. This of course is a major challenge in itself as it would require a complete update of all the organization’s hardware and software by either rebuilding it based on the current scope or by replacing it completely with a system based on new requirements and needs. 

The effort would be massive and the disruption to the existing business processes would be prohibitive. Therefore, it is understandable that it seems only a few companies choose to go down this route.

So the option that may seem the least intimidating would be to integrate new applications to the existing legacy elements while slowly migrating and phasing out the old system.
In most cases, companies choose this option as they can update on an "as-needed" basis without the huge disruption to business that a “big bang approach” would create. It takes longer, about 3-5 years for large organizations but perhaps it hurts a little less and it’s definitely worth it in the end.

• ROI: migration has an up-front cost but cost savings down the road (e.g. reduction in licensing costs, increased business, efficiency gains) will help balance that
• Scalable technology:  data integration-friendly platforms, relevant in accessing new technologies that enable speed to market, increased product capabilities and a seamless customer experience
• Improved Performance: No more lost capability or technological debt but rather an agile system that supports and implements DevOp methodologies and can be maintained and improved more easily
• Security issues: Legacy systems lack vendor support or regular updates, putting you at risk of a security breach which would do some serious damage to your budget and your reputation.  In 2020, the average total cost of a security breach was $3.86 million.

New technology is a tool that can help you gain operational efficiencies and grow your business. The ageing infrastructure of a legacy system will only hinder transformation and make it impossible to keep up with current technology and meet customer expectations. If you choose to stay with your legacy system or you decide to modernize it, keep in mind that either way it’s going to cost you. 

The question to ask is : Just how much are you willing to invest into the effort or lose by holding back?

Paddington Utilities Consulting offers a full-blown portfolio of services for the utility sector:

• Strategic consulting 
• Functional assistance in utility processes
• IT development of enterprise software for utilities 
• Project management 

Feel free to contact us for a free consultation to see how our experts can assist you!