Counting the cost of legacy systems
There’s both a science and an art to arriving at an estimated return on investment (ROI) when it comes to legacy system replacement, writes Mike Maltby, product manager at Eagle Investment Systems.
One of the biggest challenges in the decision-making process to replace legacy technology is demonstrating an ROI. System replacements, described by one consultant as “invasive” in nature, are not only expensive undertakings, but also will almost always cause significant disruption to business functions and require extensive education programs to re-train users. For this reason, executives will often ask ahead of any system replacement initiative that those endorsing it actually quantify the value to the enterprise before taking on such a large project.
The decision to replace a legacy system is rarely, if ever, one that is made purely on the basis of an ROI calculation. However, this kind of analysis can be a powerful tool in securing buy-in from senior management, as well as future business users. Not to be overlooked, it can also go a long way to help make the business case ahead of a transformation and make the end-state solution clear at the outset of an implementation. In addition to delivering a useful metric for management, an ROI exercise will also inform the ultimate system replacement strategy and help shape the solution that is deployed.
A starting point in developing an ROI should be to factor in the cost of doing nothing. The existing system simply may not be able to support the projected business and client growth. For example, current systems and operational processes may not be able to handle the volume and frequency of data required to support a growing client base. Alternatively, new geographies or expanding asset classes may pose a significant challenge.
In some instances, firms may be able to buy some time by bolting on additional technology or dedicating manual resources, but these costs need to be factored into the equation. Ultimately, however, if the existing system is not able to support the business strategy and the direction the front office wants to take, then the ROI quickly becomes apparent. Increasingly with legacy system replacements, it is the pursuit of new opportunities and growth — versus simply the introduction of new efficiencies — that really drive the ultimate ROI.
There are a number of very concrete justifications for adopting new systems, from risk reduction and heightened regulatory demands to enhanced decision-making and improved efficiency. However, attaching a definitive dollar cost to running the incumbent legacy system can be a difficult undertaking. While direct technology costs such as hardware, software, support and maintenance are fairly visible and easy to quantify, these estimates may sit on a mass of less obvious expenses, such as the operational costs stemming from the need for manual processes.
In a recent survey of senior financial technology decision-makers, nearly 90% said their operating platform has limitations that require manual processes. Quantifying the cost, in human capital terms, of these manual processes can be a challenge but is an essential consideration when it comes to calculating a true running cost of incumbent technology.
Michael Kerrigan, a principal at Accenture and co-founder of Beacon Consulting Group, has consulted on numerous projects where he was brought in to evaluate whether it is appropriate to reinvest in new technologies. At a recent client event hosted by Eagle, he emphasised the importance of factoring in these operational metrics even if they can be difficult to grasp.
For instance, he explained that the ultimate calculation will vary from company to company, depending on their organisational structure, but it often requires breaking down system usage to a granular level for each geographic or specific product area. As well as the straight technology costs, firms need to develop detailed metrics that provide a clear understanding of where they are spending money to run an operational area. This, he said, includes the manual activities where human capital costs are incurred.
It can be a painstaking process, but it is necessary for users to fully understand — and, crucially, explain to others — the potential efficiency gains of replacing legacy technology. This bottom-up approach also provides the building blocks on which strategic decision-making and senior management buy-in are built.
With this understanding in place, it becomes far easier to develop a strategy and to quantify the efficiency gains. By establishing a current expenditure level, it is possible to overlay the gains a process change or new technology can deliver based on specific functions or activities. This can help establish a baseline to identify where automated processes will result in the greatest efficiency improvements and therefore, which areas represent the best ROI.
It is a daunting prospect to look at so many interdependent functions in this way but it provides a clear picture on how efficiency gains will be achieved. Rather than working with a number in isolation, having this comprehensive overview gives firms what Kerrigan describes as a “storyboard”, which ultimately provides a set of meaningful metrics that can feed into an estimated ROI.
Making the case for new technology will always be a challenge. That said, once the true cost of running legacy systems is quantified it can bring into focus the impact new technology will have on the business and help generate excitement and support throughout the organisation.