Legacy systems: the replacement and modernisation headache

August 2017  |  COVER STORY  |  BANKING & FINANCE

Financier Worldwide Magazine

August 2017 Issue

‘Everything comes with an expiry date’ is an adage applicable to all things in life. One example is the IT currently used by many financial institutions (FIs), which many practitioners consider outdated, creaking at the seams and in dire need of being put out to pasture.

No doubt considered state-of-the-art in their day, the continued use of such legacy systems, often large and cumbersome IT infrastructure, makes it increasingly difficult for FIs to meet the stringent demands of customers, regulators and other stakeholders. Exacerbating the situation is the contention that an estimated 70 percent of corporate business systems today are legacy applications with limited functionality and usability.

Legacy systems are the heartbeat of banks and other FIs. They include payment applications, branch systems, automated teller machine (ATM) systems and enterprise resource planning (ERP) systems, and are vital in assisting FIs to provide the best services to businesses and customers. In short, they provide mission-critical business functionality and need to be reliable.

However, a White Paper by Hyland, ‘The Trouble with Legacy Systems’, states that “because legacy applications were built in a different time, often to serve a single purpose, they rarely meet the criteria necessary to help an organisation for the long-term”. What is needed to compete in today’s complex and aggressive business environment, according to Hyland, are systems based on reliable technology that is scalable and integration-friendly.

A major issue is freeing up capital to implement these systems. Although they may well satisfy their core purpose of processing huge transaction volumes, their eventual replacement – which must be considered a necessity – would amount to a multi-year, multi-billion dollar exercise for FIs.

According to the 2016 PwC briefing ‘How can legacy transformation help financial services firms to offer the best services at the lowest costs and stay ahead of changing market needs?’, legacy systems are not only expensive to maintain but also hard to customise. “The development of new functionality takes a lot of time, making it difficult to respond to rapidly changing market needs”, states the report. “Legacy systems can limit you to your ability to introduce new, competitive features or services. In addition, they limit the ability to compete at cost”.

Moreover, the fundamental question that FIs need to answer is this: how can the best private and business services be provided at the lowest cost? “To achieve this and to be competitive, it is necessary to phase out legacy systems and integration infrastructure”, advises the PwC analysis. “At the same time, they must also develop new capabilities”. Also noted is the reality that such a transformation can take up to three to five years in large organisations, with initiatives inevitably capital intensive, forcing organisations to decide whether they will be buyers or self-procurers of specific IT services. “Waiting to start a multiannual transition can be disastrous”, concludes the PwC report.

Clearly, this is a big problem with no easy solution to hand. Those responsible for financial sector IT have characterised themselves as essentially operating in survival mode, apparently having little chance of reliably adapting inflexible legacy systems, and facing the added headache of introducing much-needed innovation and modernisation.

Pressing and problematic

So, with many FIs continuing to utilise IT systems which are often decades old, the overriding question is: how pressing and problematic is the need to replace them, and what is the best way of doing so?

“It is very important to maintain, and in some cases replace, legacy IT systems if they are going to deliver a positive customer experience and still adhere to regulations that are increasing and continually changing,” says Dan Griffith, enterprise sales director at Everteam. “However, for business continuity reasons, many legacy systems cannot be replaced. In these cases, a modern agile process orchestration framework is very helpful to connect these legacy systems to the web portals and mobile applications that are key customer interfaces today.”

Danny Healy, financial technology evangelist at MuleSoft, believes that legacy IT systems prevent FIs from achieving the flexibility and agility that is required to survive in the digital era. Moreover, he does not countenance ‘rip and replace’ as being the best option for remedy, suggesting instead that FIs expose legacy assets as application programme interfaces (APIs) and modernise them to deliver greater value. “By using APIs – versus buying or building new software and hardware technology – traditional FIs compete with new market entrants that build fast, move fast, and raise the bar for consumer expectations,” he explains. “An API-led approach also makes it possible for traditional FIs to create an application network where digital investments can be quickly and easily plugged into the network.”

However, for all the talk of options, approaches and remedies, the overriding consideration for FIs and their chief information officers (CIOs) is one of cost, given that the overhaul of legacy systems is one of the biggest challenges they face and therefore unlikely to come cheap.

“Maintaining and replacing legacy systems is one of the biggest challenges for CIOs across the globe today,” suggests Mohit Joshi, president and head of banking, financial services and insurance at Infosys Ltd. “This is mainly due to the extortionate cost of keeping them up-to-date, as 70 percent of IT budgets can be dedicated to running and maintaining legacy systems that do not even have the capability to support the latest software. To upgrade the infrastructure on a legacy stack on its own is expensive, yet the price is compounded by vendors exiting the space. With vendors no longer supporting old infrastructure, the upkeep of these systems is also left to enterprises themselves.”

Furthermore, when you throw an ageing workforce into the mix, it is clear that skillsets are changing, with key expertise gradually being lost. “The legacy skilled workforce in most countries, especially in the US and Europe, is near retirement and there is a real risk of losing their knowledge and not finding skilled replacement to maintain legacy systems,” says Mr Joshi. “CIOs need to act quickly to overhaul their IT systems, not just for digital transformation projects and cost savings, but also to ensure they will not end up obsolete as older workers retire.”

For Bill Hinshaw, chief executive of Cobol Cowboys, LLC, there is a reason why financial institutions continue to operate legacy IT systems: they work and contain over 60 years of proven business rules in Common Business Oriented Language (COBOL) – the second-oldest high-level computer programming language which is primarily used in business, finance and administrative systems for companies and governments.

It is true, he states, that when legacy COBOL systems were first developed they never were designed and written to be integrated with other systems. At that time, the systems for the different banking applications were not being developed concurrently. For example, deposits came first followed by loans, then customer file, general ledger and marketing systems. The hardware and software improvements, which came later, allowed the banks to start looking at software integration within the various banking applications written in COBOL. For example, posting loan payments from deposit accounts and calculating interest rates based on the customer’s total bank relationships, and so forth. To make this happen, the COBOL software was not patched, but rather enhanced over time to take complete advantage of system integration (this integration started to take place in the 1970s). 

“The return on investment to code, test and rollout new technology to replicate proven code in thousands of COBOL programmes does not make sense to some organisations,” says Mr Hinshaw. “Their primary concern is the perceived lack of COBOL programmers being available in the future. However, this is a worry I do not share for we are being contacted by a number of younger programmers who say they are learning COBOL.”

If it ain’t broke, don’t fix it

With the consensus being that FIs are reluctant or unable to spend money on replacing legacy systems due to today’s environment of tighter IT budgets, the prevailing wisdom may be to adopt a ‘if it ain’t broke don’t fix it’ mentality. Virtually every organisation can point to past and recent examples where the replacement of legacy IT cost a fortune and stifled business in the process. Furthermore, FIs cannot ignore the issue of legacy systems, especially as the people who understand how they work are getting older and the relevant skills are becoming more difficult to acquire.

“In Australia, for example, we are seeing an increased regulatory focus on IT estates and demand for strategies that mitigate legacy technology,” says Kevin Gaut, chief technology officer at SSP. “Therefore, it is vital that financial institutions deal with this heritage and get ahead of the game, especially as it could become mandatory in the future.”

Mandatory or not, it is inherently difficult for any institution with an extensive legacy system to decide to replace it. “It is next to impossible for anyone to give a reasonable estimate regarding what the replacement of such a system would cost,” suggests Paul Klingelhuber, a software architect at Catalysts. “Moreover, the pure implementation cost of replacing such a system is only one part of this decision. The even scarier factor is the potential for problems and errors that could arise in the replacement process.”

Another reason FIs hesitate to overhaul legacy systems is the blistering pace of technological change. “ROI will always be a factor in replacing software systems, but what may be of more importance is what exactly large organisations hope to gain,” notes Mr Hinshaw. “Will these large organisations be faced with another software migration if newer technology becomes available within 10 years?”

Modernise or replace?

Given the major cost implications of replacing legacy systems, the alternative is for FIs to modernise them. There are calls for FIs to make a comprehensive modernisation programme a core component of their long-term corporate strategy. However, for the moment, the modernise or replace debate is a dilemma for which there is no easy resolution.

Mr Healy believes the most effective way to address the issue is to modernise existing legacy capabilities by exposing them as APIs. “With an API-led approach, legacy systems are no longer data silos but instead become reusable assets,” he explains. “By creating a network of applications, data and devices connected through APIs, FIs can use existing and new technologies to drive innovation and agility at scale, launch new products and revenue opportunities and improve customer experience. This approach can ultimately transform FIs’ business models. Instead of trying to own the entire value chain for each consumer, FIs will be able to participate in many different value chains, reaching new partners and customers.”

For Mr Griffith, the key to replacing legacy systems is to allow employee efficiency and customer experience to drive the priorities of a FIs’ modernisation strategy. “A simple replacement strategy where you turn on the new system and turn off the old one is not possible for most organisations,” he affirms. “Utilisation of a business process automation framework can lead to quicker results by enabling access to some legacy systems in modern interfaces while migrating critical systems. FIs also need to ensure they are preserving only the data necessary when they migrate to newer systems. An analyse, classify, migrate and manage approach to application decommissioning will ensure compliance is met and the right data is available in the new environment.”

According to Mr Joshi, taking a three-step approach to the legacy systems issue will allow FIs to put IT modernisation at the heart of their long-term corporate strategy. First, FIs need to decide on their desired future state architecture in line with their business goals and ambitions. Second, they need to identify the role that the current legacy systems should play in future. Finally, they need to plan for legacy modernisation using a framework that brings together knowledge management processes and a ‘people plus software approach’ in a cost effective and non-disruptive way.

Transform, survive and thrive

In its 2017 report, ‘Top Technology Trends in Financial Organizations’, Protiviti warns of the dangers of subscribing to the belief that a reliable core system, even one several decades old, is indispensable and, therefore, irreplaceable. Instead, FIs should view the process of modernising or replacing legacy systems as an issue with a range of options available, none of which need to be a “full-scale, big bang” solution.

FIs, suggests Protiviti, are now beginning to develop their strategies and supporting implementation plans, typically multi-year journeys that make effective programme, change and risk management “essential cornerstones to success”. Furthermore, the ongoing trend toward digitalisation and the rapid growth of FinTech startups is causing FIs to invest substantially in the replacement of their legacy IT systems.

“Aligned with the general trends in the IT industry and best practices regarding replacement of legacy systems, I expect that most FIs will follow a gradual replacement strategy,” says Mr Kilngelhuber. “They will pull out part after part of the legacy system into modern microservice-like systems, to benefit from modern software development methods and at the same time reduce risk.”

Less convinced is Mr Hinshaw, who contends that it is challenging for anyone to forecast the number of FIs that are likely to replace their legacy IT systems, due mainly to the overall impact of the process on organisations – internally and externally. “FIs will need to set their overall strategies for continuing to use COBOL, for example, or migrating to newer technology,” he maintains. “This is a difficult and ever changing decision process – one that may well need to be made again if newer technology has to be replaced further down the road.”

Ultimately, the reality is that legacy systems are often business critical systems and maintained because replacing them is considered too risky and expensive. However, as daunting as it may seem, the issue will not regress. Innovation and modularity are increasingly cited as tools which will help FIs transform, survive and thrive.

© Financier Worldwide

BY

Fraser Tennant