What is a legacy system and how does it affect the business model?

By Rachel Nitschke | Dec 17, 2015

In 2017, one in four companies will lose competitive ranking due to a lack of digital business competence– and lose out on the new markets, faster time-to-market, streamlined operations and cost savings that digital businesses generate.

What’s holding them back? For most companies, the answer is simple: legacy systems. These systems were created very specifically for their immediate use and resist adaptation to today’s business environment. The maintenance and operation eats up 85 to 90 percent of IT budgets, according to some industry polls.

More cost-effective technology exists, but 80 percent of IT systems are defined as “legacy.” They cause four main problems that significantly harm a company’s ability to respond to this threat:

  1. Problematic APIs. Companies implemented their legacy systems before the powerful RESTful API model, which debuted in the late 1990s. Legacy system APIs are notoriously difficult to work with when completing upgrades and connections to other systems. This process often causes significant delays for projects.
  2. “Dead” languages. Despite their widespread use in business, the languages of legacy code are not required education for programmers. A recent survey found that the COBOL language is relegated to a non-required elective class, and even then, at only one in four computer science programs. When the U.S. graduates 40,000 computer science bachelor’s degree earners each year to fill four million job vacancies, adding in additional skill requirements significantly raises the cost of hiring in this field.
  3. Efficiency losses. Older languages are more “wordy” and require more resources from the IT department than their newer counterparts. Siphoning off IT resources takes away from the digital innovation investments that are so pivotal to companies’ futures. More time and resources are also crucial for developing “IT agility,” or the ability to respond quickly to competitive threats to digital products’ business models.
  4. Workers’ needs. Today’s workforce has different needs that legacy systems cannot meet. The field worker needs robust mobile apps with real-time information and data to make more informed decisions. Companies need to be able to employ BYOD policies so employees can use the device most intuitive to their needs. These needs become cost-prohibitive with legacy systems.

These conditions coalesce to make it difficult for businesses to evolve into digital businesses– essential to compete in the next three to five years. As digital innovation and disruption lowers the cost of operations and introduces new markets, businesses whose legacy systems force them to resist this evolution will end up getting left behind. Gartner estimates that one in four businesses will lose competitive ranking due to a lack of digital business competence by 2017.

As companies evolve, how they position and value IT also evolves. Typically, the role of information technology goes through five stages:

Stage 1: Information technology as utility. IT is treated as a customer service and cost center. The goal is to keep costs low while maintaining a high level of service to employees. Challenges are controlling the use of ‘DIY’ or ‘shadow’ IT where employees, used to working with personal devices, circumvent IT policies and problems arise. Budget is tied up into maintaining legacy systems, which are becoming increasingly more expensive to maintain due to outdated languages, fragile spaghetti code and years of patches.

Stage 2: Information technology as siloed project. As mindsets start to open to the role of digital businesses, the company pilots a few information technology-centric projects, for example, launching a consumer mobile app and collecting insights from users to inform product development. The challenge here is that the IT department is still expected to act as a service, even while these projects need resources as crucial proofs of digital innovation. Information technology practitioners in this stage need to start to understand the inner workings of the business to prepare for later stages when information technology plays a strategic role in the business. Most companies start their digital innovation strategy process in this stage.

Stage 3: Information technology as participant. Information technology becomes a part of the business strategy. Companies in this stage recognize the value of information technology and innovation, and are beginning to bring information technology leaders out of their silos—but it’s only on a per project or invite basis. The value of information technology is still not widespread; most companies may begin with marketing and sales functions before examining operations and competitive positioning.

Stage 4: Information technology as partner. Information technology is a crucial point of leverage for all business lines in this stage and the company is starting to see benefits from a competitive advantage with information technology. The business line and information technology leaders share ownership of the infrastructure for digital innovation, which is now seen as crucial to the company’s future.

Stage 5: Information technology as enabler. Ownership of information technology has migrated into the business lines, which are now strategically using information technology to increase revenues and market share. As competitive threats and new user needs arise, the information technology infrastructure is agile enough to respond quickly and effectively, just as Corning Inc. was able to in 2007 when Apple CEO Steve Jobs called with their request for what became Gorilla Glass. The CIO and information technology leaders are responsible for managing the migration and ownership by staying on top of emerging technologies, coordinating requirements and standards, and heavily informing business strategy.

As companies move through these stages, their competitive advantage multiplies as their new products, playing fields and competitive spaces transform their value proposition to customers.


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