How Banks Can Address the Legacy IT Problem

By Mark Holland | 22 April 2014

The latest research from analyst, Ovum indicates that IT tech spending in financial markets is on the increase. Capital markets, corporate banks and asset managers are broadly agreed that it will continue to grow between now and 2018, with overall financial markets spending exceeding US$100 billion in 2018. The question is how much of this spending will be earmarked for innovative new systems and solutions and how much assigned to dealing with the issue of legacy IT.

Dealing with legacy systems within banks is not easy. If you are in charge of the IT technology budget, you will often have to face the fact that you have invested heavily in a range of mission critical systems over the past twenty to thirty years that may now be keeping the business running but progressively reaching (or already are) end of life.

These systems are likely to be rich in functionality and embedded in the bank’s main technology architecture. The businesses they support may be more important to your organisation than ever. You may have invested several hundreds or even thousands of man years in building the IT part of the business. And yet, elements of the underlying technology are becoming or are obsolete, whether that means the operating system, physical platform or the language in which the application is built.

Furthermore, a system that is two or even three decades old is likely to already have around 60-70% redundancy in its code base. In other words, the features and functionality in use today probably only amount to 30-40% of the entire application.

There is nothing intrinsically unusual about this. It is just a natural phenomenon as systems and solutions mature over time. But you now face a problem because you are likely to be relying on systems that are unsupported by their IT vendor or unsupportable by internal IT staff yet mission critical to your work as a bank. So what do you do? 

This is an issue that banks have been putting on the back-burner for years. These systems do after all continue to do what they say on the tin and they do it well, so you may have naturally been reluctant to invest in upgrading and refreshing it to a modern day platform. But at some point as risk levels continue to ramp up, you are going to run out of runway.

Deal with Obsolescent Technology

If you hold the IT purse strings, you need to realise that you can no longer persist with end-of-life technologies. The regulator won’t allow it. Banks are running heightening risk by delaying the inevitable refresh of their systems to sustainable technologies. Doing nothing about legacy systems is an option fraught with risk. Regulators are beginning to look harder at the technology infrastructure of banks that are running major mission-critical business services that has client money associated with it, on technology that is no longer fit for purpose

In the future, estimates indicate banks will spend around 15% of their IT budget on dealing with old technology. But where is the money coming from? Typically, it will need to be derived from what is known as the change the bank (CTB) budget, money assigned to innovative projects, systems and solutions that move the bank forward delivering new products and services. Re-assigning CTB budget to address end of life technology risk will dilute the revenue centric focus and slow that delivery rate.

So, doing nothing is not an option – but what do you do?

Create a Vision of Where you Want to be

More holistically, you should consider creating a vision of where you are trying to get to in the future – a target architecture that serves the business over the longer term and addresses the issues of legacy across the board, not just system by system. Every technology investment should be assessed against that vision to determine whether or not you are on or off course, strategically. You need to work out whether what you are doing is taking you one step closer or one step further away from your established vision

This will enable you to move in a steady controlled manner towards the environment that meets the future you have laid out. The challenge of doing this will typically be that it entails having a percentage of your annual budget assigned to that migration process. Often decision-makers are reluctant to pay for something that is unlikely to bring any immediate return to the business.

Once you have created a roadmap of what needs to change, you then can decide the best approach for each application. Whilst this will be unique to every application, organisation and situation, two common approaches are explained below.

Consider Reverse Engineering

One option is to outsource the re-development of your key IT system(s) and get the outsourcer to ‘reverse engineer’ it. In other words hand over the responsibility to a third party provider and ask them to replicate the features and functions of your existing system - but on a modern-day platform and written in a modern-day code base using the existing system as the blueprint

You need to give them access to the source code and after that you are effectively handing over the task of rebuilding your application(s) to a third party to return to you an exact replica. You are telling them to work out the functionality; reverse engineer the system and then give you back a solution that is physically modern and state-of-the art but that still does everything that your old platform did. Of course, there are additional benefits for you, the bank, from this model, especially in terms of freeing up valuable internal IT resource. 

As part of this approach, you should assign subject matter experts to work with the third party organisation to identify the redundant code base within the existing solution and eliminate them from the new replacement system – why rebuild unused functionality?

Once the new application has been developed, a year or so down the line, you should be well placed to go live with the new approach. The key testing point will be that the results achieved with the new application in terms of functionality should be exactly the same as those achievable with the old one – a like for like replacement.

Outsource the Running of your IT

With the need to keep the cost of all this under control in mind, you might want to take this outsourcing model one step further, so that the vendor not only ‘ports’ the system from an obsolete platform to a new one but also then takes up the responsibility of maintaining and running it going forward. As part of this process, it builds a cost model that integrates the porting cost of the new platform into the running costs. You benefit from the vendor picking up the front end cost and the risk of doing the reverse engineering, while the vendor benefits from getting an annuity fee and the knowledge that it will get its money back over years spent maintaining and running the application for the bank – a mutually beneficial arrangement for both parties.

Firms that have gone this route often trial the approach with a smaller, less mission critical system first. This proves that the technique works in their environment and with their outsourcing partner of choice without a significant gamble up front.

Sorting the Legacy Problem

So while the projected increase in expenditure on technology across the banking sector is positive news, the future will not all be about spending on new systems and solutions. If you are responsible for IT spending at a major bank, one of your top priorities will be getting to grips with the legacy IT problem before your lead regulator tells you to.

You will need to find a way of dealing with obsolescent technology and a way of managing legacy systems, whether that is through outsourcing or diverting key internal resources. It’s a difficult issue but if you get to grips with it in a timely manner, you will have the opportunity to cut costs and drive efficiencies for the bank today and in the future. 

 

By Mark Holland, founding partner, Holley Holland

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