The financial sector is finding that legacy systems aren’t up to the task of managing emerging technologies and capabilities. Approaching third-party providers is crucial to help adapt to change, says Lindsay Lucas, Managing Director of Software Solved.
The disparity between the legacy systems used in the finance sector is stark. For example, many traditional banks are using legacy systems that have been running for more than 30 years, as opposed to challenger banks who have the advantage of being born in the cloud with technology and innovation firmly in mind. An estimated £2 trillion passes through legacy banks every day and with so much money relying on these systems it is understandably risky and complex to change them. All changes run the risk of introducing defects and potential vulnerabilities, so many banks have taken a risk averse approach.
However, changes in the consumer approach has forced the financial sector to re-evaluate how to make their services compatible with a digital world. Yet these adjustments have not ensured significant changes as banks are layering modern front-end technology onto legacy systems to bring existing products through these new channels. More importantly, legacy banks have faced little competition over the years despite regulatory and government pressure. Consumer inertia was previously high and there was little incentive to move away from existing working systems.
Why legacy systems can slow further innovation
Legacy systems can cause issues for those working at banks and their customers both in terms of maintainability and flexibility. The cost of maintaining legacy systems will grow higher depending on how long they have been left without being updated. This is because the systems were developed with technologies that are no longer well supported (if supported at all) and do not have large pools of talent to keep them working effectively or handle crisis situations should something go wrong.
Ultimately this means that the cost of keeping the systems working increase, cutting into potential new investment into new, more innovative systems. Moreover, as these systems are difficult to change, it becomes harder for them to become flexible and integrate with technological advances.
Tech companies are built around the ability to deliver lots of small changes quickly. Legacy systems and the technologies that they are based on make this very tricky as they are usually based on older ways of working that take a long time to develop and release.
As industry-wide digital transformation takes hold, businesses are finding that their legacy systems aren’t up to the task of managing emerging technologies and capabilities.The heart of which typically consists of an ERP finance model.
Is rip and replace the answer?
For many in the finance sector the question is do they rip out their existing legacy infrastructure and replace it with something that meets its current needs? Or do they re-instrument and repurpose current system with integrations, connectors, add ons and improved interfaces?
For executives, the top objective of infrastructure overhauls is quick access to high-quality information that can better support strategic decision making. Good enterprise software needs to fit good enterprise workflows, not the other way around.
But what happens when the infrastructure really doesn’t work as it should? The worst-case scenario is that software meant to streamline operations does the opposite, inhibiting productivity and incurring financial losses. This scenario is typical when, for example, businesses use multiple incompatible systems that produce data silos and force teams to work outside of pre-defined workflows. In other cases, businesses might simply be running systems that are too old, but which they can’t afford to replace.
Business continuity is of key importance, and this is something that’s put at extreme risk by the rip-and-replace approach of moving immediately from legacy systems to the cloud. With little or no safety net in place, it is not the transformation quick fix that it seems.
What are the challenges?
Obviously, rip and replace comes with a number of challenges. First of all, it can be ruinously disruptive to business, and many operations can’t weather the kind of IT blackouts these operations require. Secondly, the cost can be prohibitive, not least because businesses are naturally hesitant to lose the investments they’ve made into their legacy systems, including customisations, integrations, and institutional know-how.
Also, implementing new software often incurs significant costs in terms of time, capital, and human resources. At the same time, rip and replace is a high-risk move since it’s not clear that the replacement system will work any better than its predecessor.
With the upgrade and embrace overhaul strategy, the sector retains existing systems while working to patch problem areas and extend its capabilities with internal development and/or external integrations. Building flexibility on the foundation of old infrastructure is a major challenge, but not an impossible one. In this case, businesses can keep much of the existing infrastructure but add additional floors one by one, in an incremental solution. This approach preserves the original investment and avoids tearing down everything to start from scratch, which for many is unaffordable and also runs the risk of being out of date by the time it is delivered.
Implementing a hybrid integration strategy is a far better approach. Hybrid integration is a framework of on-premises and cloud-based functionalities that utilise APIs to allow multiple applications to talk to each other. These could reside on systems anywhere inside or outside the financial institution, in multiple clouds, or on legacy environments.
Engaging third-party providers is crucial
The finance sector needs to look at third-party software providers that focus on adaptable approach to change so that value is released on an incremental basis.
Third-party providers can work with the financial sector to implement an application Platform as a Service designed to connect the dots between the wild west of legacy enterprise software systems. aPaaS solutions designed to integrate extensible data from legacy systems provides a way for enterprises to not just get all the data into one place but also provide financial institutions with a platform on which to build the tools that they actually need. Figuratively speaking, these systems effectively replace the foundations.
The right tools, using the right third-party support will pull the information out of legacy software systems and create a new foundation of extensible data on which a new stack of flexible, agile services and tools can be purpose-built for what the finance sector needs to do today. Like any industry, financial institutions that are able to adapt quickly, understand what their customers want and provide a trusted service are the ones likely to prosper.