Adapt and upgrade, or replace?

The unseen cost penalty of maintaining a legacy system has seen many delay their transition to newer enterprise technologies. But taking too long to upgrade may be just as detrimental as not upgrading at all.

It's no surprise that in the current financial climate, global investment managers are carefully scrutinising IT operating costs. Judicious pruning of expenditure by outsourcing, system consolidation and increasing automation have helped many an organisation maintain profitability at time when they are being tasked with restructuring operations to provide greater transparency, mitigate risk and provide faster reporting. 

The only problem is, the savings from these measures have been achieved and the financial environment hasn't changed. The demand for further cost-cutting is escalating, but what's left to cut and are operational expenditure cutbacks the only solution? Can IT optimisation offer a tangible alternative to belt tightening?

It was with this premise in mind that SimCorp’s global investment management cost of operations survey 2013 was designed. The survey tests the hypothesis that, as client and market demands intensify, a new, state-of-the-art investment management system could result in cost of operations that are lower over time than retaining a legacy system. 

Legacy or state-of-the-art?

The study revealed that of the 125 investment management firms surveyed, 42 per cent are running a legacy system as their primary investment management platform. Legacy and non-legacy users  showed similarities in a number of areas:  the same proportions have been running their current systems for more or less than five years; both groups have about the same proportion of domestic only versus international operations; and the proportion of IT budget spend is very similar when divided between application areas.

The differences however, appear in the way the two groups allocate their IT budgets. Respondents with legacy systems, for example, spend a higher proportion of budget on human resources such as internal staff and external consultants. The study suggests that this is a by-product of the manual, more labour-intensive processes necessary to make up for system deficiencies.

Legacy does cost more

Differences also occur in the way the two groups are planning for the future. Almost one in four (23 per cent) legacy system respondents intend to increase IT operations budgets by five per cent or more in the next two-to-three years. This compares with one in five of the respondents using state-of-the-art systems. On top of this, another third of legacy system users plan to increase their budgets by up to five per cent. 

This means that more than half (56 per cent) of the investment management firms using legacy systems are planning for the need to increase their overall IT operations budgets. By contrast, three in five firms using state-of-the-art systems say they will merely maintain or even decrease operations spend over the same period.

Next, the survey looked at the net investment plans for operational IT systems. This was defined as the proportion of respondents increasing IT operation spend less those respondents decreasing IT operation spend. The results show that 43 per cent of legacy system respondents plan to increase IT spend, versus only 27 per cent for state-of-the-art respondents.

No matter which way the data is examined, it's clear that legacy systems are incurring higher operational IT costs than state-of-the-art platforms.

Where is the extra investment going?

A little under one in five (18 per cent) of the organisations that plan to increase their IT budgets say they will be outsourcing additional application areas in the future. The remainder – more than four in five respondents – plan no changes to their deployment method. In other words, the additional budgets are primarily earmarked for investment in existing systems.

The findings highlight the legacy system dilemma.  By maintaining legacy software, a firm may avoid the initial expense of updating to a new operating platform, but it will face higher ongoing operational IT costs because of the need to continually devise work-arounds, create patches or find add-ons to adapt to business process and regulatory changes.

The organisations at greatest risk of this situation are those that have highly customised systems, operate a large number of disparate systems, or where systems have only remained up to date by becoming highly reliant on manual processes.

Jumping off the round-about

It's at this point that the real danger of the legacy system's rising operational cost becomes clear. The more an organisation must invest to maintain a legacy system, the less money that's available for new initiatives or for strategic IT activity. Ultimately, an investment management firm risks expending all its energy running on the spot just to stand still, rather than stepping out and taking advantage of technologies that will allow it to become more competitive or to develop new market opportunities.

Unfortunately, there's no easy solution to the problem. In most firms, IT budgets have been severely stripped back. Whether they can realistically trim any further and still achieve additional short term cost savings is debatable. The alternative is to spend more in the short term but save in the longer term by implementing a state-of-the-art solution that will reduce maintenance costs, streamline processes and potentially build competitive advantage. What is unarguable is the vital need for a functional, flexible and reliable IT platform that frees up human and financial resources through greater automation.

My prediction is that competition will be the ultimate driver leading many investment managers to seek a state-of-the-art platform within the next few years.  The only real question is whether some will choose to make that transition too late. 

Peter Hill is the managing director of SimCorp Asia