Legacy System Modernization: Benefits, Strategies and Considerations for Your Organization

A legacy system refers to an outdated computing system, software or hardware that continues to be used by organizations. Although a legacy system may be old or outdated, it is not obsolete and for many companies, legacy systems are critical to their operations and can perform at acceptable production levels. When a legacy system reaches its maturity point, organizations should consider upgrading them with modern programming languages and protocols. Legacy system modernization is an effective strategy in an organization’s digital modernization efforts.

The Hidden Costs of Outdated Legacy Systems

Many companies choose to continue running outdated legacy systems in an attempt to save money. However, over-extending legacy systems can cause businesses to lose productivity potential and money in the long term. 

According to CIO Insight, U.S. businesses lose up to $1.8 trillion annually in misused productivity due to outdated technology[1]. These costs are typically associated with money wasted on employee downtime, funds spent on upkeep for outdated tools, and the cost of correcting problems as they arise.

Companies often encounter a series of hidden costs as they continue to use outdated legacy systems, such as increased maintenance and support, penalties for failure to comply with industry regulations, security threats, lost business opportunities and poor business efficiency. 

Figure 1.1 – Hidden Costs Of Outdated Legacy Systems

Legacy Systems Often Require Increased Maintenance and Support

The costs associated with maintaining and supporting outdated legacy systems can become burdensome with time. Nevertheless, companies consistently pay out for standard maintenance and support costs, including monitoring, backup and disaster recovery, repairing internal infrastructure, and configuration automation.

Businesses that use legacy systems may find it difficult to obtain timely IT solutions when problems arise with their outdated systems. The result is a legacy system with performance that may result in more money spent on support and maintenance. Legacy systems also often require more expensive infrastructure and hardware the longer the system ages. In addition, costs can increase when data is siloed across several databases.

Gaps in Cybersecurity and Compliance Pose a Considerable Risk for Legacy Systems

Cybersecurity gaps are a growing risk that organizations in rapidly digitizing industries face when using outdated legacy systems. System vendors do not always deliver prompt security updates, leaving legacy systems vulnerable to cyberattacks. Once hackers are able to break into a business system, they can create a business-wide bottleneck, resulting in significant revenue loss.

Companies often discover gaps in cybersecurity when developing modernization strategies and configuring the infrastructure for testing. Implementing essential improvements through legacy system modernization is necessary for organizations to eliminate security risks and prevent non-compliance issues that could result in stiff financial penalties. 

There is a Growing Shortage of Talent to Support Legacy Systems

Operating and maintaining legacy systems can be challenging. These outdated systems often require IT professionals with complex and dated technological knowledge and skills. Unfortunately, there is a shortage of professionals with this unique skill set, and hiring this type of talent can be costly. 

The longer that an organization waits to replace or modernize its legacy systems, the more difficult it will be to find a capable team to manage the transition. Hiring “mature” developers to maintain and resolve problems that develop on legacy systems can be considerably more costly than hiring IT experts to manage and support modern systems.

Obsolete Legacy Software Lacks Compatibility with Third-Party Integrations

Modern software platforms commonly rely on third-party APIs (Application Programming Interfaces) to achieve additional capabilities, such as geolocation, payment processing, user authentication and data sharing. Integrating third-party APIs allows businesses to continue using their existing solutions at a fraction of the cost.

However, when organizations want to connect their legacy software to third-party services, they must build custom APIs which can be time-consuming, costly and require extensive custom coding. Developing a custom API means businesses that continue to use incompatible and obsolete legacy systems will often lose customers and revenue over time. 

Modern technologies are designed to be integration-ready, and API vendors often provide ongoing support for frameworks and programming languages. Unfortunately, outdated or obsolete technologies generally need to be more compatible. 

Businesses Bound to Outdated Legacy Systems Lack the Ability to Adapt

Legacy systems often need to be updated and modified to maintain a competitive pace of innovation within their organization. As businesses grow, they must change those technological needs that require advanced systems to keep up. The organization could suffer significant losses over time if a legacy system cannot support a company’s increasing production capacity. 

Organizations that continue using outdated or obsolete legacy systems are forced to align their businesses with these systems, ultimately stunting the organization’s growth. Businesses that rely on legacy systems also lack the agility to adapt to challenges that may occur and are often unable to meet the latest IT demands.

Legacy modernization refers to updating and optimizing business systems to achieve operational efficiency, meet customer expectations, resolve technological constraints, and support integration with other business systems.

Over time, it is common for legacy systems to start exhibiting bugs, errors and other critical issues that can impact operations and revenue. Eliminating outdated systems through the process of modernization is vital to digitally transforming a business and gaining a competitive edge.

Legacy modernization involves more than just system updates. It is also about helping an organization take the necessary steps toward reaching a digital environment that fosters innovation, efficiency and scalability. 

The Benefits of Application Modernization

Modernizing applications can come with numerous benefits, such as time and cost savings. Application modernization enables organizations to protect their investments and take advantage of contemporary application modernization tools, infrastructure and programming languages for customized solutions. Implementing a robust application modernization strategy can also reduce the resources needed to run applications, improve uptime and increase the reliability of deployments.

Many organizations have significant investments in their existing application portfolios; some businesses are willing to retire their legacy applications and start fresh due to financial and productivity losses. Application modernization is a sensible way for organizations to realize the benefits of newer software solutions. Application modernization can offer a host of advantages for today’s businesses, including the following:

Organizations Gain a Competitive Advantage and Create Opportunities for Growth

Achieving a competitive edge in an overly crowded marketplace is a challenging feat. A competitive advantage sets an organization apart from its competitors, allowing it to achieve a better growth profile, superior margins and enhanced customer loyalty.  One of the best ways modern businesses gain a competitive advantage is legacy system modernization.

When organizations use the latest and most innovative enterprise software within business practices, they can gain an advantage over other companies in their industries. Failure to update IT systems can cause companies to fall behind in their industry, resulting in missed opportunities. 

Protects Data Against Modern Cybersecurity Attacks and Data Breaches

One of the most significant risks of using outdated or obsolete legacy systems is the lack of security. These outdated systems typically do not have the infrastructure needed to protect sensitive business data against harmful cyber-attacks and data breaches. Without modern solutions, internal and external security breaches continue to wreak havoc on legacy systems. In some instances, businesses do not even realize when unethical employees or hackers steal company data using these outdated systems.

When organizations take the necessary steps to modernize their legacy systems, they become better equipped to keep their business data safe from rogue employees and hackers. 

Reduces Software Cost Implications and Maximizes Profits

Businesses that use legacy systems often need to pay more attention to how much these systems cost to operate and maintain. To keep legacy software performing smoothly, companies often must dedicate a large percentage of their IT budget towards maintenance and support, investments that are used to adopt new technologies that encourage advancement and growth. 

Businesses can cut software maintenance costs through legacy system modernization while maximizing profits. Legacy system modernization enables companies to adopt more modern processes, reach a greater audience, increase business value and improve overall efficiency for enhanced financial growth.

Bridges the Gap Between Current Business Models and Customer Expectations

As technology continues to grow and evolve, customers expect more from the businesses they frequent. In fact, 75 percent of customers expect companies to utilize new technologies and up-to-date practices in their business models, according to a State of the Connected Customer report published by Salesforce[2]. 

Updating legacy systems is an effective and practical way to bridge the gap between a company’s outdated business models and what modern customers have come to expect. This can result in greater customer satisfaction and an overall better user experience. It is critical for today’s businesses to keep the door open to innovation, which means being open to legacy system modernization.

Allows Organizations to Begin Using Data-Driven Business Models

Implementing data-driven business models can give companies the upper hand by enabling them to make strategic decisions based on data interpretation and analysis. Many companies strive towards a data-driven approach as these models allow them to better organize and examine their data with the goal of better serving their customers and consumers.

Legacy system modernization gives companies the unique opportunity to use data-driven business models, such as the latest accounting software, which can provide businesses with greater insights to improve the overall customer experience. Businesses that have not yet taken advantage of data analytics may want to incorporate this into their modernization plan.

The Challenges and Risks of the Legacy Modernization Process

It is common for companies to encounter specific challenges and risks throughout the legacy modernization process. Moving from an outdated system to a modern platform could potentially result in operational problems that temporarily affect how the business is run. To minimize risk, it is crucial that the modern platform offers functions that are similar to the legacy system’s data formats. 

Cost can also become a concern when going through legacy system modernization. Some companies may find it costly to move specific applications from one platform to another. However, the cost is based on various factors, such as the size of the app and its complexity. In addition, it may not always be possible to move certain apps with unique architecture through a conversion program, forcing companies to find alternative solutions.

Co-Existence of Legacy and Modern Systems

Another common problem that companies may run into when navigating legacy system modernization is the co-existence of legacy and new systems. Any company that has been operating for at least two decades will likely encounter applications that exist in legacy technologies. When businesses choose to modernize their entire legacy footprint, it can negatively impact the business in a big way.

Quality Assurance

Due to the high volume of development work involved in legacy system modernization, quality assurance is often overlooked. Similar to other IT projects, businesses must ensure that all potential test cases and scenarios are well-defined prior to the testing phase. This means planning for the user acceptance test and bringing in as many business users as possible to ensure the modern application is sound and complete. 

Ideally, businesses should involve business users from the initial application discovery phase to achieve and maintain quality assurance. Communication is also important to better understand pain points and swiftly relay feedback to business and development teams.

Modernization Cost and Duration

Innovation in the business world can be resource intensive. While IT budgets are set to increase in 2023 to reach a worldwide total of $4.5 trillion, according to Gartner, many businesses continue to struggle with the ongoing costs of digital technology[3]. The initial cost of modernization is one of many concerns among employers. Technology investments can accumulate over time, resulting in a major asset for growing businesses.

It is important for organizations to consider what forms of modernization will provide the company with the best value and greatest profit. Businesses should also consider how they can prolong their life cycle to allow for ample time to recover the investment before the next one.

Scalability and Performance

Achieving high performance and scalability with legacy system modernization can often prove challenging. In some instances, pure legacy systems, such as mainframes, are often quite effective, especially when it comes to tasks such as batch processing. Reaching this same benchmark through modernization is no easy feat.

When experiencing these problems, businesses must find viable solutions, such as analyzing legacy applications to replace existing parts of the code with commercial off-the-shelf (COTS) frameworks or products. Businesses should also consider other aspects of the upgrade, such as an optimal hardware size.

Loss of Application Knowledge

It is not uncommon for organizations to experience a knowledge deficit when attempting legacy system modernization. There are many reasons why information on operating or maintaining a system is unavailable. Sometimes, the developers who helped create or maintain the legacy software are no longer employed by the company, or they may be unable to assist with the application.

Challenges can also occur when technical or functional documentation is missing, out-of-date or irrelevant. In some instances, the source code may have gone through several patches and has become too rigid, or the sources of third-party libraries or applications used are no longer available. Although it may be possible to manually review the code to identify the functionality, this can be highly time-consuming, especially when the code is redundant.

Planning before implementing legacy system modernization is essential to ensure the process goes smoothly. Effective legacy system modernization begins with a solid understanding of the technological and operational challenges that a company could face due to the outdated system. 

Before going through legacy system modernization, businesses must consider if the legacy system meets the company’s current requirements and whether the technology is too costly or complex to maintain. It is also important to consider if the technology can properly cater to the business’s changing requirements. 

Some other factors to consider before legacy system modernization include the following:

Integration and Compliance

Integration and compliance are two critical areas to consider before modernizing legacy systems. Legacy systems often require businesses to depend on third-party application programming interfaces (APIs), such as geolocation, user verification or data transfer. When legacy apps are modernized, they are often equipped with built-in integration functionality.

Before legacy system modernization can begin, companies must confirm that the system is compatible with third-party tools. In addition, businesses should ensure that their modern designs will not encounter any compliance issues. Conducting a system modernization review can help diminish any concerns and help ensure a smooth and problem-free modernization process. 

Expenditure Review

One of the main goals of legacy system modernization is to improve operations to achieve greater profitability. However, the modernization process can be a lengthy and costly endeavor. Therefore, businesses need to consider if modernization is worth the cost and if it will be profitable for the company over time. Businesses can learn more about their profitability by assessing the costs involved in legacy system modernization via a cost analysis.

A cost analysis refers to a systematic process of estimating the financial strengths and weaknesses of a business. Many organizations use this in order to analyze which decisions to make and which to avoid. There are several elements involved in cost analysis, including the following:

ROI Analysis

Before moving forward with legacy system modernization, conduct a return on investment (ROI) analysis to assess the current situation of the business. An ROI analysis measures the probability of gaining returns from an investment and determines a ratio that compares the loss or gains from an investment relative to its cost.

When interpreting an ROI calculation, there are several things to keep in mind. First, ROI is generally expressed as a percentage, as this form makes it easier to understand. Next, the ROI calculation should include a net return in the numerator; returns from an investment are either negative or positive. 

Infrastructure Cost Analysis

During an expenditure review, a business should also calculate the IT infrastructure costs to determine how much to spend. Infrastructure costs refer to the actual cost of acquiring, developing and constructing the infrastructure. Aging infrastructure generally costs more to maintain than a modernized infrastructure, making it an essential update. 

There are many risks involved when maintaining an unsupported legacy infrastructure, such as a lack of security updates that leaves the system vulnerable to attacks. Many businesses also find it time-consuming to keep up with updates and patches, putting the business at risk. With an infrastructure cost analysis, companies can determine the cost to keep the business secure.

Maintenance Cost Analysis

Businesses preparing for legacy system modernization should also perform a maintenance cost analysis. With a maintenance cost analysis, organizations can estimate infrastructure costs and help determine accurate maintenance spending using the Constructive Cost Model (COCOMO).

COCOMO is a type of regression model that is based on lines of code (LOC). This procedural cost estimate model is commonly used during software projects to help predict the different parameters that are associated with making a project such as cost, size, quality, time and effort. For example, key parameters used to define the overall quality of a software product include effort which is the amount of labor required to complete the task, and schedule, which is the amount of time necessary to complete the job.

Potential Risk Factors

There are always risks involved when going through the legacy system modernization process. Businesses should carefully assess how much time is required to modernize legacy systems and the time commitment for individual system modernization. 

Companies must also take into account the operational risks associated with legacy system modernization. With extensive coding, developers must take extra precautions to prevent errors or redundancies that could be time-consuming or costly to identify and resolve.

Budgetary Constraints and Funding Resources

Budget restrictions and limited resources are common reasons businesses delay legacy system modernization. Modernizing outdated or obsolete software can be very expensive, especially for larger businesses or organizations that have many systems that require extensive updates. 

For a successful legacy system modernization, a business must have a well-organized and strategic fiscal plan. Consider what budgetary constraints the company has before starting the modernization process and make the appropriate arrangements to cut costs or find funding elsewhere to account for these expenses. It is important not to begin the project unless the company has sufficient funds to allocate toward the complete process.

The Time Required for Modernization

No two legacy system modernization projects are exactly alike. Due to the amount of time, commitment, and effort this type of endeavor requires, it is essential to schedule ample time to complete the task correctly. The time required for modernization can significantly vary from one company to the next.

The modernization strategy used will also play a role in the amount of time a business needs to reach completion. The revolutionary modernization approach refers to a complete infrastructure transformation from the ground up. This approach can be very time-consuming and presents certain risks, and comes with higher costs. 

The evolutionary modernization method is a long-term, multi-phased model with a workload-by-workload approach. While slower than revolutionary modernization, costs are spread out over time.

Data Governance Constraints

Businesses often struggle with managing large amounts of data, especially when they use legacy systems. Through modernization, companies can find more efficient ways to manage large volumes of data through automation and other avenues. However, data management constraints can pose certain risks during modernization.

Data must be carefully reviewed before the underlying data can be used practically. Effectively managing data requires companies to define tactical data governance rules to determine the best approach to remove data silos, achieve streamlined storage space optimization, and to better organize data.

While many businesses continue to use legacy systems simply because they still work, outdated or obsolete software can cause companies to fall behind their competitors in terms of operations and innovation. With new technologies developing daily, modern businesses need to consider how modernization could positively impact their organization.

In time, every legacy system begins to lose operational efficiency, resulting in missed opportunities and difficulty reaching business goals. The need to rebuild, restructure or replace these systems is inevitable. 

The following steps are designed to help businesses on their journey toward legacy application modernization:

Evaluate Legacy Systems

Many challenges that develop during legacy system modernization can be resolved with proper planning. Ideally, businesses should evaluate their legacy systems against six crucial drivers, including agility, risk, business fit, cost, complexity and business value. 

Figure 2.1 – Key Drivers For Application Modernization

Consider if the legacy system is meeting the company’s business needs or is helping the business reach a higher level of success. If the answer is no, the system should be modernized. In addition, consider if the application is increasing the cost of ownership or if it is posing a security risk to the business. When these situations occur, modernization is a must.  

Define Challenges and Target Specific User Stories

Communication is essential when going through the legacy system modernization process. Businesses must understand why their legacy system does not meet their present-day IT or operational needs and communicate with the appropriate parties to determine why these problems exist. This means speaking with users, such as employees or customers, to determine what is causing friction within the system.

While identifying problems that exist is critical, businesses must also gain an understanding of what works well in the legacy system. There may be some aspects of the existing system that the business wants to retain. Knowing what aspects of the current system are effective or profitable can help a business best pinpoint a modernization approach. 

Choose the Right Modernization Approach

Once a business has determined what problems exist with the current system and clearly defined these issues, a business can begin the process of modernization. There are several different modernization approaches that a company can utilize to achieve a successful legacy system modernization. These approaches are referred to as the “7 Rs” and are ranked from the most complex with minor impact to the process with the most significant impact. 

There are strategies available that allow organizations to achieve application modernization with almost no downtime and minimal risks. The degree of disruption will be dependent on the industry and the reliance of the business on the technology being modernized. 

These 7 Rs include the following:

Figure 3.1 – Seven Different Modernization Approaches

Retain

Retain or ‘encapsulate’ is considered a low-risk technique that reuses or retains components of an existing legacy application within the new architecture. With this modernization approach, the legacy software is encapsulated or “wrapped” and accessed as a service via an application programming interface (API). The retain approach also introduces the capacity to expand the application using a microservices system.

This approach is most effective when there are apps that require major refactoring but are considered critical for the operations of the business, so they are prioritized and stacked prior to migration and modernization. Companies should only make the decision to move apps that make business sense.

Rehost

The rehost strategy is one that involves moving apps without making changes to them. The most significant advantage of using this modernization approach is fast migration. With help from various tools, rehosting can be an automated process. However, some businesses may prefer to complete the process manually.

Rehosting is sometimes referred to as a “lift and shift” approach, as applications are redeployed on a virtual environment with little effort. When a business chooses to migrate the data of applications without making changes, the applications can work without issue in the new environment. In addition, a rehost happens reasonably quickly, allowing companies to make further optimizations going forward with little upfront investment. 

Replatform

The replatform modernization approach involves moving and reshaping existing code to a new platform but retaining the current code structure, functions and features. This approach enables organizations to maintain the core architecture of their applications, which reduces the amount of time required to manage database instances.

Replatforming can be achieved by migrating applications to a database-as-a-service (DBaaS) platform, such as Amazon RDS (Amazon Relational Database Service). A business can also choose to migrate its applications to a fully managed environment such as AWS Elastic Beanstalk. 

Refractor

Refractor is a modernization technique that involves optimizing and restructuring the code to eliminate some of its technical liabilities. This approach requires businesses to alter the backed components without interfering with frontend components. A refractor modernization strategy can help companies reach operational efficiency without encountering significant disruptions.

With the refractor strategy, organizations can re-imagine how applications are developed and built. Although deploying this strategy can be cost-intensive, it is recommended for businesses that have an appealing product-market fit. During this process, companies often prefer serverless architectures that can help reveal new opportunities. However, this approach does require more time and effort.

Rearchitect

The rearchitect approach to legacy system modernization involves substantially altering the code to move it to a new architecture that offers greater capabilities. Rearchitecting has medium risk but also delivers medium results. It is a step beyond re-platforming and requires new technologies to make changes on the back end while retaining front-end functionality. This results in a less disruptive modernization process.

Rearchitecting is considered an intensive effort that essentially requires an organization to rearchitect an existing application from the ground up. The ultimate goal of this strategy is to significantly improve its scalability and overall performance compared to how the app performed before the process. 

Rebuild

The rebuild approach to legacy system modernization is considered the most costly strategy as it essentially rewrites most of the application from scratch. However, this approach does not change the specifications or scope of the application.

Due to the complexity of this approach, a rebuild is the longest and most intense modernization option. While time and cost are significant factors when considering whether or not to go with the rebuild strategy, it is important to note that certain companies can benefit from a rebuild. This includes organizations that must move large, site-based systems to the cloud. When achieved, the business can enjoy a more flexible, low-cost and high-performing system. 

Replace or Retire

When a legacy application no longer works, a company should consider replacing it completely. This approach involves scrapping the existing system structure and replacing it with a modernized solution that will meet the unique needs and budget of the business. Replacing a legacy system typically requires an organization to follow a product development process.

Removing applications with obsolete components or redundant functionalities is considered a cost-effective solution for organizations facing challenges with legacy systems. Retiring software can also help businesses better optimize their existing codebase with reduced effort and eliminate the need to build from scratch.

Prepare Your Organization for Future Expansion and Changes

Businesses are always on the lookout for new ways to expand and improve. Today’s organizations face a number of struggles, such as high expectations from customers, a highly competitive market, ever-evolving technologies, and an unstable economy. Due to these constant changes, many applications have an average lifespan of 6 to 8 years.

Due to the monolithic nature of legacy systems, organizations are often presented with applications that are difficult to update. Implementing new capabilities and features can be challenging when software has little flexibility, making modernization a must.  When businesses choose to refactor or rearchitect their software, they are better equipped to meet the future needs of their organization.

How To Choose the Right Legacy Modernization Partner

One of the most significant decisions an organization will need to make after deciding to perform legacy system modernization is who will assist them with this project. Modernizing applications is not a task that most businesses function on a routine basis and internal IT teams may not have the skills or knowledge required to perform a highly technical update.

Businesses that perform legacy system modernization must also consider what internal resources will be required and if training will be necessary to use the new system. Many organizations choose to work with a trusted software partner to ensure the process goes smoothly.

Iteratively Test and Optimize the Application’s Modifications

Testing is a crucial component of implementing any update within an organization. After starting the project, it is vital to iteratively test and optimize any modifications made to the application to ensure that it does not have any problems in the software licensing, hosting, or connectivity to databases or other services during its transition.

Organizations should always plan for continual modernization initiatives to help ensure that the application continues to adapt to changing demands. In some cases, testing is such a critical phase of a modernization project that it generally accounts for more than 50 percent of the complete modernization effort.