Digital transformation is one of the top items on every organisation’s to-do list. It’s constantly being raised as a contentious priority at board level, and it’s not hard to see why. Rapid technological innovations (particularly within the treasury ecosystem) have totally redefined customer expectations, shifted regulatory goalposts and increased competition pools. In the years to come, businesses will literally sink or swim based upon their ability to utilise new digital solutions in order to become more agile.
That’s why pursuing a series of digital transformation projects now makes perfect sense. Yet to make real headway and upgrade fundamental processes, companies must first go head-to-head with the prohibitive power of legacy tech.
For all intents and purposes, a legacy system is simply an umbrella term used to describe any piece of hardware or software that’s become utterly outdated. This is normally because a solution has been superseded by a newer product generation, or because the software vendor no longer supports a particular system and has moved on. Either way, legacy tech poses a major barrier to progress.
According to the Digital Trends Report 2019 compiled by Nimbus Ninety, 41% of senior stakeholders cited dealing with legacy technology as their greatest organisational challenge in the year ahead. That makes a whole lot of sense, bearing in mind researchers at Avanade found that nearly a third of the average company’s tech ecosystem is made up of legacy solutions. Maintaining those systems consequently gobbles up 60-80% of an organisation’s IT budget – which is why 50% of stakeholders reckon legacy systems are the main barrier preventing their organisations from completing digital transformation projects.
Financial services providers actually spent twice the industry average on transformation projects last year, and 88% of CIOs told researchers at Couchbase that they’d had at least one digital project fail, been delayed or shrink in scope over the last 12 months because their legacy systems couldn’t support it. At the end of the day, a lot of older treasury systems simply don’t have the connectivity, functionality or power to facilitate transformation.
So, why not replace these systems?
Boards will tend to point the finger at the unreasonable costs of replacing a legacy solution with something a bit more state-of-the-art. Worse yet, the longer companies invest in old systems, the more resistant stakeholders seem to be at the idea of dropping even more cash in order to change them.
Treasurers have got to take the lead and push their organisations to jump off this perpetual cycle of reinvestment and pursue innovation.
Yet before diving headfirst into a costly systems upgrade, financial leaders must first be able to clearly identify and communicate the ways in which their business has outgrown legacy tech. More important still, treasurers need to quantify the net gains corporates can expect to post as a result of ditching legacy solutions.
How legacy tech hinders treasury
The issues that go hand-in-hand with legacy tech extend far beyond any unreasonable costs associated with ongoing investment and maintenance in old systems – and the single greatest point of legacy failure revolves on data accessibility. This is where the case for a newer system inevitably starts to build.
Access to real-time data is absolutely critical for treasurers, and particularly for corporations that are reliant upon a decentralised or regionalised treasury function. In order to react to market movements, spot patterns and create opportunity, teams need instant analytics on pre-trades, post-trades, pricing and borrowing instruments. Organisations require a clear snapshot on all cash positions in real-time in order to create liquidity and unlock working capital.
Without that constant flow of data, as well as the infrastructure and resource needed to consume and store that information, companies are placing themselves at a competitive disadvantage. Unfortunately for those organisations chugging along with outdated systems, real-time data generally requires cloud connectivity and pre-configured integrations that can track down and secure information feeds from both traditional and untraditional sources.
Legacy tech also hinders treasury by denying corporates a single and simple source of truth.
Although the operational boundaries between front and back office roles has become increasingly blurred over the past couple of years, many of those consolidated teams will continue to operate using incompatible legacy systems. Needless to say this mish-mash of systems hinders lateral collaboration – but it also leads to duplicated efforts and needless, manual checks to reconcile data sets and make informed decisions about liquidity, funding and risk management.
Relying upon a patchwork of legacy systems also opens corporates up to a heightened security risk. In a survey conducted last year by Macro 4, a whopping 87% of IT decision makers said they believed retaining old systems made their companies more vulnerable to cyber threats because of lax authentication functionality.
Corporates need a secure, single source of truth that front, back and middle office teams can utilise and feed up to the C-level so that everyone is on the same page. Contemporary TMS or ERP solutions can offer that single source of truth. Half a dozen legacy systems strung together cannot.
Regulatory updates have rendered quite a few solutions redundant over the past few years, too, and this is another key area in which treasurers should be able to make a case for investment – particularly if their respective organisation is involved in financial services.
Landmark rules like MiFID II, GDPR, Volcker 2.0 and PSD2 have introduced a flurry of new obligations for banks and fintechs. Liquidity is a particularly big focus, and legacy systems that are no longer being updated by vendors or were designed to manage compliance issues pre-Dodd-Frank are going to be totally useless.
New requirements on reporting around net stable funding ratios, intraday liquidity management, interest rate risk in the banking book and liquidity coverage ratios have got to be observed. It’s also worth pointing out they’ll subsequently impact on an organisation’s operations and strategy. Efficient treasury teams need systems capable of up-to-date stress testing, modelling and reporting that understands incoming regulation and offers unprompted recommendations accordingly.
Otherwise, corporates may end up getting caught off guard and slapped on the wrist in crucial markets.
Building the case to upgrade
After recognising the ways in which legacy tech hinders productivity, treasurers keen on escaping archaic systems and catapulting their organisation into the 21st century have got to develop an airtight business case for investment in a TMS or ERP system that can facilitate a fundamental, business-wide digital transformation.
As previously identified, the key barrier here is cost. Boards aren’t always inclined to want to replace a legacy system their business has spent a decade upgrading and maintaining – and so it’s incumbent upon financial leaders to demonstrate the rationale behind any upgrade by quantifying the benefits of increased functionality, flexibility and integration.
One simple way to quantify this is to forecast a new system’s scalability. Because new systems are designed to grow alongside an organisation, modern and automated systems tend to make a certain proportion of future hires redundant. Centralised systems can also eradicate banks fees through enhanced reporting functionality, mitigate fraudulent transactions through upgraded security authentication and optimise cash positions via improved visibility and forecasting models.
All of these benefits do have a quantifiable value – and when pooled together alongside projected savings on legacy maintenance, the cost of upgrading should be totally dwarfed by the ongoing expenses and disadvantages associated with legacy systems.
From there, treasurers will be able to develop a wider project file that takes into account the necessary changes in processes, operational impacts and strategic changes precipitated by the introduction of a new, single system. It won’t (and can’t) happen overnight, and there will be teething issues. But the numbers don’t lie, and the facts simply cannot be ignored: legacy systems hold companies back big time.
Upgrading might hurt a company’s balance book in the short term, but the overarching implications of modernisation and any subsequent digital transformation should be totally worth it in the long term.