This is happening, of course.  Established firms are investing millions in digital centres of excellence and research teams.  Some have bought promising start-ups to short-cut their way into robo-advice.  But as a proportion of the change budget, this kind of R&D is still relatively small-fry.  Ask the Chief Information Officer (CIO) what’s top of their in-tray, and most likely it will be the twin challenges of technology running costs and operational risk.  Ageing technology is a major source of both of these.

A hungry beast

A typical large financial services company spends around 30% of its operating budget on IT – license fees, development and maintenance contracts, hardware and the people to look after it all.  Costs escalate each time new technology is implemented to support a proposition launch without being adapted to support the products no longer for sale.  The CIO’s successors later face cost headaches.

• Much so-called “legacy” or “back book” business is run on expensive old kit and software, some of which is now unsupported by the makers. Providers must negotiate special support contracts with the manufacturer or another third party.
• Fewer IT staff have the skills to maintain this technology. Those remaining command a premium on the contractor market.
• Each new piece of product regulation potentially results in updates to legacy systems as well as current ones.
• It is generally harder to integrate new services such as digital access into legacy software and hardware – often additional “middleware” is needed.

Mad, bad and dangerous to contain

On top of the visible cost premium of keeping old technology running, there are significant operational risks attached.  A great many financial products today are still being managed on software that is out of support or written in a dead language.  With greater risks come higher solvency capital requirements, as well as unwelcome interest from the FCA. 

• As technology becomes obsolescent, it can become less stable and more prone to outages, even as consumers’ expectations for service availability are becoming ever more demanding.
• Often, outages result from attempts to integrate old technology with more modern systems, for example to facilitate web-based services.
• In some instances, the demand on a system outgrows the software or hardware’s capacity to handle it. This can particularly apply to batch processing systems, where there is only a finite amount of downtime overnight during which to run all the required batch programs.
• Older software can become more vulnerable to security breaches. With manufacturer support withdrawn, security patches are not readily available. 
• The difficulty of recruiting and retaining good staff to maintain old systems can lead to key person dependencies.

Nowhere to hide

These increasing costs and risks come at the stage of the product lifecycle where there is steady and significant run-business off.  Policies mature as customers retire or else gradually cash them in, but a small stubborn rump remains.  In the context of a potentially 50-year product like a pension, the IT cost per policy in run-off can rise exponentially.  With every retirement and maturity, revenue continues to move in the opposite direction to costs.

Of course, this isn’t limited to the world of 200 year old life companies.  Increasingly the young upstart wrap platforms that have grown up in the last 20 years are facing their own legacy challenges, in the face of downward pressure on platform fees.  As recent news stories have shown, re-platforming is far from cheap or easy.

Where's St. George

Several decades of technical progress predicted by Moore’s Law have rendered IT systems redundant at an ever increasing pace.  The need for continual technology upgrade is unavoidable, and with so many examples of cost overrun, getting it right can give firms a competitive edge.  Here are our five steps to better “dragon-slaying”.

1. Understand your total cost of ownership. Until you know which parts of your IT are causing most pain, it’s impossible to prioritise upgrades.
2. Perform a complete and realistic risk assessment of the IT estate, to inform your risk management and upgrade strategies.
3. Document the complexities of your closed book product set. This will be needed for any system replacement project, and will help to identify any unusual features that depend on manual processes or rare skills.
4. Assess the range of options. These could include migrating to a new platform, a technology outsource, a full business process outsource or even buying customers out of their existing contracts and “upgrading” them to new style accounts.
5. Design a target solution for the long term.  Accept that change is continuous and use componentised architecture over tight integration wherever possible.

While there’s no mighty sword in the fight to stay current, constant monitoring of the state of your IT landscape, an awareness of the options and a clear long term plan are the best weapons we can use to contain legacy issues.

This article first appeared in Finance Digest in July 2017