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Nov 20, 2023
Modernization

Uncovering the Hidden Costs of Legacy Systems 

Modernizing legacy systems can drain your budget, no doubt about it. Yet, the stark reality is that the maintenance costs for these legacy systems are even more staggering. The longer you wait to begin application modernization, the more you’ll need to spend. 

A study on the maintenance costs of legacy systems in the United States indicates approximately $337 million annually is shelled out to operate and maintain just ten of the government’s legacy systems. 

Outdated systems can cost an organization almost a 15% budget increase every year for maintenance. Consequently, opting for a modernized software approach might be the better alternative because of the challenges and financial implications of maintaining outdated software. 

In a survey conducted with C-level corporate executives, 70% of respondents highlighted that technical debt puts a tight leash on their IT operations, hindering their ability to innovate. Despite this, many companies are reluctant to modernize their legacy applications. Their rationale often revolves around the belief that as long as these legacy systems are still functioning, there’s no need to funnel resources—be it time, money, or organizational effort—required to update them. 

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While assessing the expense of retaining legacy systems rather than upgrading them, it becomes challenging to gauge the associated costs accurately. Supporting outdated systems introduces both explicit costs that can be easily quantified and hidden costs that are more difficult to measure but carry significant impact. A comprehensive analysis of all expenditures is essential and requires determining the most appropriate method for describing them.  

Having said that, this article provides a list of all expenses associated with legacy systems to include in your business case, as well as how to migrate to a modern system. 

The Explicit Costs of Legacy Systems 

Explicit costs refer to direct, tangible expenditures that are readily identifiable and measurable and involve the direct payment of money or other easily quantifiable assets. Examples of explicit costs include ongoing maintenance costs, tech support, licensing, environmental costs, insurance premiums, taxes, electricity bills, materials used in production, and staff costs, among others. 

1. Ongoing Maintenance Costs 

According to a Deloitte survey, IT departments typically allocate more than half their technology budget (55%) to sustaining business operations, with only 19% dedicated to developing innovative solutions.   

Continuous breakdowns and failures demand constant attention and repair efforts for the technology. Additionally, as hardware and software essential for maintenance are discontinued, their prices fluctuate. While initially decreasing, prices tend to rise as products reach the end of their life cycle and become more challenging to acquire.   

To determine legacy application maintenance costs, include expenses related to server maintenance, hardware upgrades, replacements, as well as software patches, upgrades, bug fixes, and security updates.  

2. Tech Support  

Maintaining and supporting legacy systems requires experts with the necessary skills and knowledge; however, their numbers are decreasing each year.   

Options include hiring skilled professionals experienced with legacy technology or training existing staff. If you choose the first option, you’ll face challenges in finding experts willing to work with outdated code, while the second option requires significant time and financial investment in training. Both options are pretty expensive. To calculate tech support costs, consider human resource expenses for technology maintenance, encompassing salaries, benefits, and training.  

3. Licensing  

Maintaining legacy systems often involves special licensing, particularly for discontinued and unsupported software, requiring additional investments to continue utilizing it.   

For example, in 2015, the US Navy spent at least $9 million to continue using Windows XP safely. Consider vendor support and third-party software license expenses to factor in these costs.  

4. Environmental Costs  

Older technology tends to be energy-intensive, requiring more power and extensive cooling infrastructure. In contrast, modernized technology is more energy-efficient, compact, and generates less heat.  

Remaining committed to legacy technology can undermine your environmental efficiency. Whether opting for a cloud-based or on-premises environment, platforms with updated features often contribute to greater sustainability.   

For instance, AWS reports that organizations in the cloud typically use 77% fewer servers, consume 84% less power, and employ a 28% cleaner power mix. When assessing finances, consider utility bills, including electricity, water, gas, and other related costs.  

5. Staff Costs  

As mentioned earlier, finding experienced specialists for aging legacy systems becomes increasingly challenging. Opting to train existing staff may result in them diverting their focus from exciting modern solutions, hindering career development. This not only raises the average cost of legacy system programmers but also risks employee burnout, reduced performance, and dissatisfaction, leading to higher turnovers.  

Considering these consequences, it’s crucial to question the necessity of sticking with legacy systems. Costs in this category include time spent on activities like meetings and administrative tasks, along with expenses related to employee turnover and training. Additionally, it may involve productivity losses due to equipment breakdowns or other interruptions. 

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The Hidden Costs of Legacy Systems 

Hidden costs are indirect expenses not easily identified or measured in business or individual activities. Unlike explicit costs, these don’t involve directly paying money or tangible assets. Instead, they signify opportunity costs or the missed chances of using resources in one way rather than another. 

1. Security Costs 

Legacy applications pose an elevated risk of data leaks or loss, threatening a business’s reputation and finances. According to IBM’s 2019 Cost of Data Breach Report, the average data breach cost in the US is $9.44 million.   

In 2017, the global shipping company Maersk suffered a substantial security breach due to the NotPetya ransomware attack, affecting over 4,000 servers, 45,000 PCs, and 2,500 applications across the company’s global network. One of the major causes of this breach was Maersk’s use of legacy systems and outdated software, which resulted in a staggering cost of nearly $300 million. 

Accounting for the hidden costs of safety risks can be challenging but is crucial. Consider expenses related to cybersecurity staff and services, ongoing maintenance checks, security updates, handling security breaches, and developing data recovery plans. Additionally, assess the risk of security vulnerabilities and the associated cost of mitigating them. 

2. Frequent Downtimes 

Legacy systems often face frequent downtime, resulting in potential havoc on departments and financial losses for the company.  

For example, if you’re using legacy accounting software, downtime during work hours could freeze cash inflow, preventing your business from generating revenue. 

3. Wasted Opportunities  

Maintaining legacy systems diminishes resources available for innovations that enhance process optimization and boost productivity, ultimately increasing revenue. Examples of such innovations include AI or automation. 

By resisting modernization, you also delay the potential for interconnectivity and integration with new technologies. Picture a scenario where collaboration with a partner could potentially increase your revenue and brand image, but your incompatible technology prevents seizing the opportunity. 

Consider competitors who’ve improved customer experience through application modernization and imagine the long-term consequences of clinging to legacy systems. To determine the cost of not upgrading, research the market share your company could withhold without the influence of legacy technology. Calculate the time employees spend on error resolution instead of focusing on new development for greater achievements and growth. 

4. Bad Customer Experience 

Numerous cases highlight that underperforming legacy systems can result in dissatisfied customers and decreased cash inflow for the company. For instance, in 2015, a Paris airport faced a shutdown when a 23-year-old Windows 3.1 system crashed in bad weather, grounding planes and leaving customers stranded for hours. 

In today’s competitive market, customer experience is pivotal to a company’s success. Therefore, the use of legacy systems proves detrimental to your business. 

What Can You Do About Your Legacy Technology? 

Continuing to allocate time and resources to maintain aging applications is a losing proposition, as the cost of maintaining legacy software systems only escalates. The key to preserving the value of these applications is modernization, bringing them into the current technological landscape. 

This includes transforming the traditional monolithic structure of these apps into a cloud-native microservices architecture.  

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The outcome is a codebase with minimal technical debt, easily adaptable, upgradable, and integrable with other cloud resources. 

However, the modernization process comes with challenges. The average app modernization project costs $1.5 million and takes around 16 months, with a notable 79% failure rate. Companies often struggle due to uncertainty about where to start or how to prioritize tech-debt efforts. According to McKinsey, ineffective spending on non-critical applications and misguided modernization attempts contribute to this poor performance. 

To succeed in legacy app modernization: 

  • Choose the Right Modernization Strategy: Mere migration to the cloud is insufficient; true modernization involves refactoring monolithic legacy code into microservices
  • Prioritize Effectively: Comprehensive, quantifiable data on the complexity, risk, and technical debt of your legacy app portfolio is essential to determine where to start and how to prioritize modernization efforts. 

Related Article: How Data Modernization is the Key to Becoming a Data-First Leader 

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How Data Modernization is the Key to Becoming a Data-First Leader 

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How TechBlocks Can Help with Your Modernization Efforts 

Relying on manual assessments for the modernization of legacy applications, especially those with extensive codebases, proves impractical and time-consuming, as highlighted by the McKinsey report. Developers tasked with evaluating multiple applications, potentially with millions of lines of code, face a complex and challenging task. 

Unraveling the functionalities and dependencies within large, non-modularized, monolithic codebases exceeds human capabilities within a reasonable timeframe.  

The most effective approach involves using an automated, AI-enabled analysis solution that can perform the necessary static and dynamic analyses of legacy apps much faster than manual efforts. Such a solution will also provide the essential data to quantify the expected return on investment (ROI) for your modernization program. 

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Don’t let the cost of legacy system maintenance hinder your business growth — Contact us to discuss your project scope, and collaboratively, we’ll identify and execute the right modernization strategy tailored to your needs and budget! 

About the Author

Michael Chu

Michael is our VP of Digital Product & Strategy and has over 20 years of experience as a Solutions Architect, Product Manager, Technical Architect, and Digital Architect for companies globally, with a passion for creating delightful digital experiences and driving positive change using technology. It's a love affair that started because of his keen interest in understanding what drives people.  

Michael is a proven digital leader who joined the TechBlocks family in March 2023. He oversees digital transformation efforts and ensures our client's visions are brought to life. He also has extensive experience building ecommerce and healthcare technology solutions. He focuses on seeking the root cause to solve business and technology problems rather than just fixing symptoms.    

His thirst for knowledge keeps him at the forefront of technology and has translated well into conceptualizing and designing innovative tech solutions. Michael has built a reputation for being a 'creative technologist,' whether they're life-changing health tech challenges, developing new ways for consumers to discover and purchase goods, or building other enterprise solutions for complex use cases. 

Michael brings a wealth of experience from tech companies like Mekkano, Bowstreet, and Streebo. Before joining TechBlocks, he was a Digital Architect at Vasa Digital, helping enterprise customers realize business value via enterprise architecture and digital transformation. He holds a Bachelor of Science degree in Psychology from Dalhousie University and an International Master of Business Administration degree from York University, among other certifications.   

Michael Chu