Legacy Outsourcing Requires A Delicate Touch

For the vast majority of financial firms, legacy systems -- the multiple layers of IT platforms that have been built upon over many years -- are the elephant in the data center.

Managing and maintaining these systems eats up as much as 90% of a financial institution's technology budget, leaving a measly 10% for innovation and application development, according to a recent study from Intellect, a London-based financial services think tank.

Extreme Makeover: IT Budget EditionWall Street & Technology's January digital issue, which looks at how Wall Street firms, faced with a slew of new regulations and declining profits, are squeezing more out of their existing IT infrastructures, revisiting outsourcing relationships and modernizing costly legacy systems.

Older systems are often business critical, dependent upon other elements of a bank's IT infrastructure and frequently kept running 24 hours a day. These legacy systems are costly too. Businesses have $500 billion tied up in maintaining a backlog of old applications, a 2010 Gartner report contends. Adding, removing or modifying these entrenched systems can cause one big migraine for firms. Changes can cost millions of dollars and impact many aspects of a bank's processes.

"Legacy platforms are becoming so expensive to maintain," says Daniel Simpson, managing director for enterprise data management at Markit, which provides data, valuation and trade processing products and services across multiple asset classes. "In many instances, these systems are 20 years old, so even finding developers to work on them is difficult," he says. "And the ones that are available can be expensive."

Pauline Parker, head of application managed service at Rule Financial, a London firm that provides business consulting, technical consulting and IT services to investment banks, concurs. "IT specialists must be able to operate legacy and modern applications, and there's a dearth of experts in the market who can fulfill both requirements," she says.

In addition to dealing with a lack of experts who can actually maintain legacy systems, firms are feeling pressure to upgrade out-of-date platforms. Older systems often can stunt a company's growth, as they aren't able to adapt to new business trends, customers' transparency demands or the barrage of new regulations that all financial services companies face.

As IT budgets and profits stagnate and banks look to streamline their operations and boost efficiency, they're increasingly turning to third-party vendors to provide state-of-the-art technology and maintenance services while the financial institutions go back to focusing on their core operations. After all, why focus on back-office operations when you could put all your attention on new technology that will improve the business?

Where To Begin?

But when faced with a humongous labyrinth of legacy systems that need to be upgraded or outsourced, where's the best place to start?

"Start by evaluating the current state of your application portfolio," says Mary Nugent, VP of solutions consulting at Micro Focus, which provides software that lets companies develop, test, deploy, assess and modernize business-critical enterprise applications. Only half of financial institutions have done this and know where the opportunities to cut costs or renovate are, she says.

Firms must know how their applications are built, what language they were written in, how big the lines of code are, how many batch applications are involved and how the system interacts with other applications, Nugent says. "You know you're spending an enormous amount of your budget maintaining these systems, so you have to look at how difficult it would be to transform a system. To do that, you need to know what it's connected to and about any third-party transactions that are tied to it."

Assessing which applications must be upgraded or outsourced can become as rudimentary as knowing that the application was written in the '60s and that you only have two people who know what it does with limited documentation, Nugent says.

[The Evolution of Outsourcing in Wall Street IT]

With a legacy application, in some cases a firm might have a team of developers working on a mainframe, she adds. The cost for using the mainframe usually comes from the number of instructions the application sends to it. "So your customers might ask, 'Why are we developing on the mainframe? Why not a PC?'" Nugent says. "There can be big savings when you move off a mainframe to another platform."

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