9 ROI Factors to Consider When Upgrading Legacy Systems in Digital Transformation

For enterprise technology organizations, upgrading legacy systems can seem like an overwhelming task. The sheer complexity and cost can make it difficult to justify with traditional ROI models, which often prioritize immediate return on capital over long-term value. Yet sticking with aging technology can be even more detrimental, leading to cumbersome operations, increased risk of failure, and reduced agility. Here's why it's time to reframe the conversation around IT modernization and embrace a broader ROI model that captures the full scope of benefits and risks.

The Problem with Legacy Systems

Legacy IT environments often resemble Frankenstein's monster—an amalgamation of outdated applications, mismatched tech stacks, and hard-coded solutions. These systems are costly to maintain, difficult to secure, and can be a bottleneck to your company's growth. For IT teams, managing such complexity distracts from the critical work of supporting business strategy and innovation.

While some CIOs have found ways to "ring-fence" these legacy systems through connectors, digital interfaces, and data extraction, these approaches may not be enough. To compete in a digital-first world, enterprises need to deliver compelling digital experiences to engage customers. Legacy technology can be a significant roadblock to this goal.

The Tipping Point in IT Modernization

Recent trends suggest that companies are starting to recognize the threat of outdated technology. According to Gartner, operating costs for IT increased from 67% of budgets in 2013 to 71% in 2017, while spending on digital transformation efforts decreased. However, IT departments are now shifting toward off-premise platforms like cloud services, software-as-a-service (SaaS), and integration platforms as a service (iPaaS), indicating a move toward modernization.

This shift marks a tipping point where legacy IT systems can no longer be ignored. To build a compelling business case for modernization, technology leaders need a more comprehensive ROI model that captures the risks and opportunities associated with legacy systems. Here are nine critical factors to consider:

1. Budget Constraints: Legacy systems often consume 70% to 80% of IT budgets for maintenance and operation. This leaves little room for innovation and new business opportunities. Over time, these costs will only grow as technology ages and requires more resources to maintain.
2. Cloud-Native Technology: All new technologies are built with cloud architectures, offering more flexibility and scalability. Legacy systems, on the other hand, limit your ability to leverage the latest tools and frameworks.
3. Technology Relevance: Legacy systems often use outdated languages, databases, and architectures, limiting your ability to support modern analytics, real-time transactions, and digital experiences.
4. Talent Shortages: It's increasingly difficult to find talent to operate and support legacy technologies like mainframes, COBOL, and Fortran. Attracting younger talent becomes a challenge when you're stuck with old tech.
5. Customer Experience: Digital-native companies set high expectations for customer experience, with rapid iterations and continuous feedback loops. Legacy systems often can't keep up with this pace of change, impacting customer satisfaction and loyalty.
6. Speed to Market: The primary reason companies upgrade IT systems is to support product strategy and accelerate time-to-market. The era of long release cycles and multi-year projects is over. Speed is a critical competitive differentiator.
7. Security Risks: Older technologies are harder to secure and monitor, posing significant risks as security paradigms evolve. Cloud-based solutions generally offer more robust security features and compliance capabilities.
8. Data Management & Privacy: Compliance with new data regulations is challenging when information is spread across multiple legacy systems. Modern data practices are essential to maintain customer and regulator trust.
9. New Markets and Ecosystems: Companies are embracing digital platforms and tech-enabled ecosystems to enter new markets and rethink business models. Legacy systems can limit your ability to participate in these ecosystems and seize new opportunities.

Building a New ROI Model for IT Modernization

To build a compelling business case for upgrading legacy systems, collaborate with key business partners, including finance, HR, product development, and strategy. Quantify the risks and opportunity costs associated with failing to deliver competitive customer experiences, attract top talent, speed products to market, protect data, and respond to changing market conditions.

By considering these nine factors, you can develop an ROI model that captures the full scope of benefits and risks associated with legacy systems. This approach provides a stronger foundation for advocating IT modernization and ensuring your business remains competitive in a digital-first world.