The Legacy Challenge

Recent estimates show that the current installed base of mission-critical legacy applications would cost $3 trillion to replace. Because of the magnitude of these expenditures and their business impact, IS organizations must move carefully yet decisively. Even basic maintenance of legacy systems costs huge sums of money, leaving managers with only a small fraction of their budget for critically important new applications.

These cost pressures will intensify in the future for three main reasons: first, CEO have invested in Information Technology for many years and are demanding accountability for results; second, budget increases have been limited to the rate of inflation for most of the recent past; and third, in an increasingly competitive world, companies continue to demand cost reductions and better returns on investment from every segment of the business. As a result, several challenges confront the IS organization:

■ At least 80 percent of most IS budgets is spent on legacy systems, with a declining residue left for new development. At the same time, each new application is more complicated, costing more to develop and maintain.

■ Because much of the focus of legacy maintenance is on corrections, minor enhancements, and preventing catastrophe, legacy investments quickly reach a point of decreasing marginal utility: each additional dollar buys fewer and fewer benefits, especially when compared with each dollar spent on new solutions to business problems.

■ The accelerated pace of technological change means that systems are superseded more rapidly than they were when technologies were more stable.

■ As Exhibit 1 illustrates, too much of the effort expended on legacy systems is fundamentally non-value-added; studies show that more than 50 percent of the effort is devoted to understanding a legacy application and then retesting the application after a change.

Exhibit 1. Legacy Maintenance (From GUIDE Study on Legacy Maintenance.)

■ As a result of the intensive effort made to change a legacy application, about 25 percent of legacy time is spent on testing. A more intelligent, planned, and focused approach should provide adequate testing with less effort.

■ This year's new application becomes next year's legacy, typically increasing the installed base of legacy systems that must be maintained.

These challenges have several implications for IS managers. Managers must break the cycle of an ever-increasing yet fractured installed base that drives an ever-larger annual maintenance expense. New systems have to be funded by gains in IT productivity and an accumulation of small cost savings rather than by increasing infusions of corporate capital. As with many business reengineering efforts, IS transformation will have to be quickly self-funding.

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