The Value Exchange
Barnaby Nelson, CEO of The Value Exchange, sits down with Jenna Lomax to outline a key imbalance in the industry on how legacy technology is managed. As recent research (with IHS Markit and Digital Asset) has shown, it is both a key enabler for so much industry change and a huge challenge for many firms
How big is the legacy tech problem today?
Legacy tech is a fascinating theme — because it does not catch the headlines very often and yet it stands on the critical path of just about every single major change priority that banks and investors face. From the Central Securities Depositories Regulation (CSDR) to environmental, social, and governance (ESG) or digital assets, the ability to manage your legacy technology is a key enabler to your ability to deal with market (and customer) change.
And it is a widespread issue. Among the sell-side, just over one quarter of settlements systems are more than 20 years old, which means that large parts of our daily processes are being supported by tactical workarounds or extra people whose job it is to supplement old and ageing core platforms. Aside from the obvious volume limitations of older technology, these workarounds cannot scale during volume peaks and they cannot handle future market change either.
Where is the legacy tech problem in our firms?
Legacy and siloed technology platforms reside across all of our organisations — but our research shows that the legacy problem is particularly acute in certain key areas.
It is especially prevalent in the post-trade space, for example, which has had comparatively minimal investment over the last five years when compared with bank-wide platforms (such as client onboarding, fees and client reporting).
It is alarmingly prevalent in the listed derivatives space (where 97 per cent of systems are unable to process transactions for other asset classes) and among broker-dealers (where 52 per cent of systems are run locally or regionally).
What is the strategy for replacing legacy?
A key outcome from our research is that we cannot wait until the system’s end-of-life to start planning for change. Today, the biggest driver for legacy tech replacement is actually market change (regulatory compliance, cost savings and new client reporting) — much more than it is about managing system end-of-lifes.
The average profit and loss of a legacy tech replacement project is about US$1.5 million — more than 40 per cent of which comes from new revenues. Growth enablement is a critical piece in all of the conversations we have about legacy — and it is something we do not factor into our planning enough. Legacy tech is not about keeping old systems going for as long as possible, it is about delivering on your growth priorities.
Where is legacy tech replacement happening?
We are seeing the highest volumes of transformation in areas where regulatory change and growth pressures are the most acute — which are not necessarily the areas where the systems are the oldest.
Equities is a major area for change, largely driven by the significant changes triggered by CSDR, the Shareholder Rights Directive II (and possibly T+1), as well as by the significant market volumes that we have seen in the last two years.
Functionally, corporate actions are the central area of change — and it is also where the change appears to be most urgent. This reconciles well with other ValueExchange research and highlights this space as a real hot-spot for change in the industry.
We spend all our time on settlements but all our risks are on corporate actions — and there is a huge amount of awareness today indicating that has to change.
Most importantly though: the change is happening now. 47 per cent of respondents across the industry have legacy tech transformation projects going on in 2022 — and that is clear evidence that this topic is at the centre of many transformation plans today.
What are the big risks that we need to have in mind if we want to deal with our own legacy tech problems?
The biggest challenge in executing legacy tech replacement projects is the lack of resources to manage a major transition.
It is extremely hard to get sign-off for large, multi-year projects — but it is even more difficult to secure the talent and expertise needed to realise them.
This is no doubt a key driver behind the fact that about 50 per cent of the industry is managing legacy tech through smaller, incremental change projects (such as adding new data layers or in-house work-arounds on top of their ageing systems).
It seems that some systems (especially in the settlements space) are almost too big to replace wholesale — whereas workflows such as corporate actions or tax seem more suitable for end-to-end transformation.
Nevertheless, the fact that one in two of us is opting for these tactical fixes (rather than more transformative change) is a potential red-flag for us all — as it means that we risk continuing to carry the legacy tech burden with us for many years to come.
