Out with the old and in with the new?
27 Jun 2018
Industry players discuss whether or not legacy systems should be replaced and the effects that technology is having on the industry
Image: Shutterstock
A legacy system is defined as an outdated computer system that an organisation may use instead of an available upgraded version, which also covers application software and programming languages. But, that is not to say that legacy systems are necessarily old. Legacy systems can refer to lack of vendor support or a system’s incapacity to meet organisational requirements, and to a certain extent, most organisations have legacy systems. Generally, a legacy system is incompatible with newly purchased systems, and they are sometimes considered to be high maintenance. As well as this, they require modifications and intricate patching.
Jon Trinder, fund services product manager at Linedata, explains: “The majority of buy-side firms are still using legacy IT systems. In our recent annual global asset management survey, 42.5 percent of respondents said that ‘improving legacy systems’ was one of the key areas where respondents would be allocating their IT spend over the coming 12 months.”
Some organisations may continue using legacy systems perhaps believing that if something is working adequately then there is no need to fix or change it, as well as this, a redesign can be costly.
According to Bob Garrison, managing director and CIO of The Depository Trust & Clearing Corporation (DTCC), there have been major investments in technology over the past four decades, which have transformed the financial markets and removed a lot of manual processes and paper.
Garrison continued: “That said, market participants have typically tended to build proprietary IT systems with minimal involvement from third-party vendors. While this was the preferred model and suited firms well for many years, the industry is now at a point where legacy systems have become outdated, with some reaching end of life. As a result, many firms are now considering how to best leverage new technologies like cloud and distributed ledger technology (DLT).”
Steve Mann, chief marketing officer at Arachnys, explains: “Buy-side firms retrenched from IT spending as a result of the financial crisis. This resulted in firms focusing on maintaining their legacy systems and processes. There is now accelerated investment in technologies that, for the most part, are cloud-based.”
There are many reasons for moving away from legacy systems, Mann says: “Organisations typically have a lot of legacy systems, many written in different languages with vastly different maintenance needs, resulting in a technical Tower of Babel.”
Mann continued: “On top of this, innovation typically grinds to a halt because the teams are busy maintaining existing functionality as opposed to creating this from scratch. They’ve incurred too much technical debt, which can be solved by consolidating solutions and capabilities on a single or a limited number of platforms. Every product that an IT team deploys must be done faster, cheaper, and of a higher quality and at scale.”
Firms may have specific processes in which they use to avoid significant costs when replacing legacy systems, but is it better to build or buy?
“There are no hard and fast rules on this”, Garrison says, “at times it is better to build, and other times it might be better to buy. The critical exercise here is to develop a business case. New technology may solve certain problems, but not always. In some cases, the solution may lie in changing the current processes, however, this can only be determined once a business case has been set out and agreed.”
According to Tom Wooders, head of clearing and wealth solutions at GPP, bigger buy-side firms are more likely to outsource only aspects of their business whereas smaller or emerging firms are more likely to wholesale outsource.
Wooders explains: “In both cases there are significant barriers to building from scratch; there are off the shelf solutions, often specialised, that leverage more than five years’ development effort. Additionally, platforms offer the benefit of mutualised access to new functional enhancements where their application is market-generic.”
In order for organisations to align legacy systems to meet new and more sophisticated demands from regulators and clients, several options can help with the alignment, including an investment book of records, solution offering risk reduction, and enterprise data warehouse, according to Trinder.
They could also help by standardising reporting requirements, he added.
According to Carmine Lengua, market strategist at FactSet, firms are growing more comfortable with buying/licensing software, and even hardware/infrastructure, as evidenced by the success of the various cloud offerings available today.
“One of the biggest pieces of advice we can offer is to ensure that all new systems are built to scale, built to grow, built to integrate and evolve”, Lengua advised.
With all of the new technologies, some firms may be at a disadvantage compared to those using automated advanced technological systems.
When asked whether or not firms are at a disadvantage, Paul Roberts, CEO of Milestone Group, said: “Yes, however, the emergence of new and sophisticated technologies is allowing firms with legacy systems to access new possibilities.”
“This involves winding back the demands on those legacy systems to what they were originally designed to do, and then integrating more advanced technologies to undertake the tasks and functions in a fully automated fashion that operate in concert with those underlying platforms, replicating capabilities that might otherwise require full replacement of legacy platforms.”
He added: “This is an exciting option but will not be applicable in all circumstances where technical or labour market limitations or end of life issues make this cost prohibitive.”
In terms of technology, there could well be a future risk of too much reliance on technologies such as artificial intelligence (AI) and machine learning.
For Cillian Leonowicz, head of digital and client solutions consulting at Fenergo, new exponential technologies, such as the cognitive technologies, have the ability to fundamentally alter the operational context and market dynamic as we know it. Leonowicz, continued: “For example, if a fund’s unit can be stored, traded and managed on a blockchain with the buying of these units dictated by AI and machine learning, then the operation of today will look a lot different to that of the future.”
He added: “We will, of course, still need humans; the question is how many and for what part of the new lean and interconnected value chain.”
The impact of technology and the way in which the industry is reacting to that is bound to cause changes and perhaps new enhancements in the industry.
Meanwhile, Trinder said: “AI and machine learning models achieve higher accuracy on specified tasks compared to humans. They allow technology to perform tasks that are repetitive and monotonous.”
“Our clients say they want it to a point to increase efficiency, but they still want to have a human involved whilst trust is established, they do not want to lose accountability and transparency.”
Predicting what the industry will look like in five years, Wooders said: “The pace of automation is likely to increase significantly and technology will be a key focus for buy-side firms looking to gain a competitive edge.”
Lengua, commented: “For asset servicing providers looking to add real value to investment businesses, partnerships with new types of companies, such as nimble financial technology firms, will provide innovative solutions, which can be scaled quickly.”
“However, for the most important back-office functions, traditional systems with a high level of human input will remain key.”
For Roberts, the next five years will use more modern and flexible investment technologies, which will lead to the emergence of new and different operating models that will unify market participants and allow buy-side firms to access advanced technologies without the need for a traditional build versus buy decision.
“It will also challenge existing operating model design and redefine the boundaries and thinking around insourced and outsourced functions. It will protect investment firms against future technology cycles that expose them to the legacy system challenges being faced today”, says Roberts.
Lengua said: “In five years, we will see an increase in uptake of various AI and automation technologies. We will continue to watch the march toward transparency as demanded by both regulatory bodies and an increasingly engaged and educated clientele.”
He concludes: “We will see consolidation of vendors, but also increasing openness. Developments like blockchain technology may aid in this process by serving as a framework for sharing information in a secure and immutable manner.”
Jon Trinder, fund services product manager at Linedata, explains: “The majority of buy-side firms are still using legacy IT systems. In our recent annual global asset management survey, 42.5 percent of respondents said that ‘improving legacy systems’ was one of the key areas where respondents would be allocating their IT spend over the coming 12 months.”
Some organisations may continue using legacy systems perhaps believing that if something is working adequately then there is no need to fix or change it, as well as this, a redesign can be costly.
According to Bob Garrison, managing director and CIO of The Depository Trust & Clearing Corporation (DTCC), there have been major investments in technology over the past four decades, which have transformed the financial markets and removed a lot of manual processes and paper.
Garrison continued: “That said, market participants have typically tended to build proprietary IT systems with minimal involvement from third-party vendors. While this was the preferred model and suited firms well for many years, the industry is now at a point where legacy systems have become outdated, with some reaching end of life. As a result, many firms are now considering how to best leverage new technologies like cloud and distributed ledger technology (DLT).”
Steve Mann, chief marketing officer at Arachnys, explains: “Buy-side firms retrenched from IT spending as a result of the financial crisis. This resulted in firms focusing on maintaining their legacy systems and processes. There is now accelerated investment in technologies that, for the most part, are cloud-based.”
There are many reasons for moving away from legacy systems, Mann says: “Organisations typically have a lot of legacy systems, many written in different languages with vastly different maintenance needs, resulting in a technical Tower of Babel.”
Mann continued: “On top of this, innovation typically grinds to a halt because the teams are busy maintaining existing functionality as opposed to creating this from scratch. They’ve incurred too much technical debt, which can be solved by consolidating solutions and capabilities on a single or a limited number of platforms. Every product that an IT team deploys must be done faster, cheaper, and of a higher quality and at scale.”
Firms may have specific processes in which they use to avoid significant costs when replacing legacy systems, but is it better to build or buy?
“There are no hard and fast rules on this”, Garrison says, “at times it is better to build, and other times it might be better to buy. The critical exercise here is to develop a business case. New technology may solve certain problems, but not always. In some cases, the solution may lie in changing the current processes, however, this can only be determined once a business case has been set out and agreed.”
According to Tom Wooders, head of clearing and wealth solutions at GPP, bigger buy-side firms are more likely to outsource only aspects of their business whereas smaller or emerging firms are more likely to wholesale outsource.
Wooders explains: “In both cases there are significant barriers to building from scratch; there are off the shelf solutions, often specialised, that leverage more than five years’ development effort. Additionally, platforms offer the benefit of mutualised access to new functional enhancements where their application is market-generic.”
In order for organisations to align legacy systems to meet new and more sophisticated demands from regulators and clients, several options can help with the alignment, including an investment book of records, solution offering risk reduction, and enterprise data warehouse, according to Trinder.
They could also help by standardising reporting requirements, he added.
According to Carmine Lengua, market strategist at FactSet, firms are growing more comfortable with buying/licensing software, and even hardware/infrastructure, as evidenced by the success of the various cloud offerings available today.
“One of the biggest pieces of advice we can offer is to ensure that all new systems are built to scale, built to grow, built to integrate and evolve”, Lengua advised.
With all of the new technologies, some firms may be at a disadvantage compared to those using automated advanced technological systems.
When asked whether or not firms are at a disadvantage, Paul Roberts, CEO of Milestone Group, said: “Yes, however, the emergence of new and sophisticated technologies is allowing firms with legacy systems to access new possibilities.”
“This involves winding back the demands on those legacy systems to what they were originally designed to do, and then integrating more advanced technologies to undertake the tasks and functions in a fully automated fashion that operate in concert with those underlying platforms, replicating capabilities that might otherwise require full replacement of legacy platforms.”
He added: “This is an exciting option but will not be applicable in all circumstances where technical or labour market limitations or end of life issues make this cost prohibitive.”
In terms of technology, there could well be a future risk of too much reliance on technologies such as artificial intelligence (AI) and machine learning.
For Cillian Leonowicz, head of digital and client solutions consulting at Fenergo, new exponential technologies, such as the cognitive technologies, have the ability to fundamentally alter the operational context and market dynamic as we know it. Leonowicz, continued: “For example, if a fund’s unit can be stored, traded and managed on a blockchain with the buying of these units dictated by AI and machine learning, then the operation of today will look a lot different to that of the future.”
He added: “We will, of course, still need humans; the question is how many and for what part of the new lean and interconnected value chain.”
The impact of technology and the way in which the industry is reacting to that is bound to cause changes and perhaps new enhancements in the industry.
Meanwhile, Trinder said: “AI and machine learning models achieve higher accuracy on specified tasks compared to humans. They allow technology to perform tasks that are repetitive and monotonous.”
“Our clients say they want it to a point to increase efficiency, but they still want to have a human involved whilst trust is established, they do not want to lose accountability and transparency.”
Predicting what the industry will look like in five years, Wooders said: “The pace of automation is likely to increase significantly and technology will be a key focus for buy-side firms looking to gain a competitive edge.”
Lengua, commented: “For asset servicing providers looking to add real value to investment businesses, partnerships with new types of companies, such as nimble financial technology firms, will provide innovative solutions, which can be scaled quickly.”
“However, for the most important back-office functions, traditional systems with a high level of human input will remain key.”
For Roberts, the next five years will use more modern and flexible investment technologies, which will lead to the emergence of new and different operating models that will unify market participants and allow buy-side firms to access advanced technologies without the need for a traditional build versus buy decision.
“It will also challenge existing operating model design and redefine the boundaries and thinking around insourced and outsourced functions. It will protect investment firms against future technology cycles that expose them to the legacy system challenges being faced today”, says Roberts.
Lengua said: “In five years, we will see an increase in uptake of various AI and automation technologies. We will continue to watch the march toward transparency as demanded by both regulatory bodies and an increasingly engaged and educated clientele.”
He concludes: “We will see consolidation of vendors, but also increasing openness. Developments like blockchain technology may aid in this process by serving as a framework for sharing information in a secure and immutable manner.”
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