Have You Been Caught by the Legacy Technology Trap?
The world of Private Equity and M&A is all about ROI. Upgrading your legacy technologies to the cloud has many short and long-term benefits.
When COVID hit, we scrambled to go remote and respond to changing client needs.
We watched established firms succumb to digital pressures in real-time. But–we also caught a glimpse of what’s possible when organizations go “all-in” on transformation.
For many professional services firms, digital transformation is all tangled up in the M&A strategy. A smart move, given that developing innovative solutions requires a ton of time, talent, and money. And–of course, there’s no guarantee you’ll walk away with a profitable solution. Instead, firms can buy companies with existing, market-tested solutions–and the IP they bring with them.
At the same time, investing in ready-made solutions often means trading one type of risk for another. Firms do have an opportunity to shortcut the innovation process and carve out a competitive advantage. But–may they could find themselves caught in the “legacy technology trap” if they’re not careful. And as a result, won’t reap the returns of their “transformative” portfolio investments.
Below, we’ll explain what the legacy technology trap is, why legacy system modernization matters, and signs to watch out for.
What is the Legacy Technology Trap, Anyway?
The Legacy Technology Trap describes a range of problems that emerge when a firm’s portfolio companies use outdated technology to run their business.
For example, firms might find themselves taking on unplanned expenses to avoid serious trouble. Think–regulatory non-compliance or cyberattacks.
Upgrades might cost more than anticipated. Software is no longer supported. Firms can’t access the data they need to maintain the business.
In an M&A context, the “trap” represents a serious risk–one that threatens the entire firm. See, not only does it block firms from reaping the returns on their investments, but it also prevents them from investing in the future.
Decisions, strategies, and spending end up centered on the past. And many times, focus on maintaining legacy equipment and keeping the business afloat. That means, firms lose money, clients, and opportunities. And as a result, fall further behind competitors.
Signs You’re Caught Trap and How Legacy System Modernization Can Help
Whether you’re snapping up startups or trying to maximize ROI across your existing portfolio, technology is central to your success.
The problem is when those portfolio companies rely on legacy ERP systems and aging hardware then options for M&A become far more limited. And often, those investments involve more time, resources, and risk than they’re worth.
Below, we’ve outlined some signs that your firm might be stuck in the trap and how migrating legacy systems to the cloud can help.
You’re Missing Out On Business Opportunities
Legacy systems inhibit data literacy–and by extension, block growth and agility.
As such, migrating legacy systems to the cloud is often the first step toward digital transformation.
According to McKinsey, we’re moving into a new era of capitalism that deals in knowledge, insights, and intellectual capital. That means, investing in “intangibles” assets like IP, branding, and is often the only way to create a true competitive advantage.
For professional services firms, this is old news. Consultants and analysts have always sold expertise and insights by the hour. What’s changed is, firms now face increasing pressure to enhance those capabilities. They need to make smarter decisions—faster.
M&A allows firms to invest in “fully-formed intangibles,” representing a shortcut to transformation and growth. At the same time, buying up companies means you’re not getting the proprietary tech and some new talent.
You’re potentially inheriting legacy tech that not only derails M&A efforts but undermines the rest of your business strategy.
Most legacy systems weren’t built to scale. Rather, they were designed for a specific set of tasks–with no intention of expanding beyond the predicted scope. Today, the limitations of legacy tech can actively prevent firms from entering new markets or capturing new revenue streams.
You Don’t Have Real-Time Access to Accurate Insights
One of the most compelling reasons to modernize legacy systems is the need for reliable, real-time data.
Old/incomplete data and slow processing capabilities are a liability in professional services. This is an industry where insights and expertise are the product.
A recent HBR article brings up an important point— that a firm’s ability to deliver value hinges on the skills of its professionals.
Those skills inform which markets a firm can serve, which accounts to pursue, and how to train and hire new talent with an eye toward the future.
The flip side of this is, the clients you serve have a direct impact on how you’ll evolve employee skill sets to align with changing needs. In other words—the customer drives the strategy.
A system that can’t provide a complete, accurate view of the business will make it harder to evolve your practice alongside the clients you serve.
Success can’t happen without good data, real-time insights, and a deep understanding of client needs–in context. Per IDG, all this requires tight coordination across all business units to align data goals and initiatives.
But—before you can tackle those strategic challenges, you’ll need to focus on migrating your legacy system to the cloud.
The migration process involves preparing & cleansing data, converting existing databases, eliminating data silos, and more. Altogether, you’re staring down a complicated process with no room for error.
What’s more, the data that exists within a legacy system doesn’t integrate with other technologies. Firms need to understand where and how data is stored, how it’s secured, and how it moves throughout the system to assess and mitigate risk.
Your System Lacks the Flexibility It Needs to Compete
In the fast-paced, high-risk world of M&A, you’re always on the move. The only thing firms can count on is that technology, consumers, and market conditions are constantly evolving–at a breakneck pace.
According to Deloitte, that fast-paced business environment means that firms can carve out a competitive advantage and achieve greater value through their capacity for change.
AIT Managing Partner Ben Telling explains that a lot of this has to do with the massive shift in how we work today, compared to say, five, 10 years ago. Implementing technology is no longer a matter of upgrading licenses. It’s about implementing technology capable of adapting to changing conditions–as they happen.
One of the biggest problems with maintaining legacy systems is the fact that they weren’t built to work with technologies like AI, ML, the cloud, or the IoT.
At the same time, legacy systems—no matter their age—need to integrate with the latest tech to keep business going. So then, you’re adding middleware, connectors, and custom code to the infrastructure every time you need to make an update.
Over time, systems become harder to change. Every update requires reimplementing and testing customizations, reports, integrations, and workflows.
Eventually, users find workarounds. Which usually means using manual processes or shadow IT to fill gaps that have grown over time.
You’re Struggling with a Decentralized System
Without a unified ERP, business growth often leads to a decentralized system, poor governance, and a lack of alignment.
You’re dealing with disparate systems that don’t “talk” to each other. incompatible data models and processes that block oversight and compliance efforts.
You’ll likely end up with several decision-makers with conflicting strategies and requirements.
Some orgs opt to modernize by integrating newer, cloud-based solutions into their legacy ERP. But the reality is, investing in a fragmented system is a problematic strategy.
One that only gets worse as more variables (read: custom code and integrations) enter the fold. Add in portfolio companies, global outposts, and the challenges of project-based business models—and you’re up against a lot.
As an example, relying on external solutions to complete tasks can slow productivity. Or worse—compromise the integrity of your data—with different users working from different versions of the truth.
Decentralized systems also make it hard to share information about projects–particularly with external teams, clients, and partners. And in some cases, cause serious problems.
For example, a New York Times investigation found that Amazon’s internal processes for managing employee leave were broken—due to a fragmented HR management system.
Employees were fired for “not showing up,” while on approved leave. New moms saw unexplained cuts while on maternity leave. And in some cases, disability benefits for injured workers stopped without warning.
Amazon’s solution to the problem was putting 67 employees on full-time data-entry duty—just to manage data related to employee leave.
You’re Overpaying for Maintenance and Support
Legacy systems are generally outdated, making them vulnerable to failure.
Long-term, maintenance costs—plus all those unplanned break fixes—can spiral out of control and eat the entire IT budget. As a result, firms have little room to invest in growth or innovation.
With outdated hardware, replacement parts become harder to track down and more expensive. It’s also harder to find experts who know how to perform the repair. So, you can expect to spend more on fixes, too.
You can also expect to pay more to fix legacy software issues. The older the system, the harder it becomes to find someone with experience modifying old, often proprietary, apps. Additionally, if your software is no longer supported, you’ll need to account for the fact you’re on your own when it comes to security updates and patches.
Complex systems–i.e. ones involving project-based work and portfolio brands–cost more to maintain than simpler ones. You’ll need to pay for extra admins, security experts, helpdesk support, etc. for ongoing operations. You’ll also need to consider the costs of integrating legacy tech with modern systems.
So, that might mean spending more on converting code and implementing middleware and connectors. It might also mean falling back on manual solutions like spreadsheets. Which in turn means productivity losses and extra costs. If you don’t maintain these systems, performance suffers and updates become even more complicated and costly.
Finally, maintaining legacy systems means taking on more environmental costs. Keeping old on-prem servers online means consuming more power and taking up more storage space.
Final Thoughts
Legacy tech not only undermines transformation efforts, but it also threatens M&A investments. And worst of all, it puts the core business in jeopardy.
Microsoft Dynamics combines all data and productivity solutions into a single ERP system. In turn, firms can optimize business processes and improve performance.
Working with a legacy system modernization partner like Velosio allows you to move to the cloud on an accelerated timeline. Our experts use packaged services that lower risk and increase time to value. That way, you can start delivering more profitable projects and better client outcomes. You can learn more about how we support project-driven companies here.
Download our free guide: Technology for Private Equity Firms. In it, we explain how cloud technology, along with the right partner, can support your core business–and your portfolio companies.