Business Today

Legacy: The Greatest Barrier to Digital Transformation

Depending on the industry in question, the perceived impact of digital technology ranges anywhere from "a once in a generation opportunity" to "Armageddon". Almost every organisation is evaluating or embarking on a transformation initiative to evolve into a digital enterprise.

Sameer Arora        Last Updated: December 23, 2015  | 21:15 IST

Sameer Arora
The word 'digital' has dominated word clouds for business and technology headlines in the past 24 months. Depending on the industry in question, the perceived impact of digital technology ranges anywhere from "a once in a generation opportunity" to "Armageddon". Almost every organisation is evaluating or embarking on a transformation initiative to evolve into a digital enterprise.

While many companies have made significant progress on this journey, very often the speed of change does not appear to be fast enough.

One important element is holding companies back from realising the true potential of digital technologies. It's the dreaded 'L' word - "Legacy."

In technology parlance, "legacy" refers to a set of IT systems (hardware and software) that are based on older technology, but are difficult to replace because of widespread usage or prohibitive replacement cost. A typical example would be a credit card processing system, which processes thousands of transactions every minute.

However, the word "legacy" has a much broader connotation in the digital context. It extends beyond technology systems to encompass strategy, people, and business processes.

Strategy

The legacy view of strategy was based on a finite set of known industry competitors. In the past, companies kept tabs on the intents and actions of these competitors and developed counter strategies around marketplace positioning, actions and reactions. Brand, product/ service, market share, capacity, pricing and distribution were key levers impacting the strategy execution. High entry barriers like capital requirements and proprietary technology provided protection against new entrants, who typically took a while to establish themselves in the industry.

The digital age has seen innovative companies like Google, Amazon and Apple emerge as credible competitors in many non-core industries such as payments, banking, publishing, music, retail, healthcare and even automobiles, transportation and logistics.

Every industry has a profit pool that maps out the profitability of various activities and players across the industry value chain. As an example, while car manufacturing generates the highest revenues in the auto industry, the bulk of their profits are generated by financial services - with auto loans, leasing and insurance as the most profitable elements of the value chain.

Disruptor companies use technology to disaggregate the value chain to drive down costs or even eliminate the least profitable activities in the industry value chain. Online retailers eliminated the operating cost of bookstores and music stores, and devices like the Kindle and iPad are now set to replace books and CDs completely. Share-a-ride operators eliminated the cost of buying and maintaining vehicles and taxi medallions or permits.

Technology also enables disruptors to expand revenue pools in the industry by reaching out to new markets and customers who were not being serviced by incumbents with legacy business models. This disruption results in a redistribution of the profit pool, with the consumer typically getting a fair share of the benefit through lower prices.

In the digital age, strategy needs to account for disruptive competitors emerging from completely unrelated industries. It also needs to be dynamic to respond to market shifts in near real time.

People & Processes
When it comes to an organisation's people, legacy issues become evident in all three human resource areas - talent, leadership and culture. The next generation of millennial talent, or 'digital natives', have a very different mindset compared to digital latecomers in their attitude towards privacy, comfort with technology, adherence to regulations and respect for hierarchical organisation structures.

Digital era companies epitomise the inherent risk pointed out by Peter Drucker in his famous quote: "Culture eats strategy for breakfast."

Organisations need to redefine their core people philosophies to manage the expectations of the smart phone generation. The desired employee attributes are shifting from skills, experience and execution abilities to new age capabilities like adaptability, learnability and innovation. Leadership needs to evolve from the legacy command and control style to a more collaborative and inclusive approach.

Several industries, including retail, payments, hospitality, travel and insurance have seen the rise of bold, nimble companies who have forced industry leaders to rethink their human resources approach by capitalising on a relentless drive to deliver superior customer value.

Business processes across the organisation also need to be digitised and automated, not just for efficiency, but for agility to respond to a fast-changing marketplace. The older 'command and control' leadership style is complex, approval-driven and slow, involving signoffs by multiple stakeholders at each stage of the process.

Not surprisingly, system development initiatives in the legacy era tended to be multi-year programmes. Any changes to business requirements required an equally elaborate change control process, which made it difficult for enterprises to launch new products and services, or respond to market and regulatory changes.

The digital age is all about flexibility and speed to market using agile methodologies, which incorporate continuously changing requirements, feature backlogs, iterative short cycle development and integrated development and testing.

Technology A recent McKinsey report - Shaping the Digital Revolution: Presentation at Nasscom Technology Strategy Summit, October 2015 - asserted that technology accounted for 40 per cent of capital investment in the US in 2014. Technology was treated as a high capex infrastructure investment based on a five- to 10-year planning horizon.

This investment approach, combined with complex sequential business processes and multi-year development timeframes, resulted in large, complex IT systems, which were stable and robust and served the needs of a predictable market and competitive environment.

However, the biggest barrier to digital from 'legacy systems' is the effort and time required to make changes to the system. The problem is far more acute in companies established over the course of decades, with multiple generations of IT systems and different systems for each line of business (often as a consequence of mergers and acquisitions), with limited enterprise-wide integration.

Agile and adaptive technology infrastructure and systems are critical enablers for companies in the dynamic digital age. Companies need to comprehensively evaluate their portfolio of IT systems and infrastructure to develop an architectural blueprint for the digital enterprise. They need to partner with the right IT service providers to drive an economic model that reduces their 'run the business' costs to fund digital transformation initiatives.

Digital Transformation: A CEO's Initiative, Not an IT program The journey to a digital enterprise can transform the fundamental business model and impact every aspect of the organisation. CEOs need to take a holistic view of their desired future state and drive digital transformation as a strategic corporate initiative, rather than run it as yet another IT programme.

Just as a caterpillar sheds its cocoon to emerge as a butterfly, companies need to shed the burden of their legacy strategies, processes, people and technology to become digital enterprises. The process is neither instant, nor is it painless, but it is essential for survival and long term sustainability of the organisation.

The author is Vice President and Head - Digital One, Syntel, Inc

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