Understanding the true cost of relying on legacy applications for managing Investment Risk

While we all recognize the need to replace older technology to provide new features and more automation, the decision to adopt new technology is often deferred due to the perceived high cost. It’s easy to make quick judgments by comparing initial expenses, but a comprehensive understanding demands a more thorough analysis. Enter the concept of Total Cost of Ownership (TCO) – a lens through which organizations can gauge the genuine expenses associated with both legacy and modern technology solutions.

TCO offers an end-to-end view of the financial implications throughout the entire lifecycle of a technology platform. For legacy software, while initial costs like testing, implementation and customization have long since been expensed or depreciated, an assessment of the direct and indirect costs of maintaining legacy solutions may surprise you. Licensing fees, hosting charges, and version upgrades accumulate over time. Add on the labour costs tied to manual processes required to manage functions not supported by the outdated software. And complex systems interfaces to move data into and out of legacy platforms that do not support all the asset types and formats in use today.

Additionally, legacy systems often require staff specialists for tasks like data verification and correction. The associated costs, both direct and indirect, along with potential losses stemming from relying on erroneous data, contribute significantly to the financial strain. TCO acknowledges these expenses, giving you a clearer understanding of the true cost of clinging to older technology. 

With the advent of new technology, the landscape shifts, and so does the TCO equation. While new technology investments will involve one-time expenses, these upfront costs are typically spread over a 5-year term, being capitalized and subsequently depreciated. The real value, however, emerges when considering the savings from no longer needing manual interventions for processes. This streamlined efficiency can result in substantial cost reductions over time. 

Modern investment risk management software also brings with it a realm of benefits that extend beyond the cost benefits. The enhanced capabilities and flexibility of the software empower organizations to adapt swiftly to changing market dynamics, creating a competitive advantage that extends far beyond financial metrics. The speed and precision with which the software processes data contribute to improved efficiency, enabling quicker responses and more informed strategic shifts. 

To put things into perspective, let’s conduct a side-by-side evaluation of the TCO for legacy and modern investment risk management software: 

1. Legacy Investment Risk Management Software: 

   – Ongoing licensing and hosting fees 

   – Cumulative costs for version upgrades 

   – Staff costs for managing unsupported functions 

   – Labour expenses for data verification and correction 

   – Potential losses from reliance on incorrect data 

2. Modern Investment Risk Management Software: 

   – Upfront costs, spread over 5 years

   – Ongoing licensing and hosting fees 

   – Lower, or zero costs for version upgrades

   – Reduced need for manual interventions and associated labour costs 

   – Intangible benefits: enhanced accuracy, speed, and flexibility 

Take the one-time costs for testing and implementing new technology and spread those over 5 years; add on the annual operating costs for the new solution; subtract the direct costs of running the legacy system and subtract the savings you anticipate from eliminating manual processes and data verification and correction routines.

You may find that the new technology solution costs less than the existing one; at the very least, the cost differential will be far less than you first thought, and that gap will be easier to rationalize when you factor in reduced losses arising from investment decisions made on the basis of inaccurate data.

Finally, you reduce the risk of damaging your corporate reputation if clients become aware of trading errors and delays in receiving their statements and other reports. Ultimately, client dissatisfaction can lead to lost business and lost revenue, with a very direct revenue impact.