Kevin Murray, CIO of domestic brokerage and personal lines for American International Group (AIG), had a mainframe full of fat-client legacy applications. He just trashed it in favor of newly written thin-client Java and XML applications.
Dan Roberts, CIO of the PMI Group, a mortgage insurance company, is in the middle of Web-enabling his back-office legacy systems, a project he anticipates will take up to three years. However, he says it’s “absolutely necessary” if his company is going to keep up with product development and customer demands.
Maria Fitzpatrick, CIO of PacifiCare Health Systems, just decided to get away from the multiple OpenVMS and Unix programs scattered across her company’s business units, and upgrade to a single Web-enabled platform. The project is part of a major effort to redesign PacifiCare’s corporate strategy by unifying business processes across all units.
The list, long now, will get longer. Every day thousands of enterprises rely on decades-old applications written in obsolete programming languages that, along with the systems on which they reside, are no longer supported by the application’s creators?whoever they were and wherever they may be.
So why don’t CIOs just pull the plug on these ancient applications?
“If it was that easy to get off these systems, most CIOs would have done it already,” says Dale Vecchio, research director of application development for Stamford, Conn.-based Gartner.
“The only way I’ll address renovating my legacy systems is if they stop enabling the business,” says John White, vice president of IT at Parker Hannifin, a Cleveland-based manufacturer. “My barometer is the ROI,” he says.
While White’s rule of thumb is widely held, more and more business executives are coming to grips with the fact that the Internet has placed demands on companies and computing systems?such as real-time order processing and managing high-bandwidth demands?that most legacy applications just can’t handle. CIOs know this better than anyone else. But right now would be the worst time for an organization to begin a major infrastructure face-lift, wouldn’t it? The economy is in clampdown mode. Enterprises are struggling to find cash for the most basic projects. Only the nuttiest CIO would argue for spending money on infrastructure, and only the most irresponsible CEO would approve the expenditure. Right?
Actually, not right. In fact, spending money to keep legacy applications going is a mistake. Assigning personnel to keep legacy applications running is a big mistake. Making business plans based on legacy applications is an enormous mistake.
Despite all apparent evidence to the contrary, right now is the ideal time to either pull the plug (which would be ideal) or overhaul legacy applications. And a whole roster of major American enterprises are seizing this opportunity to get a jump on their competitors by modernizing (connecting their legacy system to a Web front end) or migrating their legacy systems to new thin-client-based Web systems.
And they’re doing it right now.
The Legacy Albatross
Legacy applications underlie almost every enterprise. In general, these applications are stable but inflexible, expensive and difficult to maintain. How expensive? According to Gartner, between 60 percent and 80 percent of an average company’s IT budget is spent on maintaining existing mainframe systems and the applications that run on them. Maintenance of legacy software is complicated by the fact that the number of programmers who know how to handle former standards such as Cobol is shrinking with each passing year.
Though not every legacy application needs a complete overhaul, the harsh reality is that all legacy systems at least must be Web-enabled if a business is to grow and remain competitive, says PacifiCare’s Fitzpatrick, senior vice president and CIO of the $12 billion Santa Ana, Calif.-based company. Fitzpatrick plans to migrate from three disparate legacy software systems to a single, Web-enabled platform, which she hasn’t yet chosen.
“Right now, cost efficiency is key,” she says. “Maintaining and trying to integrate multiple software platforms becomes expensive over time. There’s a great business need for companies to strive to provide increased service levels to customers. Web capabilities are the path.”
The project’s expected ROI stems in part from the projected decrease in maintenance costs of the new system compared with the legacy system, she says. Also, by linking to the Web, Fitzpatrick can put her company in closer contact with its constituents?doctors, hospitals and employers?and decrease administrative costs.
“The most important justification for beginning this kind of project is the business need,” says Bruce Fadem, vice president and CIO of American Home Products, a $13.3 billion global pharmaceutical company based in Madison, N.J.
Because legacy applications are so tightly tied to the way a company functions, the health and flexibility of those applications directly affect the business’ ability to grow.
“The time is right for modernization because the attempt to marry the worlds of legacy and e-business has reached the point of pain,” says Tyler McDaniel, an analyst with the Hurwitz Group, an IT consultancy in Framingham, Mass. “If you wait to modernize, you’ll continue to suffer consequences such as errors, delays in processing and fulfillment lags. These are things that will drive your company out of business.”
You Are Your Legacy System
Before beginning any kind of modernization or migration project, business and IT executives must understand exactly what their legacy systems do and whether the way the systems work actually reflects the business strategy, McDaniel says.
“It’s a huge mistake to jump into migration on a per-project basis just to see where it leads,” he says. “Develop a vision of where you want your architecture and infrastructure to be in two, four, six and eight years. Assess what skills are available and know what your investments are right now in development versus maintaining legacy applications. Does the existing system map the key business processes that are critical to success? That’s where you must start.”
David R. Guzman, senior vice president and CIO of Glenallen, Va.-based maker of medical and surgical supplies Owens & Minor, did just that. His legacy systems were configured to assume that Owens & Minor, with $3.5 billion in revenues, owned all the supplies it shipped to customers, but the company was evolving toward a third-party logistics distribution model. What Guzman needed was a system that allowed the company flexibility in distribution methods. This provided the business rationale for migrating to a Web-based platform.
For Roberts, CIO of the $763 million San Francisco-based PMI Group, his legacy system’s ability to support customer demands was “questionable.” The back-office systems, which included claims payment, billing and policy maintenance, were 12 to 15 years old. According to a 1996 study commissioned by PMI (one year before Roberts arrived), the cost of modernizing the company’s legacy systems, estimated to be about $20 million (see “Modern Math,” Page 58), was less than the estimated cost of the potential service-related failures that could result if the systems were left in place.
At that time, PMI staff in both the IT department and the policy servicing department were spending hours cross-referencing customer data between the legacy systems and the separate policy systems. As the two systems didn’t talk to each other, there was always the risk that someone might miss something during the manual check.
“It was only a matter of time,” Roberts says. “Everyone knew this was a long-term problem and that our business was getting more, not less, complex.”
After careful analysis, Roberts determined that the database underlying his systems wasn’t inherently flawed. He stuck with the AS/400 platform and is rebuilding his back-office applications in Java and RPG, an AS/400-specific programming language. He’s looking at several legacy migration tools that could handle translating the data analytics processes hidden within his legacy transaction processing system, but he has not decided yet on a particular tool. (See “Your Modernization & Migration Toolkit,” Page 62.)
PMI’s executive board members knew the legacy system was a problem, but they delayed the migration project in order to focus on getting the company’s e-commerce strategy in place. Once that was complete in late 1999, Roberts and Kathy Schroeder, vice president of policy management systems and the project’s business sponsor, got to work convincing the board that the time was right to tackle the migration. And one of the reasons the time was right, they said, was that the cost of the project, estimated at $20 million in 1996, had come down in 1999 to an estimated $12 million.
“The board knew that the business had changed and that the legacy system wasn’t built to deal with the kind of claims processing and transaction products we had,” Roberts says. “They knew that if we created a new product, the old system would limit our ability to roll it out. We had to make it very clear that waiting any longer could really hold us back.”
The migration was approved, the money found. Roberts went to work pulling apart his legacy applications in October 2000. He plans to finish by the end of 2003.
Selling Your CEO on Legacy Modernization
American Home Products’ legacy system, according to its CIO, was ready for the junk pile. “We were dealing with a system that was weak in function and antiquated in platform, and to redefine our business processes we had to reconfigure the system. It was that simple,” says Fadem.
When multiple, disparate systems begin slowing a company’s growth, it’s time to take action, no matter the state of the economy. But first the executive board has to give the thumbs-up. And when times are tough, selling infrastructure projects can be problematic.
To successfully sell a large-scale migration project to executive leaders, CIOs must present decisive evidence that the project will save money and strengthen the business.
“You have to fully understand the benefits of migrating, and discuss those benefits from a business perspective by showing how the project ties in to the company’s strategy,” says Al Biland, CIO of Snap-On, a Kenosha, Wis.-based power tool and equipment manufacturer with $2.1 billion in revenues. “That can be by making the company more operationally fit, by cutting costs or by generating profitable growth.”
When Murray became CIO of New York City-based AIG, no one knew how much money the $46 billion financial services company was spending on maintaining its legacy systems. He organized a total cost of ownership study that served as a benchmark for the cost of maintenance and illustrated how much AIG could save in terms of money and efficiency if the company migrated to a Java-based system. The figure Murray came up with got the attention of his executive board. (Murray declined to share that figure with CIO.)”I told them that we could be saving 30 percent of what we were spending on maintenance if we moved from mainframe to thin client,” he says. “Their jaws hit the floor. They said, ’It costs us that much?’”
Murray presented his board with the ROI of migrating over a five-year period and showed how the project would increase employees’ efficiency by reducing the hours spent on manual processes and maintenance. The study indicated that a migration would drastically improve AIG’s speed to market and its customer service. That, Murray says, made the biggest impression. “The executive team liked hearing how the project would improve the business,” he says. “And they gave us the money we needed.”
In a cost-cutting environment, the theory that migrating now will provide a competitive advantage later needs to be advanced with caution, says Wayne Kernochan, managing vice president of platform infrastructure at the Aberdeen Group, a consultancy in Boston.
“CEOs and CFOs have to look at the issue in both the short and long term,” Kernochan explains. In order for them to believe that their CIO understands their position, the CIO must acknowledge that the ROI of infrastructure modernization will not immediately be realized even as he demonstrates that spending now will reduce maintenance costs. At the same time, the CIO can argue that “once we’re out of the downturn, the advantages of revamping business practices now will become very clear,” says Kernochan.
Plus, the pain of migration, in both cash and time, is not what it once was.
So You Think You Know Migration
Eight or nine years ago, there were few options for migrating or renovating applications. CIOs could either re-build or replace software systems, and either choice was extremely time-consuming and expensive.
In 1992, Snap-On’s Biland decided to get rid of the Cobol-based, homegrown IBM mainframe applications that his company relied on and replace them with a Baan platform. “We had green-screen terminals and not a lot of functionality,” Biland recalls. “The legacy applications didn’t give us the level of detail around inventory and transaction data that we needed.”
Six years and millions of dollars later, the new platform was in place.
Today, businesses have more options than replace or rebuild. There are tools that can do anything, from delving into legacy data, plucking out relevant business rules and rewriting them in Java or XML, to attaching a Web front end on to an intact legacy database, and everything in between. The tools are fast and relatively cheap, particularly compared with the cost of migrating an enterprise to an ERP platform.
Owens & Minor’s Guzman, for example, had no desire to go through an ERP implementation. “ERP projects take too long, they generally don’t turn out well, and they cost too much,” he says. But something needed to be done with the cumbersome, multilayered, 15-year-old applications that contained the contracts and pricing systems for the company. To upgrade, Guzman couldn’t go to the original vendor?KnowledgeWare?because it was out of business. And Owens & Minor’s heavily customized applications ran OS/2, which IBM no longer supports.
“Legacy applications are a cancerous problem that needs to be excised,” Guzman says dramatically. “It’s not a choice. If your business is changing, your systems have to change. We needed the ability to do things like multicurrency transactions over the Web, and the old system was completely inflexible.”
Still, the old contracts and pricing system contained extremely complex business rules and mathematical computations that were vital to Owens & Minor’s dynamic pricing methods. The legacy system set a separate, unique price for every product for every single Owens & Minor client, taking into account literally dozens of factors. Guzman didn’t even want to think about losing that functionality. So he took a gamble on a tool by Relativity Technologies that promised to uncover the vital business processes buried in the old system, turn them into Web-ready components and translate the Cobol and CICS into Java.
Guzman tested the tool on three master files containing EDI maps and customer information. Within six months, the test project was complete.
“It easily would have taken us years to modernize via hand-coding,” he says. “And it easily would have cost us tens of millions of dollars to go with SAP or Oracle. So far we’ve spent about $1 million on this project.”
Guzman is taking the transformation one step and one application at a time. “We should complete the whole thing within 18 months and for less than $5 million,” he says.
No Time Like Right Now
Modernizing legacy applications is a huge task, and it has both risks and rewards. It’s easy to rely on what seem like stable systems and hope they’ll sustain the business through a recession. But these systems are the technical avatar of a company’s business strategy, and if they aren’t updated, the business will begin tripping over its own virtual feet. Times are tough, but breaking a few proverbial eggs now could put your company 10 steps ahead of the competition. And that’s priceless.