Modernizing Legacy Infrastructure to Increase Competitiveness: The Board’s Role
Innovative culture, speed to market, customer focus, and organizational agility are mainstays in boardroom conversations about innovation. However, these discussions should also address technological roadblocks to realizing innovation initiatives.
The origin of the phrase, “innovate or die,” is unclear. But it was made famous over 35 years ago in one of Peter Drucker’s classic books, Innovation and Entrepreneurship: Practice and Principles. In it, he wrote that that the entrepreneur sees “change as the norm and as healthy… [and] always searches for change, responds to it, and exploits it as an opportunity.” Today’s business realities have proven these words to be quite prescient in referring to the importance of agility in the market.
Based on the results of a recent global survey of board members and C-suite executives, the rapid speed of disruptive innovation ranks among the top risk issues for organizations over the next decade. To face the future confidently, directors need to understand the extent to which the company’s legacy infrastructure either enables or constrains the organization’s effectiveness in responding rapidly and continually to emerging market opportunities, competitive threats, and customer demands.
To understand how information technology (IT) organizations are ushering legacy infrastructure into the digital era to enable the innovation that will fuel long-term value creation, Protiviti undertook a global survey of more than 1,000 chief information officers, chief technology officers, and chief information security officers. This study found, among other things, that a majority of organizations (79%) have clearly defined innovation goals, but only 29 percent of respondents indicated that innovation leaders bridge the gap between technology and business needs very well. It also found that organizations are spending an average of 31 percent of their IT budgets and are investing, on average, 21 percent of their resources on managing technical debt, which is the cost and magnitude of additional rework caused by the accumulation of legacy systems and application solutions that were easier to implement over the short term but not the best overall solution for the long term. The result is legacy infrastructure that is difficult to maintain and support. As to the impact of technical debt on the ability to innovate, 69 percent of survey respondents rated it as higher than a moderate impact.
Why should boards care about these findings? In an environment dominated by emerging technologies, disruption of business models, and universal acknowledgement of the importance of agility and resiliency to corporate success, innovation is a strategic imperative. Unfortunately, all efforts to inculcate an innovative culture can be frustrated when technical debt has accrued to such a level that it slows organizational response to emerging market opportunities and stifles the ability to compete in a digital world.
The aforementioned research offers a call to action to increase agility and sustain the company’s innovation and transformation journey successfully over the long term. Key steps are summarized below:
Modernize legacy applications. Address accumulated technical debt to drive efficiency in business and IT systems, reduce infrastructure costs by streamlining services and moving core applications to the cloud, and improve capacity to innovate to enrich customer experiences, digitalize products and services, inform decision-making, and compete with “born digital” players. Several tactical approaches are offered in the study to mitigate technical debt, including the following:
Create a greenfield. Start with a clean digital slate (e.g., use cloud solutions).
Ring-fence. Isolate technical debt from the rest of the operating environment.
Upgrade and replace. Reduce technical debt in phases over time through a risk-sensitive, phased upgrade or transition to newer technology platforms.
Go big. Use the rip-and-replace process on existing systems to reduce technical debt aggressively by upgrading to a more modern infrastructure (a potentially high-reward option with associated risks that should be assessed carefully).
These and the other approaches offered in the study are dependent on the current state of an organization’s technical debt, existing documentation, institutional knowledge, appetite for risk, and available resources. Not mutually exclusive, the approaches can be combined.
Improve agility through rapid response and strong operational resilience. Orchestrate the building of resilience across existing domains such as business continuity, disaster recovery, technical recovery, cyber resilience, and third-party asset management so that organizations can readily respond to outages, crises, and other threats.
Capitalize on the emergence of advanced technology platforms and capabilities. Leverage new platforms and architectures for building and running business applications to enable better access to data, provide flexibility and faster time to market, and support digital capabilities to deliver differentiated experiences. Deploy greater process automation and intelligent technologies such as artificial intelligence (AI), machine learning, and augmented and virtual reality to reimagine existing processes and alleviate risks arising from the inevitable shifts in labor availability and costs.
Maximize customer engagement. Focus on the experiences of users and consumers (both positive and negative) to drive interaction through a modern, innovative operating model. Decisions based on insightful customer and sufficiently advanced user analytics and AI are likelier to achieve business success.
Prioritize cybersecurity and data privacy in innovation activities, but don’t create bottlenecks. Proper cyber hygiene is key to managing security risks and maintaining the resilience of business services. Companies should harness the power of effective cybersecurity frameworks to mitigate cyber risks without slowing down innovation. They should search for opportunities to boost enterprise value with novel tools such as greenfield cloud environments and consider implementing practices that balance identity and access management to ensure maximum speed of user access while managing risk and complying with applicable legal and regulatory data privacy requirements.
Make your talent your customer. A focus on the customer experience should extend to the organization’s people and talent. Retention of key people requires efforts to keep them engaged for the long term. That’s why an advocate for the preservation of talent and culture should have a seat at the decision-making table as the organization focuses on sustaining its financial health.
Directors should consider the above call to action when discussing innovation goals and strategies. By listening to the voices of customers, employees, and other stakeholders, businesses can identify technical debt issues and prioritize their infrastructure modernization efforts. From the board’s perspective, it is essential to address constraints on critical innovation initiatives in a timely manner—before the limitations placed on improving operational efficiency and adjusting business models become so egregious that they impair the organization’s competitive position.
Protiviti is an NACD partner, providing directors with critical and timely information, and perspectives. Protiviti is a financial supporter of the NACD.
Jim DeLoach is managing director of Protiviti. DeLoach is the author of several books and a frequent contributor to NACD BoardTalk.