One of the most difficult challenges faced by many enterprise software companies is determining how to maximize their return on invested capital (ROIC). The pace of technology puts demands, whether actual or perceived, on a company to stay “on the cutting edge.” In this context, it can be difficult to strike a balance between getting the most value from existing software and investing in modernization efforts.
Legacy systems, while tried and true, can become outdated and pose limitations. Challenges appear in scalability, performance, and compatibility with newer technologies. But modernization can be costly and time-consuming, requiring a significant investment of resources.
Finding the right balance can define the long-term success of a software company. By optimizing legacy systems, companies can continue to leverage their existing infrastructure and maintain stability while reducing costs. Investing in modernization can open up doors to new opportunities, enhanced functionalities, and improved customer experiences.
The Problem with Overlooking Legacy Systems
There’s a pervasive attitude in the world of software development that legacy systems are a hindrance. Many believe outdated technology is holding their business back from reaching its full potential. But dismissing the viability of legacy systems can be a big mistake.
Let me present you with a real-world example that demonstrates the power of established software. Imagine a company that has been in business for decades. During that time, they’ve developed a highly profitable and serviceable piece of software. This product generates the majority of their revenue and has a loyal customer base.
This company has two options:
- They can iteratively modernize their existing technology or
- Completely modernize with a ground-up next-gen product offering.
Many technology leaders might say building fresh with a next-gen product is the obvious choice. But you have to make sure you aren’t throwing the baby out with the bathwater. A complete rip-and-replace strategy comes with significant risks and costs.
The new software may not be as stable or reliable as the legacy system. That means downtime and lost revenue. Users might not like or adopt the next-gen product, leading to lost customers. And of course, this is assuming the next-gen product actually launches.
On the other hand, the legacy system is already familiar to employees and customers. It’s been refined over the years and is proven to be reliable. By continuing to support and optimize the legacy system, the company can maintain its revenue stream. This can maximize value by gradually implementing modernization efforts.
So, before you write off legacy systems as a hindrance, consider their profitability and serviceability. They may be the foundation of your success and a valuable asset you should not overlook.
The Dangers of the “Next-Gen” Mindset
I understand the desire to stay ahead of the game and embrace the latest technologies. But you should be careful when it comes to choosing new development over existing solutions. Let’s shed some light on the pitfalls of adopting a “next-gen” mindset.
First, let’s talk about the success rate of complete system rebuilds. In my experience, a staggering amount of next-gen products fail to launch and/or thrive. Imagine dumping millions of R&D time into a new product, only to have it sputter in the market. Dire consequences for your business. Not only would you waste valuable time and resources, but you would also risk losing customers. Your company’s reputation could take a huge hit.
The financial risks involved in pursuing “next-gen” modernization are substantial, often costing many millions of dollars over several years. During this time, incremental improvements and fixes to current revenue-generating products are halted or greatly curtailed. This can certainly strain your finances, your relationship with your board and investors, and potentially threaten the sustainability of your business. Especially when compared to the cost of fortifying and augmenting your already established software offerings.
Instead of solely focusing on shiny new technologies, consider the growth opportunities of your existing solutions. By building on what you already have, you can save both time and money. Enhancements and incremental updates can often yield significant results without the risks associated with complete rebuilds.
Embracing and Extending Legacy Products
Embracing and extending legacy products is not a “sexy solution.” But it’s a strategy that can pay off.
When it comes to software development, we often talk about systems of record (SOR) and systems of engagement (SOE). Combining these can be a highly effective modernization strategy that keeps risks low and upside high.
Systems of record are the backbone of an organization, capturing and storing critical data. They are the proven and reliable foundation that has been built over the years. Likely, they are the source of most of your revenue.
Systems of Engagement are smaller, modern apps and experiences that augment and extend the value delivered by a System of Record. These are the more sexy bits: web and mobile apps, dashboards, and APIs. They are the shiny bits that your customers have likely been requesting for quite some time.
So, how do we strike the right balance between legacy technology and product modernization? By embracing our legacy products and extending their life through modern interfaces and technologies. This approach allows us to extract maximum value from existing systems while also meeting market demands.
By embracing and extending our legacy products through Systems of Engagement, we can give them new life. And can do so with much less risk and with much less investment than any rip-and-replace effort. We can introduce modern features and functionalities to delight users and keep them coming back to the data in our cornerstone products.
And the best part? We don’t have to throw away all the hard work and investment we’ve put into our legacy systems. Instead, we can build on what we already have and move forward with confidence.
Financial Health and Decision-Making
How many software decisions at tech companies are based on financial metrics and the value delivered to customers? My guess is: NOT ENOUGH. Too often, companies rush into replacement projects without assessing their financial and operational impact, which almost guarantees wasted resources and missed opportunities.
Before taking on a development project, you have to know the financial implications. Consider factors such as the cost of development, maintenance, and support. Compare these costs to the potential benefits. Look at things like increased revenue, improved efficiency, and enhanced customer satisfaction. By doing so, you can be honest about the chance your investment will be both profitable and sustainable.
Along with financial considerations, it’s essential to prioritize the value delivered to customers. Focus on creating software that meets their needs and exceeds their expectations quarter-after-quarter. This will drive customer loyalty and attract new customers through positive word-of-mouth. The worst thing you can do is to promise that what they want will be delivered in a next-gen product. A next-gen product that never arrives.
To effectively balance legacy technology with product modernization, take a strategic approach. Identify areas where updating legacy software will provide the most value to both your customers and your bottom line. Prioritize profitable projects that will have the greatest financial and operational impact.
The Role of Culture and Technology Leadership
To make the most out of their development investments, software CEOs must adopt a mature leadership approach. This isn’t always popular. In the bold software game, pragmatic and financially responsible decisions aren’t seen as “cool.” But a measured and prudent leader can keep a scaling business from burning out, or give a stalled-out business new life.
One of the key elements of this approach is to build a culture of continuous improvement and delivering customer value. Customers must be at the center of decision-making. Software companies can stay ahead of the competition by listening to their users. This helps them adapt to ever-evolving market demands.
Technology leaders and their teams should have a deep understanding of the company’s goals and vision. They should be in tune with the needs of their customers. They should be able to evaluate the cost and benefits of different approaches. Tuned-in developers can help the company prioritize investments in development. A good technology leader also empowers their team to take ownership of their work, fostering collaboration and accountability.
Here’s a secret. Your developers are some of the smartest, most driven people in your organization. If they know what the business goals are, there’s a very good chance they will pursue them aggressively and successfully.
Advice for Future-Proofing Enterprise Software Companies
The key to sustained success lies in strategic planning and incremental innovation. Here are some recommendations to help future-proof your software company:
Embrace Innovation:
Keep a pulse on emerging technologies and trends, such as artificial intelligence and cloud computing. Integrate these new technologies into your existing systems gradually, allowing for seamless transitions and avoiding disruptions.
Foster Collaboration:
Encourage collaboration between your development team and other departments. This will ensure that new initiatives in software development align with your company’s goals and objectives, driving maximum value from your investments.
Create a Platform, Not a Product:
By iteratively building Systems of Engagement on top of your legacy software, you create a larger “surface area” for customers to engage. As your platform expands and serves the market, the percentage of your offering that customers may perceive as legacy technology drops substantially.
Maximizing Your Return on Software Development Investment
Maximizing the return on investment in software development requires a balanced approach to legacy systems and modernization. Building off the strengths of existing technology while enabling innovation is the key. Software companies can achieve sustainable growth and drive customer-centric value without the risks of next-gen development.
Here are the key takeaways to bear in mind:
- Treat customers as the driving force: A customer-centric mindset should guide every decision and action. Understanding their needs, pain points, and aspirations will inform the direction of development efforts.
- Don’t dismiss legacy systems: Legacy systems often possess invaluable data and functionality. Instead of discarding them, find ways to open-up, modernize and integrate these systems with new technology to maximize their value.
- Embrace modernization for competitive edge: Focus on delivering tangible value to customers rather than getting caught up in the excitement of new technology. Understand the problem you want to solve for the customer, and then choose the most appropriate technology to support that goal.
By striking a balance between legacy systems and modernization, software companies can maximize their return on invested capital, drive sustainable growth, and continually innovate for the benefit of their customers.
To see how we’ve helped software companies successfully execute this strategy, take a look at our Cultura Case Study. Find out how this agritech company modernized a 20-year old database in 90 days.