Developing an IT strategy for some organizations can be difficult because of the presence of a legacy system. Legacy systems that are old, out-of-date, and difficult to maintain are a huge obstacle to innovation. As a result, business leaders become increasingly frustrated by their inability to roll out new mobile apps, connect with customers, analyze business performance, or become a digital business.
In recent years, it has become popular to describe organizations with an out-of-date legacy system as being in “technical debt.” I would take this a step further. If an organization ignores the need to update the system for too long, it can lead to what I refer to as “technical bankruptcy.”
We can define technical bankruptcy as a situation where the organization cannot, or finds it exceedingly difficult to, pay off the technical debt. It does not mean that the organization is in financial bankruptcy but rather that its systems are broken or held together in a way that makes them extremely difficult to upgrade.
Significant Percentage of Organizations Are at Risk of Technical Bankruptcy
In work with our clients at Strativa over the past several years, we have gained new insights into challenges facing organizations that have out-of-date legacy systems. We recently took the opportunity to combine those insights with survey data from our sister IT research firm, Computer Economics, to produce a new report, Avoiding Technical Bankruptcy in Legacy Systems. (Click the link to download the report free from the Strativa website.)
Figure 3 from the full report shows the magnitude of the problem as it applies to ERP systems. A small but significant percentage (7%) of organization have not upgraded their ERP systems for 10 or more years. These are likely to already be in technical bankruptcy. But the 13% of organizations that have not upgraded their systems in the five-to-nine-year time frame are in the danger zone: Technical debt is building, and if the organization does not undertake a major upgrade, it risks falling into technical bankruptcy.
Signs of Technical Bankruptcy
What are typical signs that a legacy system has reached the stage of technical bankruptcy? We found five characteristics:
Extensive modifications, extensions, and interfaces.
Poor understanding of the system by users and IT alike
Direct involvement of IT personnel in business processes.
Legacy system atrophy as shadow IT emerges.
Upgrade or replacement hard to justify.
In the full report, we explore the symptoms of technical bankruptcy and the devastating effects that it has on the organization. We continue by quantifying the scope of the problem specifically for ERP systems, using our research on the typical age, frequency of upgrades, and extent of modification of these systems.
Most importantly, we conclude with recommendations on how to avoid technical bankruptcy and, for organizations that have reached this stage, strategies for getting out and staying out of technical bankruptcy going forward.
In many markets for enterprise software, the battle between cloud and on-premises (or hosted) systems is over. Salesforce, the market leader in CRM, will soon pass the $10 billion mark in annual revenue. Workday, with its cloud HCM offering and growing financial management applications, expects to hit the $2 billion mark in 2018. Traditional Tier I providers, SAP and Oracle, are certainly not out of the race. But the only way they have been able to compete is by building, or buying, their own cloud services for CRM and HCM. Cloud has won.
Why Is Manufacturing Cloud ERP Lagging Behind?
Nevertheless, there is no cloud ERP provider the size of Salesforce or Workday, and there is certainly no cloud ERP provider for the manufacturing industry with that scale. NetSuite was founded in 1998, around the same time as Salesforce. But it only reached the $741 million revenue mark in 2015, before being acquired by Oracle. Claiming more than 30,000 companies, organizations, and subsidiaries in more than 100 countries as customers, it is by far the largest cloud ERP provider. Although it has done very well with professional services firms, software companies, and other services-related businesses, manufacturing companies form only a small part of that number. Plex Systems has a pure cloud ERP system for manufacturers dating from 2000 and has been rapidly growing over the past four or five years. But its customer count is under 600. After NetSuite and Plex, the number falls significantly: Cloud-only systems such as SAP’s Business ByDesign, Rootstock, and Kenandy, each have even fewer manufacturing customers.
To understand how great the market opportunity is for cloud ERP in manufacturing, consider that, according to the U.S. Census, there were about 63,000 manufacturing firms in the United States in 2014 with 20 or more employees, as shown in Figure 1. Considering that the estimated customer counts by vendor in the preceding paragraph include customers outside of the U.S., it is safe to say that manufacturing cloud ERP probably has less than 2% market share in the U.S. The market opportunity going forward, therefore, is enormous.
Send tips, rumors, gossip, and feedback to Frank Scavo, at
I'm interested in hearing about best practices, lessons learned, horror stories, and case studies of success or failure.
Selecting a new enterprise system can be a difficult decision.
My consulting firm, Strativa, offers assistance that is independent and unbiased.
For information on how we can help your organization make and carry out these decisions, write to me.
My IT research firm, Computer Economics provides metrics for IT management, such as IT spending and staffing benchmarks, technology adoption and investment trends, IT management best practices, IT salaries, outsourcing statistics, and more.