Maintaining legacy systems is notoriously expensive. But what actually makes up the costs? And how can you measure those costs to make a business case for modernizing the software?
Legacy systems can plague businesses from a variety of industries. We've seen SaaS startups struggle with poorly built software that isn't up to customer expectations, as well as non-profits and government agencies that are dealing with costly legacy applications designed for internal use.
Why businesses stick with legacy systems longer than they should
There are several reasons why businesses continue to fork out the high amounts that it costs to maintain legacy applications. Executive leaders at an older, profitable software company might feel content to keep the customers they have and the software they have, instead of tackling new opportunities. Executives at a large enterprise or government organization might have undertaken a legacy system update, only for it to fail or cause further disruptions. And in another scenario, leaders might be spending exorbitant amounts to maintain their legacy system, without fully realizing how much it's costing the organization.
In any case, it's smart to take a step back and assess your own costs. When you know what your legacy application is actually costing you, it can help you put the cost of a software modernization project into perspective.
The major cost categories of maintaining legacy systems
There are 7 main categories of expenses for maintaining legacy applications:
Maintenance
Security
New development
Downtime
Customer support
Lost revenue
Opportunity
1. Maintenance costs
Just maintaining a software and its current feature set can be expensive.
What goes into this cost:
This category is made up by what you spend on infrastructure, such as your cloud provider and DevOps platform, as well as what you spend on development just to maintain and QA the current set of features. What you spend on product development staff, agencies, and freelancers are all included here.
2. Security costs
While security is related to maintenance, it can come with its own costs.
What goes into this cost:
This category covers everything you spend on security, both proactively (like cybersecurity staff and services) as well as retroactively (like data recovery). The more users you have, the more you will likely spend on security.
3. New development costs
Updating a legacy application is typically much more expensive than a modern one. Longer development times cost more staff and contractor hours. You might be paying 2 - 5X more for new development because your system is so difficult to update.
What goes into this cost:
This cost is typically measured in terms of the hourly or monthly rates you're paying staff or contractors to develop new features. However, there might be some fixed costs associated with adding new features to a legacy system, such as overly high cloud fees due to lengthy code.
4. Downtime costs
Legacy applications tend to go down more frequently because their tech is outdated. You might also experience more outages because your development team doesn't have the necessary skills to properly maintain the system due to its old architecture or programming language.
What goes into this cost:
This category is made up of what you spend on uptime monitoring, downtime notifications, and staff or contractor hours to get the system back up again. But downtime also cause increases in other costs on this list, such as lost opportunity from new customers, higher churn, and increased customer support tickets.
5. Customer support costs
If you have a legacy system that is a nightmare for your dev team to maintain and update, there's a really good chance it's a disaster for your users as well.
What goes into this cost:
You'll end up paying more on customer support if the experience is bad. If there are constantly tons of errors and the UX is so confusing that customers can't figure things out independently, you'll have more customer support tickets. You'll also have to pay your dev team to fix the bugs that users uncover.
6. Lost revenue costs
In the next category, we'll take a look at the new opportunity costs, but this category is all about the business you already have that you're losing as a result of your legacy system.
What goes into this cost:
For software companies, calculate your rate of churn, your average lifetime value, and the average length of the customer relationship when customers churn.
For internal-use systems, you need to calculate how many staff hours are being lost because of time spent in an inefficient application.
7. Opportunity costs
And finally, we have the category that is hardest to calculate: your lost opportunity costs.
What goes into this cost:
For software companies, you need to research your total addressable market and the share your company could conceivably achieve were it not for your outdated system and poor user experience.
For internal-use systems, your lost opportunity costs come down to what your dev team could be focused on if they didn't have to maintain this application. What could they achieve?
Average costs of keeping legacy tech
From our work with startups, enterprises, and government agencies, we've seen that legacy tech can easily cost 20 - 25% more on an annual basis compared to modern software. After a successful modernization project, the amount that you spend could very well be less, especially if the system is for internal use, has a simple use case, or doesn't need an expanded feature set.
However, software companies might end up spending more on software development after a successful modernization project because they finally have the technical capacity to build the new features that their target audience demands.
In extreme cases, an organization will experience extreme savings. For example, the AirForce was able to cut the annual expenses of one legacy application from $35 million a year down to $1 million a year.
At the very least, you should expect to see 15%+ savings on infrastructure and maintenance costs.
How to modernize your legacy system and get ROI quickly
When undertaking a software modernization project, you need to make sure you're hitting these essentials:
Speed: The faster the modernization project gets done, the faster you can start experiencing cost savings.
Future-proof tech: Your UX, data architecture, and DevOps processes should all be ready to power innovation for at least 5 years to come.
Developer-favorite frameworks: Make sure to use modern tech that developers actually want to use, such as Laravel and Vue.js.
You might want to start by reading examples of legacy system modernization so you can get a feel for the positive results that other organizations have experienced.
To partner with a fully managed product development team that specializes in modernization, check out DevSquad.
