Legacy financial systems: When to migrate and what to look for

Fiddling with paper invoices and receipts? Crunching numbers in Excel? Recoiling in horror because someone flouted the expense policy again? If you can relate, you're probably dealing with these and more of the many headaches of legacy financial systems.

Getting stuck in a rut with your tech stack is easy. Perhaps legacy financial software is all your team has worked with, or fear of the unknown keeps you from exploring other options. Either way, you're not alone: 43% of banking software still operates on (Common Business Oriented Language) COBOL, a computer program developed in 1959 over 60 years ago.

In this article, we'll break down what legacy financial systems are and the tell-tale signs it's time to switch to a more agile and complete alternative. We'll also explore some critical strategies for selection and onboarding. Finally, we'll get you up to speed on the potential hazards you'll encounter to make your digital transformation a hit.

Understanding legacy financial systems

Before diving into the digital transformation strategy, let’s get into some legacy system basics.

What do we mean by legacy financial systems?

In this article, we really mean two different things when we talk about legacy systems:

1) Legacy financial systems as 'archaic' software and hardware.

Systems, which are often the backbone of finance operations and long-running big businesses, make them intimidating to replace. Think accounting, payments, budgeting, forecasting, and expense management software.

While many come from reputable companies and undergo updates to remain relevant, they're still old-school tech. Why? The underlying infrastructure. It can still reflect past systems and practices. Plus, it may no longer be mainstream.

Some solutions are also custom-built, adding extra complexity and cost when revamping. Companies rack up $1,083,000 of technical debt for every 300,000 lines of code. The kicker is that's just the initial amount.

2) Multiple disconnected systems: a hangover from the first wave of digital transformation.

Many companies in different industries have undergone digital transformations over the past ten years. These changes saw companies adopt various solutions for corporate cards, expenses, subscriptions, and more, which initially seemed really helpful but have now led to a complex and disjointed view.

Payhawk customer Carolina Einarasson, FD Essentia Analytics, describes:

Before Payhawk, we used a couple of point solutions, excel, and a few different credit cards, but we didn't have an all-in-one centralized solution. The first thing I did when I became FD was to remove time-draining activities. For us, spend management was a quick win; we saw Payhawk as the future where we could have expense data entry, credit cards, approvals, spend requests, paying invoices, and employee reimbursements all in one.

We've got your back if you're looking to move from multiple disconnected solutions and ride the second wave of digital transformation towards a fully connected spend management function.

With Payhawk, you can stop juggling tools and screens as we bring everything you need together in one place. Plus, we're constantly tweaking and improving our features and direct integrations (with ERPs like NetSuite and Xero) to give finance pros better control and a clear view of corporate spending.

Signs it’s time to modernize your legacy financial software

Legacy systems were once the pinnacle of technology. But now, more innovative end-to-end solutions have hit the market, easing the load on finance teams. But, decision fatigue can set in when browsing the options, leaving you second-guessing whether to switch.

To help you decide, let’s cover some issues archaic finance systems bring.

The challenges of legacy financial systems

• Team efficiency takes a hit: A significant challenge with multiple or legacy systems is their snail’s pace. Often, companies built the architecture in the heydays of floppy disks and fax machines, not Big Data and blockchain. The fallout from this disconnect is slow processes and rigid solutions that can’t fulfill modern-day finance tasks.
• Lacklustre integrations dull progress: Integration is the cool kid in finance that streamlines workflows. It can also enrich your financial insights with information from solutions like CRM, HR, and ERP systems. Integrations are crucial for business optimization, and the market could hit $30.27 billion by 2030. Yet mixing some old and new technologies is like trying to blend oil with water; it doesn’t work. The result? Siloed data, incomplete evaluations, and widespread inefficiency.
• Reliance on old-school hardware creates losses: Windows 97 desktops, remember those? While classic hardware is nostalgic, the novelty quickly wears off when it breaks down. Maintaining hardware is challenging. It's as available parts and technicians diminish over time. This setup causes lengthy downtimes and financial losses.
• Vulnerability to cyber crime threatens your business: Cybercriminals are more daring than ever. So, it's not "if" they'll strike but "when." In 2023, 72.7% of all organizations fell victim to a ransomware attack, costing an average of $4.54 million per attack. Some legacy systems lack the framework to defend themselves, so businesses' funds and reputations are vulnerable. Likewise, with multiple solutions from multiple providers, there are more risks and more vulnerabilities.
• Eye-watering maintenance costs eat away profits: Like a leaky tap, legacy financial software can drip cash out of your business and down the drain. Just think about outages and call-out charges. Another example is the technical debt burden and its huge opportunity cost. Companies in the US spend a staggering $85 billion a year on maintaining old technology. Globally, this figure tops $300 billion.
• Limited platform scalability stunts growth: No matter how promising your projects are, you can only go as far as your tech infrastructure allows. Obsolete systems can't always accommodate modern endeavors. So, you can't leverage game-changing tech like spend management automation and embedded finance. Older systems can also have bandwidth issues, closing off even more opportunities.
• Meeting regulatory duties becomes harder: Businesses have increasing legal obligations, spanning anti-money laundering to data protection. But use old technology to manage modern duties, and cracks will show. For example, you could forget to submit a tax statement by relying on calendar notifications. Miss too many deadlines, and you’ll soon be in legal hot water.
• A painful user experience kills adoption: Today, we’re used to getting information fast and don’t want to wait for software to load. Clunky interfaces, stiff features, multiple user experiences, and the buffering wheel of doom waste time and are a chore. Soon, staff are using different tools and switching up processes.

Outdated finance solutions: The impact on business performance

It's critical to know the consequences of avoiding the digital transformation leap. Here are a few:

Profits nosedive
The upkeep costs of archaic systems rack up quickly. Businesses waste around 20% of their IT budget yearly, and unresolved technical debt is one cause. These costs eat into profits, thinning your bottom line.

Errors galore
Outdated systems and disconnected interfaces combined with manual processes leave room for errors. This issue can steer decision-making in the wrong direction with costly consequences. Imagine a team member putting incorrect numbers into an outdated forecasting system (or waiting ages for a data lag to resolve and show information from one tool to the next) and then overshooting earning projections and budgets by 30%.

The knock-on effect of the above is mass overspending. Reporting a loss soon follows.

All of which you could have avoided by using modern corporate expense management software.

Operational efficiency takes a beating
Some legacy financial systems slow down task completion, making it tough to hit growth targets. Customers also feel the adverse effects of archaic technology through service delays.

Poor adaptability decreases competitiveness
In today's competitive market, agility and speed are essential to remain responsive. Yet, some legacy systems can't adapt, so meeting customer and company needs is tougher. So, market shifts rock the business; worse, it'll lose its competitive edge.

Laying the foundation: How to set objectives for modernization

To go from concept to reality in tech modernization, you’ve got to understand what your finance tech stack looks like now and how you’d like it to be. Here’s the game plan.

Evaluate current system limitations and strengths

First, get to know your finance tech ecosystem to identify what features should stay, go, and join. Gather your team, grab a whiteboard, and answer the following questions:

• What persistent issues are we facing with our current finance tech stack?
• What’s been the root of the issues we’ve faced?
• What problems do we see on the horizon?
• What gaps have we noticed in our finance software’s capabilities?
• What areas are our financial systems causing us to lose money and why?
• Are there any features employees and clients have complained about?
• What’s keeping us tied to legacy systems?
• What features would we like to keep? And why?

Identify business goals and requirements

• Next, clarify your company and team goals to crystalize your necessary tools and strategy. Some questions to reflect on include:
• What goals does our finance team have for the next five years?
• What problems do we aim to solve by hitting these targets?
• What steps will it take to achieve these goals?
• What does the business or our team gain by achieving these goals?
• What finance tasks will become mission-critical within the next five years?
• What tools have you noticed competitors using?

A step-by-step guide to crafting a failproof modernization strategy

The harsh reality is that 70% of digital transformation projects flop. The high failure rate isn't due to a lack of enthusiasm but rather improper planning. So, it's essential to have a strategy for replacing legacy systems. Let's break down the steps to build one.

Step 1: Assess your legacy system(s)

During the objectives-setting phase, we outlined the strengths and weaknesses of your legacy systems. Now, you're going to up the ante by diving into the details of its architecture. Here's how:

Take inventory of your legacy system's characteristics

Zoom in on the biology of legacy financial software. We're talking details like the:

• Interface(s)
• Features
• Modules
• Database(s)
• Storage capacity
• Active software version(s)
• Hardware
• Programming language(s)

Analyse the legacy financial system’s performance

Next, consider the following metrics to evaluate how the system has held up:

• Response time: How quickly the software executes a user request
• Transaction processing speed: How fast the program completes a transaction
• Throughput: The number of jobs the system can process over a certain period
• Scalability: How the system manages influxes or drops in usage or users
• System reliability: How long the system remains available and operational

Also, highlight any bottlenecks and performance issues. For example:

• How many outages do you experience each year?
• How long does it take to generate reports?
• How easy is it to use the legacy system?

Conduct security and compliance checks

Next, complete security and compliance assessments to pinpoint vulnerabilities. Concentrate on the following areas:

Security

• Access controls
• Encryption
• Data protection
• Secure document sharing and signing
• Cyber threat defense mechanisms

Compliance

• Check the legacy system's compliance with industry standards and regulatory requirements
• Identify any tools that aid your team in meeting compliance obligations
• Note any gaps in compliance tools

Examine your system’s integration capabilities

A crucial question you want to answer is, “How agile are our legacy financial systems?” Note how the legacy system integrates with other systems, considering time, speed, and accuracy. Also, examine how adaptable the tools are.

Review the legacy system’s documentation

Understand your legacy system’s maintenance requirements via its technical documents and manuals. Also, review any contracts and licenses and note expiry and hardware certification dates.

Step 2: Analyse business processes and workflows

Next, outline each business process using legacy financial software. Consider how you can simplify these tasks. For example, say your staff isn’t submitting evidence for expenses because the process is too long. They must scan an invoice, email it to themselves, and then upload it to the legacy system. You could use solutions like Payhawk to streamline the process. Like the global agency FFW did.

FFW had used payment methods and solutions across European entities, creating complex operational challenges. So, they pulled spend management tasks under one roof with Payhawk. Staff now get corporate cards with spend controls that the finance team can manage effortlessly.

Also, cardholders use Payhawk’s AI camera app with OCR technology to extract key receipt details for speedy processing. Then, FFW’s pre-set approval policy facilitates expense approval with a single click on any device.

Payhawk's fuss-free, and automation-powered process saves FFW hours daily. No more wasting energy on manual data entry, triple-checking banking details, or chasing receipts. Read more about FFW’s inspiring journey.

Step 3: Evaluate modernization options and approaches

There are seven tried and tested approaches to bring a financial tech stack into the future. Which one works best depends on your budget, existing technical debt, and risk tolerance. Let’s take a closer look.

Replatforming, a.k.a. the Lift and Shift Method

It entails migrating existing software to another software or hardware with minimal code changes. It aims to improve the system’s infrastructure.

Rearchitecting

You’ll change the legacy system’s infrastructure by adopting new designs and adapting the system to fit modern standards. Restructuring tackles the system’s performance, agility, and scalability.

Rebuilding, a.k.a., rewriting

You’ll create a new system to copy the legacy system’s functionality. From here, users can access features they know and love while introducing modern technologies and infrastructure. Scaling and maintenance are also quicker.

Rehosting

Involves moving software to a new environment with few code changes, for example, shifting the application to another server while preserving the architecture and code. Rehosting strives to maintain existing business logic and workflows. You can also gain quick results with minimal disruption risk.

Reimagining, a.k.a. Greenfield Development

Requires ditching the legacy financial software and taking a fresh outlook. You’ll also implement the latest technologies and best practices. Some adoptees integrate the legacy system, while others replace it over time. This approach aspires to align systems with the organization’s current needs.

Refactoring

Using the Refactoring approach, you’ll restructure the legacy systems code without altering how it behaves on the user side. You won’t debut any new features. Instead, you’ll optimize the code’s internal structure. Refactoring aims to make code easier to maintain, read, and perform.

Encapsulating

To encapsulate, you’ll draw from the legacy system and expand its features by breaking up and bundling its data and functions. You’ll also preserve most of the code and use an API to make it accessible as a service. This approach allows the system to be more secure, run more efficiently, and conduct repairs more quickly.

Step 4: Involve key stakeholders in decision-making

A successful business digitisation project balances each stakeholder's needs. So, get everyone involved with a survey or roundtable. Inquire about the legacy financial software's positives and negatives and get improvement suggestions.
Some key stakeholders include:

• Employees
• C-Suite management
• Vendors
• Investors

Step 5: Create a roadmap from testing to implementation

You’ve researched, got everyone involved, and whittled down a few options. Great work! Now, break down your testing and implementation into phases. How much depends on your company’s internal procedures and priorities.
For example, imagine you want to onboard a spend management software. If you're a big complex business, you could trial two core functions: spend control and reimbursement of travel expenses. Then, roll out to other tasks once you’ve got proof of concept.

Discordia took a similar approach. They ran a Payhawk trial with about 30 drivers over 2.5 months. Then, using their learnings, they optimized the second trial, involving 700 drivers over one year. Discordia now has a robust technological system, and drivers use the new software seamlessly. (More on Discordia’s phenomenal journey later).

New-school technologies to support legacy system modernisation

Recently, groundbreaking solutions have hit the finance world. Here are some of the latest and greatest tools:

• ESG reporting: Governments worldwide have pledged to reduce emissions, creating new obligations and incentives. Now, companies use ESG reporting tools to manage carbon tracking and reporting to remain compliant and secure write-offs.
• Subscription management: The subscription economy has boomed and may hit $1.5 trillion by 2025. Consumers aren't the only ones racking up subscriptions; corporations are, too. But it's easy for things to go haywire. So, businesses leverage technology to manage subscriptions, like tracking recurring payments and admin.
• Fraud detection: Businesses are fighting cybercrime with an ace up their sleeve: AI-powered tools. These solutions can spot transaction and behavioral anomalies. Then, they'll alert your team of potential threats to keep your company safe.
• Expense management: Companies are upgrading their approach to expenses. Solutions like corporate Visa cards and virtual cards take spending control to the next level. AI solutions, like Payhawk's AI camera, have also joined the mix. This feature extracts receipt data, eliminating costly manual data entry.
• Accounting, tax, and ERP integrations: These software aren’t new, but there’s a 2.0 twist on how businesses use them. Enter integrations. For instance, using Payhawk, your team can feed data automatically from the business ecosystem. They can also automate most of the busy work of balancing the books. We’re talking automated payment reconciliation, seamless ERP integrations, and much more. You can even import and update your Chart of Accounts, tax rates, and categorizations using Payhawk’s expansive custom fields.

Addressing potential risks of modernization

Modernization comes with potential pitfalls, so a risk management strategy is vital. Outline all the possible hazards and how to dodge them to bounce back quickly if disaster strikes. Here are some of the most common:

• Data migration issues
• Integration challenges
• Business disruption
• Security issues
• Resistance to adoption from stakeholders
• Running over budget
• Workforce skills gaps
• Lack of vendor support and lock-ins

Partnering with software development agencies for successful modernization projects

Switching from legacy financial systems? Take the pre-built solution expressway.

The quickest and easiest way to optimize your finance tech stack is to onboard an all-in-one solution. It should be customizable, with access to technology updates and expert support.

It's the route the transport company Discordia took. Truck driver levels took a hit after tackling complex logistics, international paperwork, and various payment tools. Having to send money to drivers' bank accounts daily also affected the finance team. So, Discordia partnered with Payhawk to drive workforce efficiency, satisfaction, and retention.

Using Payhawk's expense management software and smart capture features, Discordia removed burdensome paperwork from drivers' duties. Discordia's finance team now manages transactions to driver's accounts through one master account on Payhawk. This feature eliminates time-consuming admin and expensive bank transfer charges.

Drivers also get a debit card, which Finance top-up daily, providing more flexibility and convenience. Payhawk even syncs with Discordia's ERP platform for improved insights and decision-making.

The blueprint for modernizing legacy financial software

“The only constant in life is change”, as the saying goes. Not too long ago, basic software and manual tools and processes ruled. Thankfully, some new solutions are so good they give legacy financial systems a run for their money.

So, don’t settle for obsolete or multiple disconnected tools. Pull together an action plan, test a few tools, and adjust your tech stack based on the results. Digital transformation is a never-ending journey. So, when you find your match, commit to the long haul and don’t stop improving. Your finance processes will be unrecognizable, and your bottom line, staff, and customers will thank you, too.

Is outdated finance software holding your business back? Take the digital transformation leap with Payhawk: Book a personalized demo today.