Why modernize? Your company's survival may depend on it

As 2025 opens, the technological dichotomy in the business world is more profound than ever. On the one hand, you have general-purpose AI, which is transforming the way business does business by accelerating, automating, and improving workflows and decision-making. On the other hand are companies that persist in using manual labor to power core business processes. Not to mention that as much as 70% of software used by Fortune 500 companies was developed 20 or more years ago. Despite the consensus that only the most technologically mature companies will thrive or even survive in this century, there is a surprising amount of digital transformation yet to be done.

Perhaps more surprisingly, there is still confusion around what digital transformation means, and how it should be applied to business. A new McKinsey book Rewired: A McKinsey Guide to Outcompeting in the Age of Digital and AI takes the common sense view that digital transformation aims to build competitive advantage by continuously deploying tech at scale to improve the customer experience and lower costs. A key enabler of this is technology that makes it easy for teams to “continually develop and release digital innovations to users.”

20% of IT budgets are consumed by tech debt alone

As McKinsey illustrates, digital transformation is not a one-and-done project, it’s an ongoing journey of change, improvement, and continual innovation. Ensuring your company is properly tooled for digital transformation requires a flexible technology infrastructure that can quickly and cost-effectively support new business strategies as customer demands and market dynamics evolve. In fact, 2023 research by Google shows that a flexible tech infrastructure enables 30% higher organizational performance than an inflexible one.

Let’s take a closer look at how operational performance is negatively impacted by complex, obsolete, and inflexible legacy systems.

1. Exploding tech debt. In the US, 49-79% of tech executives struggle with moderate to critical levels of tech debt, which, in 2022, represented a total cost of USD 1.52 trillion. On average, US companies dedicate 20% of IT budgets to managing tech debt, which is money that won’t be spent on innovation, growth, and strategic advancement. Tech debt also undermines operational resilience, creates security risks, and can even cause tech bankruptcy, in which maintaining and/or upgrading systems becomes infeasible, leading to significant disruption and expense.
2. Zero business agility. Outdated, monolithic legacy architectures that lack modern APIs hinder business agility in several critical ways:
   • They can’t scale or be modified or integrated with modern systems without extensive rework.
   • Introducing new features or updates requires significant time and lengthy development cycles that involve manual coding and testing.
   • Limited support for DevOps practices and a lack of automated workflows slow the delivery of new capabilities.
   • Siloed data prevents seamless data sharing, which slows decision-making.
3. Increased developer costs and turnover. Obsolete, inflexible technologies require specialized skills to manage and drive up the need for resources. They may also increase turnover by creating a frustrating experience for IT personnel because of the constant need for manual intervention, frequent breakdowns, integration challenges, and clunky, outdated interfaces. Legacy technology also discourages new hires who have been trained on the latest technologies and expect to use them.

56% of executives feel modernization efforts are lagging

Not surprisingly, a recent study by IBM revealed that 83% of IT executives feel that modernization is central to their organization’s strategy. Still, only 27% say their organizations have made significant headway in doing so. Part of the problem is that modernization is more complicated than building a few cloud-native apps and integrating them with existing systems. If that’s all it took, you might be further along.

According to IDC, some 750 million cloud-native apps have been developed. However, the success of these applications depends on strategic decisions about their deployment. Factors like geographical location, infrastructure choice, and deployment models (public cloud, private cloud, hybrid) directly influence how quickly they can be launched and their ability to deliver business benefits.

The complexity of most legacy enterprises, which often comprise a complicated mix of disparate systems (both old and new), makes it difficult to keep existing systems up to date while simultaneously adopting innovative cloud-native capabilities. This fragmentation, along with shortages of skilled personnel, insufficient resources, and inconsistent workflows, creates barriers to achieving all the benefits of modernization.

Taking an incremental approach

Unless the modernization fairies gift you a new enterprise overnight, you will probably best be served by taking an incremental approach. Here are some key aspects of modernization that CIOs can apply to workflows (applications, data, and underlying systems) to enable modernization of a kind and at a pace that makes the most sense for their organizations.

1. Ensure access to software innovation
   AI, ML, Hybrid Cloud, and DevSecOps are the current darlings of the Gartner hype-cycle, and today, the advances won’t slow down. Keeping up with current technology is a digital transformation imperative. CIOs need to ensure that where feasible, these technologies are incorporated into enterprise system development, and IT teams are enabled to use them.
2. Improve development speed and agility
   • How quickly do your existing systems enable you to test your business hypotheses using parameters such as channels, metrics, and personas?
   • How quickly are you able to introduce new features into the market (from concept to production?
   • How efficiently are you able to pivot in response to changing market conditions?
   • How quickly can you innovate, and deliver and extract value from your innovations?
   • How efficient is your release process?

Your answers to these questions are a key indicator of your ability to compete in the digital economy. Ask yourself where you can update developer tooling and create more agile processes to accelerate value-driven innovation.

3. Streamline processes to lower costs
   Implementing automation wherever possible will not only reduce costs, but it will also help accelerate development by automating manual processes such as code generation and testing, driving faster release of new features among other benefits.Runtime modernization is a big step toward improving performance while reducing costs. It requires minimal setup and supports a more future-ready enterprise by easing the transition to microservices.
4. Create a better developer experience
   Creating a better experience for your developers will not only lower costs and boost developer morale, it will improve the customer experience by enabling development teams to quickly implement new features and changes that will have a direct impact on customer satisfaction.According to IBM research, “by 2026, approximately 80% of software engineering organizations will establish platform teams as internal providers of reusable services, components, and tools for application delivery.Modernizing development and delivery cuts down the cognitive load for developers and directly connects their achievements to business value. According to IBM, the areas that have the biggest impact on developer morale are transitioning to modular architectures, adopting modern development tooling and agile methodologies, and creating internal platforms with reusable configurable components.

The sustainability clause

In case you still aren’t feeling the pressure to modernize, let me toss another ticking time bomb onto your plate: sustainability. According to Gartner, by 2027, 25% of CIOs will have compensation linked to their sustainable technology impact.

Enterprise modernization can address sustainability goals in too many ways to list here, but in a nutshell, they improve energy efficiency, reduce resource consumption, and enable environmentally conscious practices. Here are a few examples:

• Modernization typically involves reducing the number of physical servers through virtualization or cloud migration. Fewer servers mean lower power consumption and reduced cooling requirements.
• Modern digital workflows and applications reduce dependency on physical documentation, saving paper and printing resources.
• Modern AI and analytics-driven systems enable better inventory management, reducing waste and unnecessary production.
• Enterprise modernization aligns with Environmental, Social, and Governance (ESG) frameworks, helping organizations meet regulatory and stakeholder expectations for sustainability.

Tooling up for success

Choosing the right approach and technologies to modernize depends on understanding the specific needs and realities of your enterprise and organization. The good news is, that the reason modernizing is so important for your business is the same reason you have a lot of options for doing so – flexibility. In other words, the same technology that will help your business become more innovative, agile, and responsive to employee and customer needs is the same technology that will help you map out a modernization journey that conforms to your needs – no fairy magic required.