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Why technical debt can be as insidious as financial debt

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Why technical debt can be as insidious as financial debt

Richard Blanford, managing director, Fordway

The collapse of Carillion earlier this year reminded all of us of the dangers of running up debt in a business.

Reports say that Carillion’s debts grew by more than 50 percent in its last four months of trading, and it also had a huge pension deficit.

However, another type of debt can be just as insidious – technical debt, where IT systems and services that were once cutting edge are simply not replaced as long as they keep on working. This creates a number of problems, ranging from reduced efficiency as a result of systems running slowly to shadow IT – where staff use products and services not sanctioned by the organisation– and an increased risk of security breaches from old software which are no longer patched or supported by its vendors.

Richard Blanford

Richard Blanford

One of the most high profile examples of technical debt is the NHS, where IT systems that had not been upgraded for years were caught up in last year’s ransomware attacks. New Health Secretary Matt Hancock has recently announced funding to tackle outdated technology, pointing out that generic technology available outside the NHS is “a million times better” than systems currently in use.

The NHS is not alone. We see examples of technical debt regularly at customers who have minimised IT investment over the past few years or are tied into outsourcing contracts supporting outdated IT systems that no longer meet their needs. It is becoming a growing problem, as most businesses are now dependent on technology for critical business functions. But, like financial debt, it is something that people don’t want to talk about, as they don’t want to admit that their organisation might be falling behind their competitors.

For most organisations, technical debt arises due to the accumulation ofa series of business decisions. Each was perfectly valid at the time but was made without considering its effect on other systems and an organisation’s overall IT architecture. The result is an unnecessarily complex IT infrastructure which limits performance, scalability and particularly agility – a major problem in today’s fast-changing digital world. It also takes a lot of internal resource and cost to maintain and manage.

As part of this situation, organisations typically become dependent on bespoke or heavily customised applications that do the job but are complex and difficult to change and become ‘part of the way we do things round here’. This is particularly true in the finance sector, where high budgets once made customised and bespoke applications the norm. These continue to run unchallenged until they fail spectacularly, or the organisation tries to migrate them to a new operating system, by which time the team who implemented them are long gone and a closer look shows that they are written in outdated code on an obsolete platform.

One way to identify the problem at an earlier stage is to spot situations where an undocumented script, work-around or quick fix could become a liability. This means ensuring well-enforced change control and management processes for all the organisation’s applications.

Problems can become apparent very quickly when an organisation tries to move its applications to public cloud. Many application providers are developing their own Software as a Service (SaaS) strategy, but these frequently only support the latest version of their software, so an organisation using an older version which it has customised extensively will need to use private or managed cloud instead.

Although investment will be required to get out of technical debt, continuing to operate an overly complex, out of date infrastructure is expensive. We have benchmarked this across a range of organisations and found that by optimising their IT infrastructure, replacing or upgrading outdated legacy systems and managing licensing and capacity, most organisations can save up to 25 percent of their annual IT budget. It’s a significant saving and something well worth exploring.

As with financial debt, the first step in tackling technical debt is to understand the problem.  Your IT team and systems are there to serve the needs of the business – they are not an end in itself.  Review and work out what services your business actually needs,not that you or your colleagues thinkit wants, and then decide what systems you need to support those services and what you can consolidate, simplify or turn off. Once that’s done, understand which services can usefully be provided via cloud, which are better off outsourced to a third party, and which to retain in-house.

Here’s an example of how to tackle the problem. As a replacement for a bespoke system running on an outdated operating system, which was costing them a considerable sum in both third party maintenance and in-house staff to support it, one of our customers took the approach of asking us to implement a replacement based on commercial, off the shelf software as much as possible. Whilst they had to make minor changes to existing business processes to fit the way the new application worked, they gained significantly increased functionality, plus easier, simpler and cheaper integration with complimentary applications. They have also minimised their potential for complications and made it much easier to keep up to date,as well as ensuring it can easily be supported by third parties. Minimising the need for bespoke IT is a very effective way to reduce the risk of technical debt.

Another customer, a joint venture, decided that cloud was the best route to take. Each of the companies in the joint venture had different IT systems, making collaboration difficult. Rather than create something bespoke, which would have to be maintained and updated, they decided to have a dedicated Office 365 domain for the project in the Microsoft cloud. They simply have to pay for what they use, while users always have access to the latest version of all the Office applications and receive updates as soon as they’re released.

Every organisation will have different business needs and require different IT solutions. Some legacy systems may be unavoidable, but the more you can standardise and simplify, the lower your risk of falling into technical debt.

www.fordway.com

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Seven lessons from 2020

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Seven lessons from 2020 1

Rebeca Ehrnrooth, Equilibrium Capital and CEMS Alumni Association President

 

Attending a New Year’s luncheon on 31 December 2019, we played a game that involved predicting the world in 2020. Some of the questions included: would Uber become profitable? Would the three-decade bond rally finally come to an end? Would the US hit a recession?

Unlike any of our predictions based on a traditional approach to business and predicting, we now know that 2020 became the year where business, professional and personal plans were turned upside down, reshaped and put-on hold. The proverbial black swan had arrived.

As revealed in a new CEMS Guide to Leadership in a Post-COVID-19 World, to which I contributed, the COVID-19 pandemic has exposed deficiencies in the 20th Century vision of leadership, giving a rare opportunity to question the status quo.

So, what are the main lessons from 2020?

  1. Humans are enormously adaptive.  This is not an extinction scenario. The world is getting used to dealing with global human disaster which may become a recurring event. Life continues guided by new parameters.

  1. No sector or country is immune to rapid change. Just as the leveraged finance and equity markets ground to a halt during the Global Financial Crisis, we have seen a disruption in the financial markets (including M&A) in 2020, including a significant redistribution of wealth between sectors; think tech vs airlines and the hospitality industry. When a market is disrupted it has secondary and tertiary effects such as less work for accountants, lawyers, financiers etc.

 

  1. Location is not as important anymore. The belief that finance staff need to be based in one of the financial capitals to be effective has been forever altered. Pursuing a career in finance from anywhere is becoming possible. However, it’s likely that over time, financial controls and human interaction will move the work model back towards the traditional office approach, as work is a critical sanctuary for people. While working from home may allow more time for family, chores and sports, it is mainly effective for people who already have their internal and external networks. For junior employees it presents a notable challenge as they may be forced to spend their formative years without a chance to really build their networks.

 

  1. Change is likely to be lasting. The opportunity for alternative finance and tech focused providers is enormous and 2020 will accelerate this shift. For example, many retail banks are providing rather poor customer service, blaming the pandemic. Even the most loyal customers will be heading elsewhere. For recent graduates and current students this is a major shift; future winners and key employers may not be names we are used to seeing in the headlines.

 

  1. There will be a spotlight on leaders with visionary strategy and understanding of the operations. 2020 showed many politicians and business leaders behaving like they were playing a game of snakes and ladders, rather than executing a thought-out strategy. The next wave of thoughtful leadership is urgently required.

 

  1. Collaboration leads to success. The definition of a pandemic is an infectious disease prevalent worldwide. A global problem requires a collaborative solution rather than each country and industry on their own. Quoting Steven Riley, professor of infectious disease dynamics at Imperial College London: “Once you have the knowledge and you share the knowledge, then you are able to take measures to push transmission much lower”. This principle is transferable to management education. In a world more complex than ever, investing in a degree is hard currency. Combined with the full global alumni network, corporate partners and schools, CEMS is capital that doesn’t depreciate.

  1. Resilience has become a watch word. Saint-Exupéry’s quote resonates with me: “If you want to build a ship, don’t drum up people to collect wood and don’t assign them tasks and work, but rather teach them to long for the endless immensity of the sea.” We are in a new paradigm – so prepare for the next change. For COVID-19, while we hope that the vaccine will soon upon us, the broader long-term positive challenge remains.
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Data after Brexit: How does the end of the transition affect GDPR?

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UK's Post Brexit productivity puzzle

By John Flynn, Principal Security Consultant at Conosco

The UK has officially left the European Union now that the transition period has ended on January 1st 2021. But this could raise issues with one of the biggest bugbears for many companies – the international transfer of personal data.

Businesses can relax, somewhat – GDPR, which took businesses months to get their heads around, is not being replaced. It will continue as the UK GDPR 2018, and will still be based on the criteria of the Data Protection Act of 2018. However, the UK will retain the right to change the UK GDPR as it sees fit in the future.

The main changes apply to those who receive data coming into the UK from Europe. Transfers from the UK to other countries can continue under existing arrangements.

We know it can be difficult to cut through the legal jargon, so we have simplified what you need to know to protect yourself and your data:

1 – Update your privacy notice

Most businesses do not have the correct clauses in place ahead of January 1st, potentially exposing their liability, should something happen to their data. All company privacy notices online will need to be updated to specifically state ‘UK GDPR’, as opposed to ‘EU GDPR’. You will also need standard contractual clauses in place, which cover both parties – those transferring and those receiving the data.

 The Information Commissioner’s Office (ICO) has a list of what needs to be included in the standard contractual clause here. The ICO will remain the UK regulator for data protection, regularly liaising with each EU member state.

This also applies to Multi Corporate Groups who operate in multiple countries, who need to update their documentation and privacy notice to expressly cover the data transfers.  The UK has applied for an adequacy assessment, which would negate the need for contractual clauses, however this has not yet been approved by the EU.

2 – Data privacy assessments

Any company which runs applications and software should always perform a Data Privacy Impact Assessment. This was also in the guidelines before, but these assessments are now more important for those who outsource their IT operations internationally.

For example, when using a service such as a cloud-based system, the company must be sure that its service provider adheres to UK GDPR and stores the data within the European Economic Area (EEA), or has a binding corporate agreement with the company, where data is stored outside of the EEA. You should also, as mentioned above, make sure that a contractual clause is in place.

3 – Review local legislation

Contracts should now have contractual clauses that specify the responsibilities of the data controller and the data processor. If you are receiving personal data from a country territory or sector covered by a European Commission adequacy decision, the sender of the data will need to consider how to comply with its local laws on international transfers. You should check local legislation and guidance in this case.

4 – Cyber Security health check

The ICO is increasing its capacity and efforts to crack down on data breaches, post-Brexit. Now is a great time for all companies to have a health check to understand their Information Security posture and GDPR compliance. Nobody wants to be caught handling data improperly and fined when it could have been prevented with education and training.

A gap analysis performed by an expert is money well-spent. It’s also a fact that companies that have cybersecurity and Information Security controls are not only able to better defend against attacks but are also far better placed to recover from an attack.

Looking forward

It’s important that all businesses – large and small – are properly preparing their data storage and transferring for the 1st January. ICO has been busy setting examples by fining large, high-profile companies for failing to keep millions of customers’ personal data safe.

It will continue to come down hard on the data breaches of personal identifiable information and special categories of data. The saying ‘prevention is better than a cure’ rings truer than ever this year, and you will thank yourself if you make the efforts to properly store your data now, and not when it’s too late.

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2020 reflections and 2021 outlook

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2020 reflections and 2021 outlook 2

By John Hunter, Head of Banking and Fiduciaries, Finance Isle of Man

Reflections on the most surreal year

The Covid-19 pandemic has completely changed the world as we knew it, resulting in catastrophic loss of life and fears of a downturn hang over global economies like a sword of Damocles. In the UK, the new strain has further exacerbated the situation. As I am sure many have already said we are living in what could be called the most surreal times. People have been trying to cope with this “new normal”, by changing their lifestyles and evolving behaviours.

The Isle of Man responded swiftly to the pandemic by closing its borders and enforcing social restrictions which everyone respected and adhered to. Socially and culturally the Island demonstrated all the good things that come from living on a relatively small Island where community still means so much.

The Isle of Man’s financial services sector adapted quickly, seamlessly transitioning to working from home. The banks too adopted flexible remote working practices and continued to support clients around the world helping them navigate the challenging situation and making the most of any opportunities that arose.

Although there is no substitute for face-to-face interactions, we all embraced web-conferencing platforms like Microsoft Teams and Zoom to stay connected with contacts around the world and build and nurture business relationships, whether it was with financial services firms or high net worth individuals looking to relocate to the Island.

Furthermore, a priority for the Isle of Man has been to reinvigorate the business and cultural ties with South Africa. In a normal world, we would have travelled to the country, held in-person meetings with businesses and industry representatives and talked about building on our wonderful historic ties. However, because of the scale and breadth of disruption we had to change all our plans! We hosted a virtual roadshow which comprised a series of webinars exploring why it has never been more important for South African businesses and individuals to choose the right jurisdiction for long term financial planning.

Looking ahead to the future

We are all hoping that the global rollout of vaccines will provide the pathway to some form of return to normality and all the things people are missing will be back. Like amidst all periods of immense turmoil, interesting, new possibilities have emerged such as the revolution in work culture and a renewed importance of being close to nature and green spaces is. And these possibilities can help reshape society for the better.

The global economic recovery and rebuild might seem further away in the current environment especially amidst the new lockdowns. But we are confident in the resilience of economies and are hopeful that different industrial sectors and governments working together would result in green shoots.

The financial services industry has an important role to play in getting the world economy back on its feet. It is a core component of the solution to continue facilitating the financing of corporates, as well as to develop sustainable finance and nurture digital technologies which have proven to be vital during the pandemic. The sector should continue its cooperation and collaboration with governments and regulators to ensure efficient capital flows and financial stability for businesses and individuals.

Banks too have a crucial role to play as they are instrumental to the effective transmission of monetary policies and stimulus packages. As mentioned in a report by EY: “Financial insecurity in the wake of COVID-19 will require banks to boost consumer confidence and help build a more resilient working world.”

We expect the Isle of Man’s financial services sector and banks to continue navigating the situation with resilience as they have been doing thus far and contributing to the global recovery process. Also, we truly hope this will be our busiest year ever (subject to our ability to travel), with an extensive global schedule of planned activity to promote the Island as an international financial centre of excellence and innovation. Personally, I had planned to be in South Africa for the British & Irish Lions tour, but regrettably, it might not take place and as such we will look forward to catching up with friends there as and when we can.

Conclusion

No doubt, there are significant challenges for the world ahead but as Albert Einstein said: “in the midst of every crisis lies great opportunity”. And it is this opportunity that we all need to work together to identify and make the most of. We are confident that in 2021 the Isle of Man will continue to support financial services businesses help their clients, employees, and the wider society through these surreal times. We are all in this together.

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