Legacy systems can cost businesses dearly. Southwest’s screw-up is just the latest example

Southwest, the IRS and Royal Bank of Scotland, what do they have in common? Well, they all serve as reminders to companies that failure to modernize internal systems can cost them dearly. Here is how:

Southwest

As 2022 was inching to a close, the airline that used to be known for customer services had the biggest meltdown in the industry’s recent history. Southwest cancelled more than 15,000 flights in the past few days, making up 80%, 86% and 94% of the country’s total cancelled flights on 27th, 28th and 29th of December respectively. This catastrophe left hundreds of passengers stranded, not knowing where to go or where to pick up their luggage. All of this could have been avoided, if it were not for Southwest’s inexplicable reliance on outdated tools and baffling refusal to modernize them.

Southwest uses an in-house system called Sky Solver to assign crews. Southwest flight attendants and pilots have been calling for an overhaul of this system for years to accommodate the growing complexity of the airline’s operations. Yet, the calls fell to deaf ears. Brutal winter storms and heightened demand unfortunately exposed Sky Solver’s shortcomings to the fullest. Phone lines jammed up. Crew members didn’t know which planes they should go to. Pilots booked their own hotels while flight attendants spent the nights at crew lounges. The airline couldn’t locate even their own employees. Although planes were ready to take off, Southwest had no choice but to cancel flights because there were no crew members to operate those planes.

By no means is this an isolated incident. In 2021, cancelled flights over 4 days in Q3 cost Southwest $75 million. Because what happened this week is bigger in scale, it is going to cost Southwest a lot more than what they paid out last year. Moreover, it is part of a trend that has been coming. In the last 10 years, Southwest consistently had more cancellations than its peers as its cancellation rate jumped from 0.8% in 2013 to 2.4% in 2022. As cancelled flights piled up, only 7 out of 10 Southwest flights have arrived on time.

The story of Herb Kelleher heroically fighting the status quo at the time to found Southwest is widely cited and studied in business schools. The airline prides itself in customer services. Yet, recent management teams have prioritized familiarity and bottom lines over making tough yet necessary investments. And now, they are paying the price. Not just in terms of the financial impacts, but also regulatory scrutiny and damaged trust from passengers.

Southwest's cancellations
Source: CNN

Internal Revenue Service (IRS)

As the agency that handles taxes of millions of Americans every year, you’d think that the IRS uses state-of-the-art systems. The reality is anything but. The IRS is the poster boy of how failing to modernize systems can cause significant damages:

  • In 1985, computer issues at the IRS delayed 1.5 million individual returns. Those who filed on time were eligible for interest on delayed payments, but that also meant millions of dollars in additional expense to the government
  • In 2007, the IRS handed out $318 million in fraudulent refunds
  • In 2018, a computer glitch on the deadline day caused widespread confusion and prevented more than 5 million Americans from filing tax returns electronically
  • The government literally spent tens of thousands of dollars over the years, trying to modernize the tools that the IRS used, with nothing to show for it
Source: Bloomberg Tax

The IRS built a system called Individual Master File (IMF) in the 1960s that holds tax payer data. More than 60 years later, the same software is still what processes our tax returns. As arguably the oldest system used in the US government, IMF runs on a legacy code that few people know. As the number of developers that can handle such an archaic code dwindles every year, the software is increasingly expensive to maintain. For good measure, the IRS has to tweak the legacy code every year to reflect changes imposed by Congress, adding complexity in the process. There has been no lack of effort to modernize IMF over the years. The latest attempt is called Customer Account Data Engine 2 or CADE 2. Announced in 2013, the project has suffered multiple setbacks and is now slated to be completed by 2030. But don’t be surprised if there are further postponements.

IMF is just the core system and one of the hundreds that the agency has developed over the years to meet its needs. Unfortunately, these systems don’t necessarily talk to one another. Per National Taxpayer Advocate:

Example: When a custodial parent wishes to amend her 2019 tax return to allow the non-custodial parent to claim a child as a dependent and to claim various credits, she can file an amended return electronically, but must mail the Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, along with Form 1040-X, Amended U.S. Individual Income Tax Return. The return-processing arm of the IRS does not have the capability to accept the Form 8332 electronically, so it must scan and upload the data from a paper form received. The delay resulting from mailing and processing of a paper Form 8332 could cause complications for the taxpayer or the non-custodial parent if the audit arm of the IRS acts on the amended return based on outdated return information of either parent.

To be fair, the IRS’s budget has decreased over the years while their job is not any simpler. Regardless, it’s very hard to fathom that one of the richest countries on Earth, if not the richest, and the birthplace of many tech companies cannot solve this issue. Everybody’s life will be dramatically improved if the IRS can overhaul its aging systems and make filing taxes easier. It seems far-fetched, but in the spirit of a new year, let’s just wish that would happen soon.

Royal Bank of Scotland (RBS)

Despite their pivotal roles in our societies, banks are notorious for tardiness in modernizing legacy internal systems. Such a failure to invest in IT infrastructure properly can result in serious business and financial consequences; one example of which is Royal Bank of Scotland (RBS).

In June 2012, a computer glitch wrecked RBS operations and exposed its systems’ weaknesses. About 12 million consumers had their accounts frozen and couldn’t complete transactions or withdraw cash from ATMs. Some said they couldn’t even see their account details. The meltdown cost the bank 56 million pounds in fine and another 175 million to compensate affected customers. It also put a regulatory spotlight on the bank and damaged the trust among customers.

At the time, RBS’ mainframes were using codes that dated back in the 1970s. The codes were so complicated that even insiders at RBS couldn’t understand. To make matters worse, the bank dismissed experienced employees that had the technical abilities to maintain the system and outsourced those jobs to low-paying staff in India. All in the name of cost savings. Guess what? The disaster in 2012 stemmed from one of those outsourced technicians making a major error on the job. Whether outsourcing was the root cause of RBS outages remains unclear, but perhaps given what was covered after the incident, an experienced operative would have helped avoid it.

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