Technical debt in business is the cost a business will incur when delaying technology upgrades and advancements within the company. From applications to infrastructure, all delays have risk, and costs associated with them. These costs could be fairly minor, or absolutely devastating. Executives need to understand the deal they are making, before they decide how much debt to take on.
The general misconception about technical debt, is that it is a one-to-one ratio of the cost implementation now vs. the same cost of implementation later. So if the investment was $10,000 today, it will cost the same one or two years from now. If I stay a couple versions back on this application, or hold off on the infrastructure upgrades, or spread out my equipment replacement lifecycle for another year or two, then I will save me money in the long run because I can essentially “skip” some upgrades.
But it’s usually not that simple. Every short-term decision has long term implications. With regards to technology, some of these can be very easy to measure, like productivity, efficiency, and quality, while others can be a little more difficult, like employee and customer confidence, employee engagement, and corporate culture. Every decision to hold off on investing in necessary technology for the business, will come at a price that could far exceed the cost of the technology itself in the long run.
Categories of Technical Debt
It’s easier to think of technical debt in one of two buckets, business debt and infrastructure debt. The business debt includes all of the strategic investments that help create efficiencies, increase productivity, enhance products or services, increase quality, reduce waste, gain insights into the business, and anything else that you can measure and establish an ROI (Return on Investment).
Infrastructure debt is related to the updates necessary to support the general operations of the business. General communications and networking infrastructure, workstations, tablets, Internet connectivity, server and cloud hosting solutions, storage, data security, etc. Items that are required, but don’t directly relate to an calculable ROI.
** IDC provides a good explanation of how some business decisions for managing the fast pace of technology changes can lead to dangerous outcomes and technical debt. Summary provided by ITWORLDCANADA.com
This debt usually only exists in the companies that do not have the systems or KPI’s in place to measure items like efficiency, productivity, quality, etc., or the ones that have the measurement tools, but are unaware of the technology that can help them advance each area. Once a company starts measuring and associating value to things like productivity, quality, waste, etc. they tend to start researching new tools and updates and allocating the investment dollars to implement.
Calculating business debt is very easy, it is the same calculation for the ROI of that investment. If you make a 60K investment for a new software tool, and you’ve calculated a return on investment of 12 months based on the increase in productivity. Then it is the same as saying the technical debt accumulated for not moving forward is roughly 5K per month. This is because there is a tangible dollar savings by making the investment, and by delaying you are paying more per month to do the same workload. So, in other words, if you hold off with the investment for one year, the total cost you are paying is 120K, (60K in lost productivity, and 60K for the initial investment).
Infrastructure debt is much more common in business. Mostly because it is harder to identify and calculate. To simplify let’s first better define what we mean by infrastructure debt. First of all, any infrastructure changes that are necessary for a business-related upgrade, meaning anything that is being completed to enhance business systems for a measurable return, would not be considered technical debt. Technical debt is specifically the general system updates implemented to maintain the systems, and create a more stable, more enjoyable technology platform for the business. Items like better Wi-Fi, faster internet speeds, maintenance updates, replacement workstations, HR systems, IT related resources, and even non-technical support related systems must be considered. These are items that are necessary, but historically the investment has not been evaluated using an ROI.
So, the common view here that if it doesn’t have an ROI, why make the investment? In that case it would help to think of Infrastructure debt in a different way. Basically, think of these upgrades as any system improvements that can have an impact on employee and customer confidence, happiness and engagement. The updates that help to shape what your employees and your customers think about your business ,and how easily you can manages that culture and view.
What impact does this technology have on your employees? Does it create a better working environment that supports highly engaged people, or does it create tension and somewhat disengaged team members? Is this technology helping to create confidence in the infrastructure and the leadership team, or hurting it? How does it play a role in the culture of the company? Are employees proud of the technology and energized by it, or are they constantly complaining about the systems? The fact is, accumulating too much infrastructure debt can affect the happiness and culture of your employees, it can hurt engagement, confidence, and even spread outward to negatively affect your customers. Think about it, if you are an employee expected to perform at a high level, but are not given the tools to do so, what is eventually going to happen? Today’s employees need the right tools to consistently perform. They want mobility, flexibility, education, feedback, recognition. All items which become a part of the technology foundation of a company. If systems are not offered or maintained, it can impact your people, customers, your new hires, overall productivity and profitability, and cause long term personnel problems. The impact will surface in employee engagement, employee productivity, employee separation rates, and ultimately create culture issues that can easily spread outward.
Luckily, technical debt does in fact have a ROI. But you have to create new baselines for employee productivity, engagement, separation rates, etc. You need to track where you are starting from, and use those numbers to drive system changes going forward. Measure your KPI’s over time based on specific investments in the infrastructure of the business. Some investments will have an overall impact, and some may not, but the point is to focus your energy on the items you know will impact confidence, happiness, and engagement. And measure the value those changes have had over time. When done correctly, infrastructure changes can have a significant return.
For example, let’s look at company of 100 people that has a separation rate of 35% annually. They are currently paying to hire, onboard and train 35 people per year. If they brought that number down to 25% by properly investing in HR systems, general infrastructure functionality, proper training, and up-to-date tools, they save cost of hiring, onboarding and training roughly 10 people per year annually. With an average cost of hiring around 4K (and average time of 52 days), that could be a 48K return every year based on the investment. So even spending 100K on changes has a very quick (24 month) ROI. Or looking at it from a technical debt perspective, you could be paying an additional 4K per month currently that you ultimately can avoid.
Impact of Technical Debt
When should you accumulate Technical Debt
Sometime adding technical debt may be deliberate and strategic. In the past, companies would accumulate this debt by holding off on upgrades and system enhancements prior to a merger or acquisition. They would focus on bottom line revenue for a year or two preceding the sale, and take advantage of higher valuations. Today this is much riskier as technical competency and maturity are becoming a more popular component of a business valuation. Investors have specialists to identify tactics like this and ways to measure the long term technical debt that has been incurred.
Another reason for assuming technical debt is to shorten time to market for a new product or service. This can be well worth it in the long run if time to market is critical for your business. But even with this approach there should be a calculation made to determine if getting to market sooner financially outweighs the debt accumulated.
There is no escape, but you do have control
Every company in every industry accumulates and has to pay back technical debt. There is no escaping this reality as technology is a core necessity of business. The challenge of course is how to make the correct decision around paying for it now or paying for it later. Thoroughly understanding what that debt will cost you in the long run is the first step to making the decision. But, ultimately; when you have insight, you have control.