Just as having piles of financial debt may limit a person’s or company’s financial options, so too can technical debt stifles digital growth. Now we have some data to prove it.
That’s the word from McKinsey, which released a study that shows that everyone has some degree of technical debt, which slows down digital progress across a number of industries.
Technical debt is the accumulation of relatively quick fixes to systems, or heavy-but-misguided investments, which may be money sinks in the long run. The trouble is technical debt is almost impossible to identify. “Technical debt is like dark matter: you know it exists, you can infer its impact, but you can’t see or measure it,” according to the study’s authors, a team led by Sven Blumberg and Björn Münstermann, both with McKinsey, points out. “Product delays, hidden risks, spiraling costs, and even engineers leaving in frustration are all common symptoms.”
While hard to pin down, the McKinsey team asked about 220 CIOs to take their best shot, with 30 percent estimating that “more than 20 percent of their technical budget ostensibly dedicated to new products is diverted to resolving issues related to tech debt.” They also calculate that tech debt amounts to 20 to 40 percent of the value of their entire technology estate.
In the case of one large insurance company, “tech debt amounted to 15 to 60 percent of every dollar spent on IT, which had not been accounted for in the business cases,” the co-authors relate. “One large North American bank learned that its more than 1,000 systems and applications together generated over $2 billion in tech-debt costs.”
It’s not getting any better, either, with tech debt on the rise everywhere. The study suggests a “significant correlation” between the technical debt levels and business performance, the McKinsey team finds. That is, that 20 percent of companies with the lowest levels of technical debt tend to have revenue growth that is 20 percent higher than those with the highest level of debt.
The correlation can go both ways, they add. “Improving your tech-debt position helps to direct technology resources toward initiatives that increase revenue. It may also be true that companies with stronger business performance are able and more willing to proactively pay down technology debt.”
High levels of technical debt, like high levels of credit card debt, feeds upon itself — it “leads to a downward spiral of failed efforts to modernize IT, resulting in ever more tech debt,” the McKinsey team notes. High-debt companies are 40 percent more likely to have incomplete or canceled IT modernizations than their low-debt counterparts. “This poor performance is a result of companies’ uncertainty about where to start or how to prioritize their tech-debt efforts.” These companies “sink almost half of their IT change spend (versus spending on maintenance) into applications that they would just as soon retire.”
The McKinsey co-authors make the following recommendations for addressing technical debt:
Measure the size and cost of tech debt. “Develop transparency into the dark matter of tech debt by getting as granular as possible to identify where it originates and quantify its impact,” they advise.
Price tech debt into all IT services and projects. “As a result, what business units pay for IT services will dynamically change over time based on the decisions they make around growing or paying down technical debt.”
Tailor the remediation program. “Companies with large and old core systems wrapped in a multitude of modern applications, for example, will need to prioritize application remediation and redesign their architecture. Those with slick front-end but highly manual back-end processes typically need to focus on automating their operational backbone from scratch.”
Establish an operating model to systematically optimize tech debt. “This means providing the CEO and board with transparency into the true costs of tech debt and how it affects IT investments. The CFO and CIO can then agree on trade-off priorities, which the CIO can use to develop strategies with his or her teams to address tech debt.”