Debt refers to the state of owing something, usually money, to another party in the future. Technical debt is when you “borrow” from your company’s FUTURE PRODUCTIVITY by not making the proper investments TODAY. The justification is usually based on not having the actual financial capacity to invest in your business technology. This leads to a downward spiral in productivity, that impacts profits, and further increases your technical debt.
Like all debts, technical debt will come “due” at some point. The due date usually comes in the form of a business crippling event, loss of competitive advantage, or general decline in productivity. None of these outcomes is positive, and all are avoidable with proper planning. The first step is to categorize the technical investment buckets and to then allocate a percentage of your technology budget to each one.
Run the Business
The technology investments here are the cost of ongoing operations and should be part of your annual operating budget. Hardware lifecycle, user software subscriptions, and outsourcing is included here. It must be 100% funded and not deferred. Many businesses make cuts here when finances get tight, but this is the worst area to cut.
The downstream affects from not making the proper investments here are hard to notice, until it’s too late. There is no such thing as cutting these expenses, only DEFERRING them and building more and more TECHNICAL DEBT. It will come due, and likely with poor timing. Ever wonder why the struggling business also seems to have really outdated technology?
Improve the Business
Standing still with your business capabilities is not a recipe for long term success. Competitive advantage comes from performing BETTER THAN your competition, not just matching them. Technical investment has proven to be a key area to focus when looking to increase your competitive advantage.
If you are properly investing in the Run the Business area, this should be generating enough profit for you to now focus on investing in the improve the business bucket. It is tempting to forgo this investment and take the profits instead. Our suggestion is to allocate at least 15% of your overall technology budget to this area.
Change the Business
Technology transformation fundamentally changes how a business operates, or launches new products or services. This area is the most exciting to work in, BUT it will not pay off if you are not properly funding the first two buckets. The good news is that by investing in the first two areas, there will be MORE profit available to allocate here. This is a VIRTUOUS CYCLE that we want to create.
Your success rate here should be 80%+. Meaning 20% of the time your investment may not pay off, and that’s okay. The idea is that once you have paid all your technical debt off you will have the “free cash flow” to make investments in this area without impacting your business in a negative way.
We would suggest that you allocate 75% to Run, 15% to Improve, and 10% to Change. We will explore the relationship between your revenue, profits, and overall technology budget in another post.