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Financial Implications of Technical Debt | VanillaSys Blog
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ago 2018

Financial Implications of Technical Debt

Financial Implications of Technical Debt

What is Technical Debt?

Is the incremental cost and loss of agility to a company as a result of prior decisions that were made to save time or money when implementing new systems or maintaining existing ones.

An example would be when you have to develop in a language / framework which a developer is not 100% familiarized there will be an invest from both sides (Company & Developer).

Why Does Technical Debt Occur?

Is a time constraint that leads to a compromise being taken. This can often be forgotten.

The temptation to save costs also can result in a tech debt situation. This is often related to forgoing software updates or over-extending hardware replacement cycles.

What if you had no idea how much debt you had? It would be an uncomfortable position to be in, to not know how much it was costing or to what degree it was preventing your company from making operational improvements, reacting to market changes, or even transforming the business completely.

Moreover, what if just about anyone in your organization could incur debt without seeking permission? For example, your head of real estate could quickly enter into a multi-year lease with a low year-one rent but with significantly escalating rents in the out-years—without anyone disclosing it other than conversationally.

This all sounds like imprudent governance, but it’s actually quite common in businesses. The catch is that this kind of “debt” does not come in the form of the traditional financial instruments that we all know so well.

Technical debt has all of these characteristics.

Debt in its simplest form is borrowing today with the intent and promise to repay in the future. Debt makes sense when today’s borrowing will lead to a better tomorrow, e.g., borrowing for college or buying a house. Debt is generally bad when borrowing today will lead to a worse tomorrow, e.g., going out for an expensive dinner and putting it on a credit card that you won’t immediately pay off.

In corporate terms, debt can be good when it is incurred to fund investments that will provide a greater return than the cost of the debt. It may also make sense if you plan on selling the business long before the debt is due. The downside of debt is that it has a very real expense that drags cash and profits, restricts flexibility, and can become so burdensome that it could ultimately lead to bankruptcy.

Up to now, the metaphor that we are alluding to is about financial debt, yet another form of debt—technical debt (or “tech debt”)—has many similar characteristics and must be measured, managed, and entered into in a deliberate fashion. If it allows your company to get to the market ahead of the competition, it very likely is worth it. Similarly, taking on tech debt to mitigate a potentially serious security vulnerability is probably worth it too.

However, technical debt has its downsides, leading to inefficiency and inertia—such as when one department doesn’t want to use another’s software, or if you delay an upgrade several times to hit short-term financial targets.


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