A hard-to-measure barrier to digital transformation

Just as having piles of financial debt can limit a person or business’s financial options, technical debt can also stifle digital growth. Now we have data to prove it.

That’s the word from McKinsey, who published research that shows everyone has some degree of technical debt, which is slowing digital progress across a number of industries.

Technical debt is the accumulation of relatively quick fixes to systems, or heavy but misguided investments, which can be long-term money sinks. The problem is that 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 it or measure it,” according to the study’s authors, a team led by Sven Blumberg and Björn Münstermann, both at McKinsey, points out. “Product delays, hidden risks, spiraling costs, and even frustrated engineers leaving are all common symptoms.”

Although difficult to pin down, the McKinsey team asked about 220 CIOs to do their best, with 30% estimating that “more than 20% of their technical budget ostensibly dedicated to new products is diverted to solving problems related to technological debt. They also calculate that tech debt is 20-40% of the value of all of their tech assets.

In the case of a large insurance company, “technology debt amounted to 15-60% of every dollar spent on IT, which had not been factored into business cases,” say the authors. co-authors. “A major North American bank learned that its more than 1,000 systems and applications together generated more than $2 billion in technology debt costs.”

It’s not getting any better either, with tech debt rising everywhere. The study suggests a “significant correlation” between technical leverage levels and business performance, according to the McKinsey team. In other words, the 20% of companies with the lowest levels of technical debt tend to have 20% higher revenue growth than those with the highest level of debt.

The correlation can go both ways, they add. “Improving your technology debt position helps 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 repay debt. technological debt.

High levels of technical debt, like high levels of credit card debt, feed on themselves – this “leads to a downward spiral of failed efforts to modernize IT, resulting in ever-increasing technology debt “, notes the McKinsey team. Companies with high debt are 40% more likely to have incomplete or canceled IT modernizations than their low-leverage counterparts. “This poor performance is the result of companies’ uncertainty about where to start or how to prioritize their tech debt efforts.” These companies “invest nearly half of their IT change spend (vs. maintenance spend) in applications they would rather retire.”

The McKinsey co-authors make the following recommendations for dealing with technical debt:

Measure the size and cost of technology debt. “Build transparency into the dark matter of technology debt by becoming as specific as possible in identifying its origin and quantifying its impact,” they advise.

Price technology debt across all IT departments and projects. “As a result, what business units pay for IT services will dynamically change over time based on the decisions they make about increasing or paying down technical debt.”

Adapt the remediation program. “For example, enterprises with large, legacy core systems wrapped in a slew of modern applications will need to prioritize application patching and re-architecting. Those with smooth front-end processes but highly manual back-end processes typically need to focus on automating their operational backbone from scratch.

Establish an operating model to systematically optimize technology debt. “That means providing the CEO and board with transparency on the true costs of technology 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 their teams to address technology debt.

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