Technology leaders are challenged to adapt to the current economic environment – rising inflation and potential economic slowdown. New IT strategies must consider possible limitations on IT spending combined with an increasing risk from cyberthreats and vulnerabilities. IT leaders need to provide more value to the business with smaller budgets that can no longer be spent on “repaying” the technical debt.
Technical debt (or technology obsolescence) in IT infrastructure arises from neglecting the upgrades of technology devices like computers, servers, and applications, leading to outdated systems known as legacy infrastructure. Ignoring unresolved technical debt contributes to its accumulation, posing not only security risks but can be a major cause of financial burden for companies. Unlike financial debt, it is not tangible – therefore many companies struggle to estimate the magnitude of impact caused by technical debt and hence don’t budget correctly for it. To optimise financial performance, it is important to understand all the components of technical debt, budget for the financial impact associated and recognise the severity if left unattended.
This article explores the costs companies can incur, as a result of technical debt accumulating, plus maps out our 4 stage approach to dealing with Technical Debt.
“In the US alone, technical debt was estimated to reach ~$1.52 trillion in 2022”
Why is this figure so high?
A McKinsey survey of CIOs found that 20% of budgets for new products is spent on remediation of technical debt, while the total technical debt value can be up to 40% of the technology estate.
Costs incurred as a result of building technical debt
Technical debt often leads to higher costs for businesses as legacy technology’s maintenance becomes more expensive as it reaches end-of-support. Companies with high level of technical debt must purchase extended support for such applications/infrastructure, which is more expensive and does not provide the same level of coverage. Such technology is even more expensive to scale, which can be required as the business grows.
While such risks can be mitigated by monitoring the company’s technology estate, part of such expenses is unavoidable as sometimes technology is purchased close to its end-of-support date but must be amortised (and used) beyond that – according to its useful life. That is why it is crucial to actively manage the entire technology estate and identify its most concerning segments.
Companies face unplanned work due to technical debt, which leads to untapped capacity. On average organisations waste 23-42% of development time due to technical debt (link). As it accumulates, extensive remediation and rebuilding is required, significantly impacting business operations. Consequently, hiring more full-time employees becomes necessary, also resulting in additional coordination costs for the business.
Outages and bugs refer to the higher risks associated with technical debt and can have a direct commercial effect – especially within the financial sector. Not only is there the possibility of significant delays should legacy technology upholding critical business activities fail, but the financial loss of that incident can be compounded when considering the costs needed to remediate such incidents.
Companies with abnormal level of technical debt expose themselves to a higher risk of security threats as legacy technologies often stop receiving security patches – this often results to compliance penalties and further reputational damage, affecting everyone from customers to shareholders and corporate management. Security breaches are often targeted by cybercriminals – according to Check Point’s report organisations faced on average 1,168 threats per week in 2022.
Like financial debt, technical debt accrues “interest” – that is why it is prudent to address it as early as possible rather than cumulate it and be forced to launch a large-scale transformation programme when it is impossible to sustain the IT environment anymore. Such programmes necessitate more resources and are associated with outages, degraded service levels and other business disruptions.
The total estimate of technical debt must consider indirect costs, including customer churn, degraded customer experience, employee churn, longer time-to-market, reduced ability to innovate, amongst others. When combined, the real technical debt impact on the business skyrockets.
Wavestone’s Approach to Managing Technical Debt
With many years of experience in this field, Wavestone has developed a strategic framework for technical debt management that brings expertise and accelerators to help our clients across each stage of their tech debt journey. The journey is segmented into 4 key stages:
- Strategic alignment: Setting the tone for the tech debt strategy, considering internal and external drivers, and conducting an operational process assessment
- Discovery: Conducting due diligence and building an accurate view of the application and infrastructure estate to lay the foundation for analysis.
- Analysis and prioritisation: Developing MI tooling to analyse risks and drive awareness, strategic management decisions and data integrity initiatives.
- Remediation: Planning and delivery of remediation activities such as portfolio rationalisation, migration, or decommissioning.
Wavestone utilises a bespoke application risk scoring methodology considering obsolescence, stability, and vulnerability. This informs prioritization of remediation efforts based on strategic view in accordance with the client's risk tolerance and wider IT Risk Impact Framework. This involves developing a dynamic and automated dashboard that provides multiple perspectives of the technology estate across departments and forecasts the technical debt profile for several years. The improved reporting capability allows the team to track and provide regular updates on technical debt, flagging upcoming issues in advance.
Final Piece of Advice
Jacob Hill
Senior Consultant
Although difficult to measure, technical debt is a business problem which can have significant financial costs depending on its extent and severity. Technical debt can result in higher maintenance costs, untapped capacity, outages, penalties, degraded customer experience, customer churn, and damage to brand reputation
The cost of mitigating technical debt can be high but ignoring it can lead to even greater costs over time as much like financial debt it accrues “interest”. That is why companies that track their level of technical debt and address it as early as possible are investing in their long-term success.
Wavestone’s framework analyses infrastructure and applications to offer valuable risk and transformation budget insights. Wavestone empowers clients to manage technical debt with a success-proven methodology and offers a value-driven approach to technology management, proven by numerous success stories across different industries.
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