Assessing the cost of enterprise technical debt

November 23, 2023

The burden of aging technology is heavy - and much of it stems from legacy ERP systems

by Konrad Rogers, Chief Information & Operating Officer at Nextworld

Question: Do you know how much technical debt your company has on its IT balance sheet?

Answer: Not likely.

Technical debt, a measure of a company’s burden that stems from aging and inflexible computer systems, can be just as much of a liability as financial debt. And yet it never shows up on quarterly reports.

More’s the pity, especially when we extend this exercise and think of the compounding interest on technical debt as the money spent maintaining existing systems plus the effort expended to compensate for their inefficiencies plus the opportunities lost because an enterprise is unable to keep pace with more nimble competitors.

The principal, of course, is the financial outlay necessary to modernize technical infrastructure so it runs efficiently, needs little remedial maintenance, and allows for easy innovation.

If, after this very short course, it sounds like your company has a high technical debt load, you are far from alone. In one McKinsey survey, 87% of global CIOs said the complexity of their existing systems prevents them from investing in the next generation of services.

Of course, to those who have spent careers in large enterprises it may seem that IT can only be a game of whack-a-mole. In this view, companies are forever doomed to choose between accepting obsolescence or engaging in large reengineering projects that are as likely as not to implode under their own weight. Either way, there’s no avoiding technical debt.

But if the frustration is real, the resignation need not be inevitable.

I’ve worked in enterprise software for nearly three decades, and I see a technology revolution today that is different from past platform shifts—from mainframes to client-server to software as a service. The best cloud software today is designed with a humility that accepts that no single solution can do everything. Rather, it’s built to work with multiple programs while keeping a single up-to-date version of critical data. Equally important, it empowers rather than inhibits innovation by business units.

For enterprises, the best way to incorporate this powerful new architecture is to start with a clear-eyed assessment of an organization’s technical debt. What’s causing it? What’s the annual cost? Is it growing or shrinking? And what will it take to substantially reduce it?

In the rest of this article, I’ll explain how your organization can begin to answer these questions. My aim is to give you the information you need not only to make sure your short-term actions don’t increase technical debt but also to prioritize initiatives that will pay much of it off.

I know from years of experience that many companies will come out of this assessment concluding that most of their technical debt can be traced to one system: their enterprise resource planning (ERP) software. And I can imagine everyone who reads this thinking, Yes! For many years, ERP has caused pain and expense in enterprises worldwide. That’s why so many companies supplement their ERP systems with other applications instead of tearing them out and replacing them. Bolt-on solutions are the obvious stopgap in the face of large outlays and the need to move at the speed of technology. But if you stay with me to the end of this analysis, you may well see how you can turn the ERP system from your company’s biggest source of technical debt into a tool that can retire most of it.

The causes of technical debt

There is no escaping technical debt. The day you turn on a system for the first time it is one day closer to obsolescence. Over time, the ecosystem of engineers and tools that can exploit that technology will thin.

Meanwhile, business happens. A rush to get something to market, a need to respond to a C-suite directive, or any of a host of other daily issues sidetrack any thought of strategic IT investment. In those moments, it simply seems smarter to pick the fastest solution, not the one that preserves long-term resilience. Thus is more technical debt added to the books.

As core systems become more convoluted, maintenance consumes an ever-greater share of IT resources, and it becomes more difficult to develop new products and capabilities. Desperate to compete with more nimble rivals, business-unit leaders invest in shadow IT initiatives, surreptitiously deploying technology—often cloud-based services—outside of the central technology organization.

These shadow IT investments, no matter how well intentioned, exponentially increase the complexity of the overall organization’s technological infrastructure, fragmenting its data, and making future upgrades even more expensive. Technical debt spirals upwards.

ERP as a catalyst for technical debt

At many large organizations, nothing has contributed more to the accumulation of technical debt than the ERP systems. Pioneered in the 1990s by companies like SAP and Oracle, ERP promised a unified view of everything that mattered in a company—people, inventory, procurement, revenue (the “enterprise resources” part)—so that its leaders could make smarter decisions (the “planning” part).

Very often ERP delivered the promised benefits of centralized data, but at quite a cost: installation was expensive, time-consuming, and painful. How could it be otherwise for systems that touched nearly every function in a company and used relatively inflexible technology—mainframe, client-server, or software as a service, depending on the generation.

Today, many companies find that the technology meant to be the center of their operations and the custodian of their most important data is in fact the least flexible and reliable component of their IT infrastructure. These flaws, in turn, ripple through every other system in the enterprise and encourage the deployment of marginally compatible bolt-on services by the central IT organization and individual business units acting on their own.

Measuring the annual cost of technical debt

Okay, enough of the theory. Let’s look at how to assess the annual cost of maintaining the legacy systems at your company—in other words, the interest on your technical debt. It’s not as clear-cut, unfortunately, as tallying the debt service on your bank loans and bonds. But if we go over your company’s overall IT spending we can get to a number that is in the ballpark. More important, this is a method that you can apply consistently to manage and reduce your technical debt over time.

Start by getting your CIO and CFO together to go through technology spending throughout the enterprise, whether by the central IT organization or the separate business units. Add up everything that isn’t the cost of building new capabilities—that is, the cost of keeping the machines on. This number will never be zero, but it shouldn’t be so high as to crowd out progress.

Relevant expenditures include resources devoted to:

• Operating and maintaining the existing functionality of your current systems.
• New development projects meant to replace unreliable components or restore lost functionality.
• User support and bug fixes of existing systems.
• Software maintenance contracts and routine upgrades.
• Systems to move data between other systems, including integration platforms, enterprise service buses, and ETL (extract, transform, load) tools.

Calculate the sum of these costs as a percentage of your company’s overall IT spending. Don’t be surprised at how high the figure is.

Whether it’s too high depends on your company and industry. A standard goal should be to spend less than half your technology budget only on doing the same thing today that you did yesterday. To be fair, it’s a goal that most big companies can’t meet, at least according to a global survey of CIOs by Deloitte. The average company spends 56% of its enterprise technology budget on maintaining existing business operations.

The most technically sophisticated companies, those that Deloitte categorizes as “digital vanguards,” spend just 47% of their budgets on existing operations. These leaders have set ambitious targets to redirect spending to innovation: on average, their goal for maintenance spending is 33% of their IT budgets.

Is technical debt spiraling out of control?

Once you’ve tallied your company’s current spending in service of its technical debt, assess whether the situation is getting better or worse. Your historical financial statements and budgeting process can give one view of this.

Here are other indicators that should raise concerns about your rising technical debt level:

• A backlog of project requests from business units. This is an open invitation for operating departments to go rogue with shadow IT efforts and all the technical debt they create.
• Contractors and consultants are being hired to fix or maintain existing systems. Of course, you sometimes need to bring in additional help on a major project, particularly if you are deploying new technology. Still, if you are regularly calling in reinforcements to put out fires, you’ve got too many fires.
• A rise in support cases about core functionality that is impaired. Examples include complaints that data is missing or out of date, or that existing features have stopped working.
• The IT department has decided not to upgrade software the company continues to use. This is a strong signal that the company’s systems are a house of cards–one more small change and everything could collapse.
• The company has multiple contracts for the same software or several applications with duplicate functions. These suggest the central IT department is so dragged down by technical debt that business units are breaking loose.

If several of these red flags hit close to home, well, here too you’ve got company. In a survey by McKinsey, three out of five CIOs said their company’s technical debt had increased over the past three years.

How to get out of technical debt

So far, we’ve tallied the annual spending needed to keep your systems running, the interest on the technical debt. (To be clear, this is a conservative estimate; it doesn’t include revenue lost to rivals with more modern technology.)

Now for the big question: What will it take for your company to pay off the principal of your technical debt so you can devote most of your resources to innovation?

Global CIOs are as gloomy here as they’ve been in the other surveys we’ve quoted. They tell McKinsey that their total technical debt is between 20% and 40% of the total value of their “technology estate” before depreciation. Translation: much more money than anyone wants to spend.

I’m a lot more optimistic than this chorus of CIOs. I can’t give you a formula to calculate a price tag—that is dependent on your company’s specific situation and aspirations—but I can tell you that the cost has come down substantially and is probably lower than you think.

The reason for this, as I mentioned earlier, is the disruptive nature of the latest generation of technology, much of which is designed to mitigate the major causes of technical debt. Cloud services reduce the pain of upgrades. APIs enable data to be validated and exchanged in real-time. Strictly no-code tools enable business units to develop and customize their own applications that don’t require refactoring when the next release from the software vendor comes around.

Most importantly, well-designed, modern cloud software understands it’s not going to be the solution for everything. Accordingly, it’s built to integrate seamlessly with other applications.

So as you make tactical decisions about maintaining and expanding your systems, use the yardsticks we’ve identified to look for solutions that incrementally mitigate rather than exacerbate your technical debt. In most cases, choosing cloud solutions designed for integration will help increase speed, data accuracy, sustainability, and flexibility.

How Enterprise Applications Platforms wipe out technical debt

Incremental change, however, likely will not be enough. Resist the temptation to wave the banner of digital transformation while bolting fancy applications to a back end that can’t support them. You’re buying a showy McMansion on swampland with a ton of technical debt that you may not be able to repay.

By contrast, the most powerful way to reduce technical debt is
to address the worst culprit: your aging ERP system. Of course, the phrase “new ERP system” is more frightening to most IT veterans than “amateur heart surgeon.” We get it. That's why we usually don't recommend companies completely change out their ERP.

At Nextworld, we believe that digital transformation doesn't have to start with a rip-and-replace project. Continue to let ERP run the core, unchanging processes because debits and credits will always be just that. An Enterprise Applications Platform can augment the functionality that would otherwise result in ERP customization or 3rd-party bolt-on solutions. EAPs are best for capturing those unique parts of your business that you could never quite automate or find the right solution for by allowing users to build applications, integrate with your entire application landscape, and extend the prebuilt applications that come with it.

Not only will your technical debt fall sharply, it will stay low, freeing up the resources to innovate and use technology to drive your business forward.

Nextworld is a composable, comprehensive, and wholly custom platform that features a suite of prebuilt, robust business applications and plenty of room for you to decide what’s next. Our architecture helps organizations better align with today's business realities by making rapid, sustainable change. We are eager to share our insights into the sources of technical debt and the best strategies for your company to reduce it.