healthcarereimagined

April 25, 2023 | Article

By Aamer Baig, Sven Blumberg, Arun Gundurao, and Basel Kayyali

Develop data-driven insights to build a strategy for paying down the tech debt that stands in the way of business modernization.

A large B2B business faced an agonizing quandary: its leadership team was considering dozens of modernization initiatives that could bring a $2 billion margin expansion opportunity. But 70 percent of them depended on technology that would cost a staggering $400 million—much higher than expected. The reason for such a high price tag? Its tech stack had become massively complex after years of building quick workarounds and one-off solutions to favor speed over good design for the long term.

This reality forced the company to ratchet back its investment to about $300 million and walk away from 25 percent of the potential margin expansion. Cutting back on these tech initiatives had a compounding effect, though, because the unaddressed issues would continue to fester and undermine future projects. That became painfully clear two and a half years later when the team was able to complete only half of the planned work because of ongoing technical issues.

This example is all too typical across businesses today. As much as 71 percent of the impact from business transformations depends on technology, according to our research (Exhibit 1). This is particularly concerning given that so many companies need to modernize if they are to remain competitive.

While many companies understand the importance of technology in meeting their strategic goals, the silent killer of technology modernization efforts—technical debt—often stands in their way. Technical debt is basically the “tax” a company pays on any development to redress existing technology issues, and it accounts for about 40 percent of IT balance sheets, according to our research. Companies pay an additional 10 to 20 percent to address tech debt on top of the costs of any project.¹ Some 30 percent of CIOs we surveyed believe that more than 20 percent of their technical budget ostensibly dedicated to new products is diverted to resolving issues related to tech debt.

As such, the benefits of paying down technical debt can be game changing. They include: freeing up engineers to spend as much as 50 percent more of their time working on value-generating products and services; reducing costs by cutting back on time needed to manage complexities; and improving uptime and resiliency. Cutting back tech debt is the key to becoming tech forward: a company where technology is an engine for continual growth and productivity.

So how can organizations begin paying down their technical debt? It starts with insights—knowing which aspects of technical debt are most tied to value offers a path into a more strategic approach to resolving technical debt.

A closer look: Technical debt’s vicious cycle

Technical debt is the result of a range of practices. These can include making temporary fixes that inevitably become permanent, not updating solutions that become outdated, favoring fast technology delivery over long-term benefits, or implementing one-off solutions to meet business priorities. Many of these decisions make sense at the time and are necessary. But complexity builds, and future projects become more difficult. This vicious downward cycle translates into an enormous cost for the business in the form of lost opportunities and wasted resources (Exhibit 2).

These layers of tech debt create a huge drag on any business transformation effort—it’s like trying to run while pulling an increasingly heavy anchor behind you. CIOs estimate that tech debt amounts to 20 to 40 percent of the value of their entire technology estate (before depreciation), according to our research.²Companies in the bottom 20th percentile in terms of tech debt severity are 40 percent more likely to have incomplete or canceled IT modernizations than those in the top 20 percent.

Escaping this vicious cycle is not easy. Knowing where and how to start is a serious challenge. A poorly sequenced approach can easily result in time and money spent without much change to the tech debt profile. The business side of the house may be overwhelmed by the task and want to delegate the problem to IT, but both sides will need to work together to identify solutions that allow the organization to compete and build value.

Article link: https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/breaking-technical-debts-vicious-cycle-to-modernize-your-business?