The real cost of tech debt
Identifying your technical debt and calculating its costs can help your treasury run more efficiently.
Business operations come with hidden costs, and treasury is no exception. The additional future costs and loss of flexibility that a company incurs resulting from a suboptimal system architecture previously implemented as a means to save time or money is known as treasury technical debt, or tech debt. Identifying and measuring these costs can help treasurers drive their strategy and optimize treasury operations.
Sources of tech debt
Tech debt doesn’t accumulate overnight. It’s important to avoid its most common causes, which include:
In the past, businesses implemented technology systems on a standalone basis because the process was faster and solved specific tasks. Finance decisionmakers typically didn’t have a full line of sight into the “why” and “how” of tech decisions, which often led to unforeseen impacts.
The resulting problems: Legacy systems can’t always automate processes or work with other systems.
Inefficient solutions: Companies can choose to manage these outdated systems, spend resources to repair obsolete hardware, manually create processes as temporary solutions or invest in another system. However, these fixes require constant upkeep and investment.
Urgent purchases or systems inherited in acquisitions
Different lines of business may have lobbied for one or more tech systems to address an urgent need without considering a long-term solution. Similarly, two companies involved in a merger or acquisition may each keep their own systems and processes for collections, payments and reconciliation functions.
The resulting problems: Business units may not communicate with each other to uncover personnel and system redundancies.
Inefficient solutions: Companies may struggle to keep their existing redundant systems functional. They may also spend money programming customizations or building integrations to get these systems to talk to each other instead of automating processes and constructing a scalable solution.
What to do about tech debt
1. Raise your tech debt consciousness
Understanding how much tech debt you have is critical to addressing it. Start by evaluating your current cash management processes. Focus on identifying gaps and opportunities.
This may involve meeting with different departments involved in the flow of funds (e.g., treasury, accounts payable and accounts receivable). These discussions can help you evaluate your current systems and find possible alternatives; you’ll also learn more about the capabilities of your associates, vendors and integrators. Consultants can help you identify strengths and weaknesses of available technology. You may also want to seek outside help with business process reviews and a treasury optimization strategy.
2. Look at hard and soft costs
Examine tech debt’s hard and soft costs to your business.
Begin by adding up the time employees spend addressing inefficiencies that result from manual steps, duplication and remediation. Then, reach out to tangential stakeholders, such as accounting or business partners, who may also be affected.
Obtain an estimate of costs directly from your information technology team—not just costs of systems, but also how much time IT spends on connectivity initiatives with the company and its banks. The hours employees spend remediating outages, patching and adding customizations can amount to a full-time job.
3. Prioritize changes
As you prioritize your efforts to reduce tech debt, make sure the project plan includes change management. The plan should also account for potential budget overruns or long implementation timelines that could have a major impact. Executive alignment is also critical, so it’s important to have a clear vision of the jobs and functions that will change and how the changes align with business goals.
4. Measure results
When tracking outcomes, it’s important to measure the business function you’re transforming, not necessarily the project or your investment. What key performance indicators can best measure the effectiveness of the function? Fully eliminating tech debt is not the goal—it may not even be feasible. However, it’s essential that you have a full understanding of your sources of tech debt and introduce measures to mitigate the debt and establish an acceptable level of added investment.
“Ask yourself which is more costly: today’s investments or tomorrow’s tech debt?”
The status quo’s total cost
Technology investments and upgrades may be expensive, but so is carrying technical debt. If you’re delaying new technology and scalability options, postponing a major upgrade or integration investments, or giving other initiatives priority, ask yourself which is more costly: today’s investments or tomorrow’s tech debt?
J.P. Morgan’s Corporate Treasury Consulting team can help your organization with a process review and treasury roadmap. Fill out the form below to learn how to get started.