Organisational Debt - or what is needed to modernise organisations?

In Switzerland, we are currently questioning a bit our national identity. You might have heard that a certain Swiss corporate beacon got absorbed by its main competitor.

I once was a customer of this company and, back then, even thought about working for said company. When I got my first degree, I would have been a candidate to go down the banking or insurance road.

Sure, it would have been interesting, but at the same time, I would have also made intense contact with the concept of organisational debt.

Banking is fascinating because legacy business models are melting like ice cream in the sun, and organisations have difficulty adapting. The whole industry is currently suffering from organisational debt.

But what exactly is organisational debt?

The term organisational debt comes from technical debt, which is a well-known concept in the context of software development. Technical debt is created when you need to take a shortcut to make something work. Then, later, you will have to pay to clean the mess up.

The transition from technical debt to organisational debt is attributed to Steve Blank. He established the concept in the context of startups. In startups, you usually can't afford the perfect solution from the start. The positive angle of this is that it forces you to choose the most effective solution.

Multiple authors have already followed up and broadened the topic. So do I.

I believe that organisational debt constantly accumulates in most organisations over time. So keeping organisational debt low is essential to enable an organisation to modernise and respond to the need for change.

Where does it accumulate?

We've established that organisational debt is a useful concept. But where in the organisation does it accumulate?

In the beginning, an organisation is like a small child. Open-minded, learning quickly, outspoken, but also "chaotic".

Over time, organisations mature, processes get established and formalisation increases. For the most part, this is a good thing.

But there are also less optimal traits that emerge.

These days, these less optimal traits are often discussed and well-identified. However, more has to be done to lessen them.

Why we aren't further on this journey is almost a philosophical question. And the answer is eclectic. But this is a topic for a different series.

We need to name a few prime examples of organisational debt drivers to understand where it accumulates: Bad product design practices, encouraged hedging, extensive bureaucracy, legacy technology, overengineered processes, poor risk management, slow communication, tolerated silos, unsustainable financing and weak compliance.

These are all elements which are slowing the organisation down and reducing transparency. And if you keep our Swiss case study in mind - some signs were there. E.g., multiple reported incidents where the organisation operated in a non-compliant state resulted in penalties and important stakeholders losing trust.

It is easier to comment in the aftermath and from an outside view.

However, the signs were there, and critical stakeholders did not fully understand the severity of the incidents, or the organisation couldn't adapt.

Or both.

So the organisation accumulated too much debt, making it so heavy-footed that it could no longer change course.

Why should you care?

Why wouldn't you? Organisational debt accumulates in all types of organisations. Also, public institutions or NPOs are not immune to organisational debt. You could still say that you don't care, but you, as a citizen, are also concerned.

On a small scale, the organisation you own or pays your salary may go out of business because of organisational debt. Nonaction is no solution if you are part of an organisation you care about. Also, if you alone won't save the day, but as a team, you can succeed.

On a large scale, the economy you are part of may take over an additional financial burden or an implicit economic risk, as in our case here in Switzerland.

On a vast scale, it may destabilise complex systems, as it might have in our case study. The organisational debt of a single organisation can go as far as triggering complex chain reactions. Luckily this doesn't happen too often. And a big part of it is psychological - some aspects of how our global economy works are rather odd.

So we've established that you should care. But how can you find out if you are off track?

How can you measure it?

Were you ever part of an organisation and felt things started turning sour? Getting to this state is normal. It is even good that things start feeling off. But what you do with these insights is the big question.

The worst situation is when things are off, and nobody cares. If an organisation has reached the "beyond-care threshold", things will get worse quickly. If an organisation has reached this state, measuring anything will be challenging because most metrics will be fake. Luckily, this doesn't happen too often.

More realistic is that you are in some sort of twilight. But how can you gain vital insights?

Thanks to tools like static code analysis, it is easier to track technical debt.

It is far less deterministic and trickier on the human side.

Here are a few key vectors and linked criteria:

• Ask your employees -> focus on internal culture.

• Ask your customers -> focus on interactions with your organisation.

• Monitor your products/services -> focus on how you compare to your direct competitors.

• Consult your financial numbers -> focus on how you compare to your direct competitors.

• Where it applies: Consult your governance body/regulator -> focus on compliance.

Based on these criteria, you can develop indicators to track how your organisational debt evolves.

To recall our case study: One can only assume there would have been clear signals.

How can you manage it?

First, you must accept that your organisation will build up organisational debt over time. Therefore, it is wise to be actively on the lookout. Because, as so often, the riskiest form is hidden debt.

Transparency is a good starting point in the internal cultural context. Information should flow freely. Good quality information enables you to identify, categorise and reduce organisational debt before it grows to something threatening and unmanageable.

In the customer context, it is likely frequency. Steady contact with your customers lets you identify weaknesses in your products/services portfolio, providing organisational debt "indicators".

For example, a customer tells you that you are suddenly falling behind a direct competitor or points out disruptive innovations which may challenge your value proposition.

In the context of financial numbers, it is probably long-term viability. You should want to establish a stable profit band slightly above the industry standard.

Do you have the financial stability to ensure the organisation can consistently execute its strategy? Do you have allocated funding for innovation/rejuvenation efforts? Are your predictions close to reality?

To summarise and go full circle: Organisational debt is a holistic concept, and it is more than technical debt and also different from bureaucracy.

Organisational debt is a networked concept that fosters the blame-free identification of cross-functional and cross-department weak points.

If we recall our initial case study, they probably should have been able to identify and track increasing organisational debt over the last ten years.