Technical Debt Overview
What is Technical Debt?
Technical debt is a term used to describe the short-term decisions made during the development process that compromise the long-term stability, and scalability of software systems. Technical debt can also be a legacy system that is a part of a company’s technology stack which can be critical to the operation of the platform that is still in use. Technical debt is closely intertwined with legacy systems and is the result of significant system changes over time that stems from different technology stacks being patched together to meet changing requirements. The result is that companies end up with a tangled codebase that is difficult to update. However, developers can essentially “pay down” technical debt through proper maintenance and rewriting of their systems, preventing the accumulation of “debt” that leads to legacy systems.
What makes dealing with technical debt frustrating for companies is it cannot accurately be calculated using a single formula or metric because it encompasses various factors such as code quality, system complexity, documentation, and development practices. [1]
Technical debt matters significantly for technology companies because using outdated or unsupported technologies, or tools in a company’s technology stack can have far-reaching implications on their long-term business. For instance, if a company is using a legacy programming language that is no longer widely supported, it may be difficult to find developers with the necessary skills to update the system, which is a burden on the company. As a software evolves, outdated frameworks may become a barrier to implementing new features. Technical debt can also increases the risk of security breaches, data loss, and system outages, which can result in significant monetary loss, and reputational damage. [2]
Most importantly, technical debt can hinder a company's ability to innovate and adapt to changing market demands. As technology evolves and customer needs change, a company may need to pivot its product offerings or add new features to remain relevant. However, if the company's software system is burdened by technical debt, it may be difficult to implement these changes quickly and effectively, with the cost of updating and maintaining the system being too high.
Why is Technical Debt Important in M&A?
Technical debt is important to consider in mergers and acquisitions (M&A) as well. When a company is looking to acquire another company, it will conduct due diligence to assess the target company's financial health, operations, intellectual property, and other key factors. [3]
This makes the acquisition of a company with significant technical debt costly and risky for the acquirer. If the acquirer fails to identify and address technical debt during due diligence, it may face unexpected costs and delays after or during its acquisition. Moreover, if the technical debt is severe enough, it may require a complete overhaul of the target company's software system, which can be a lengthy and expensive process that lowers the seller’s valuation. On the other hand, if a company has effectively managed its technical debt, it can be an attractive acquisition target. A software system that is free from technical debt is easier to maintain, update, and scale. It can also adapt more quickly to changing market conditions and customer needs, making it more valuable to the acquirer.
In conclusion, technical debt is a critical consideration for technology companies, and matters in M&A. Companies that effectively manage their technical debt can maintain a competitive edge, reduce risks, and be more attractive acquisition targets. On the other hand, companies that neglect their technical debt may face significantly lower valuations if they do not have an accurate plan to track technical debt.
Written by Coleton Smith
Photo by Rostyslav Kondrat
References:
[1] McKinsey: Demystifying digital dark matter: A new standard to tame technical debt
[2] Why Understanding and Reducing Technical Debt Matters
[3] A CTO’s Perspective on Technology Debt in M&A