Tech debt: Reclaiming

tech equity
Almost every business has some degree of tech debt; the trick is
knowing how to identify, value, and manage it.

by Vishal Dalal, Krish Krishnakanthan, Björn Münstermann, and Rob Patenge

© Getty Images

October 2020
 As the world becomes more digital, technology And disjointed data architectures prevent
is increasingly becoming a core driver of value for businesses from making full use of advanced
business. But as companies modernize their IT, a analytics to improve their decision making.
hidden peril is emerging that could undermine their
efforts: tech debt. This refers to the off-balance- In a recent McKinsey survey,¹ CIOs reported
sheet accumulation of all the technology work a that 10 to 20 percent of the technology budget
company needs to do in the future. dedicated to new products is diverted to resolving
issues related to tech debt. More troubling
Poor management of tech debt hamstrings still, CIOs estimated that tech debt amounts
companies’ ability to compete. The complications to 20 to 40 percent of the value of their entire
created by old and outdated systems can make technology estate before depreciation. For larger
integrating new products and capabilities organizations, this translates into hundreds of
prohibitively costly. Challenges hidden in the millions of dollars of unpaid debt. And things are
architecture can spring surprises that make projects not improving: 60 percent of the CIOs we surveyed
run over budget and miss deadlines. Much of IT felt their organization’s tech debt had risen
employees’ time is spent managing complexity perceptibly over the past three years (Exhibit 1).
rather than thinking innovatively about the future.

1
McKinsey carried out a survey of organizations’ tech debt in July 2020. We surveyed 50 CIOs of financial-services and technology companies
with revenues in excess of $1 billion.

Exhibit 1
CIOsbelieve
CIOs believe tech
tech debt
debt is increasing—but
is increasing—but generally
generally allocateallocate
less thanless than 20
20 percent of their
percent of their tech budget to paying it down.
tech budget to paying it down.

CIO estimates of spend on tech debt

Perceived change in tech debt over past 3 years Share of tech budget allocated to paying down
% of respondents (n = 45) tech debt
Share of IT
budget % of respondents

0–5% 22

6–10% 35
60
11–20% 35

25 21–25% 5
Vast majority of respondents
15 use less than a fifth of
26–50% 3 their annual budget to address
Decreased Stayed Increased tech debt
the same 51–75%

Source: McKinsey survey of tech debt among 50 CIOs, July 2020

2 Tech debt: Reclaiming tech equity

 As with financial debt, a degree of tech debt is includes deferred maintenance or upgrades
an unavoidable cost of doing business, and it below the app layer, modifications to comply
needs to be managed appropriately to ensure an with data standards, and bespoke packaged
organization’s long-term viability. That could include software (that is, customizations that take
“paying down” debt through carefully targeted, software beyond the point where the original
high-impact interventions, such as modernizing vendor can easily provide ongoing support).
systems to align with target architecture, simplifying
application interfaces, and retiring redundant apps — The interest is the complexity tax that every
and databases. Some companies find that actively project pays today. It derives from the need to
managing their tech debt frees up engineers to work through fragile point-to-point or batch data
spend up to 50 percent more of their time on work integrations, harmonize nonstandard data, and
that supports business goals. The CIO of a leading create workarounds to confront risk and meet
cloud provider told us, “By reinventing our debt business needs. These frictional losses inhibit
management, we went from 75 percent of engineer companies’ long-term velocity and productivity
time paying the [tech debt] ‘tax’ to 25 percent. It and harm current budgets and returns on
allowed us to be who we are today.” investment.

Note that the goal is not to reach zero tech Together, principal and interest create a strong drag
debt. That would involve devoting all resources on enterprise value (Exhibit 2).
to remediation rather than building points of
competitive differentiation. It would also make it A company that spends more than half of its IT
difficult to expedite IT development when strategic project budget on integrations and fixing legacy
or risk considerations require it. Rather, companies systems is likely to be caught in a tech-debt spiral
should work to size, value, and control their tech in which it is paying interest only. Conversely, a
debt and regularly communicate it to the business. company that operates on a modern IT stack and
has little or no tech debt is able to direct almost all
its technology investment to new offerings. Most
What is tech debt? companies sit somewhere between these two
A good way to get a grasp of tech debt is to think of extremes.
it as having the same two components as financial
debt:
What drives tech debt?
— The principal is all the work that must be done Simply by being in business, an organization
to modernize the entire technology stack. This accrues some level of tech debt; it will always have

“By reinventing our debt management, we

went from 75 percent of engineer time
paying the [tech debt] ‘tax’ to 25 percent.
It allowed us to be who we are today.”
—Former CIO, major cloud provider

Tech debt: Reclaiming tech equity 3

 Exhibit 2
Tech-debt principal
Tech-debt principal accounts
accounts fortoup40topercent
for up 40 percent of IT balance
of IT balance sheets,
sheets, while while
most
most companies pay more than 10 percent interest
companies pay more than 10 percent interest on projects. on projects.

CIO estimates of spend on technology debt

Principal: Relative share of debt and equity on tech Interest: Estimated share of new-project spend allocated
balance sheets to resolving tech debt

% of respondents

0–5% 7

Tech-debt
20–40% 6–10% 24
principal

11–20% 40
Tech assets
(total value
100% Tech equity 21–25% 16
of all tech
investments) (net contri-
bution of all 69% of respondents are
60–80% 26–50% 11
technology to using more than 10%
enterprise of new-project spend
value) 51–75% 2 to resolve tech debt

Source: McKinsey survey of tech debt among 50 CIOs, July 2020

technology of different ages from different sources — Underprovisioned tech integration during
serving different purposes. But tech debt can M&A, leading to undue complexity, orphaned
also be driven by certain actions or omissions that systems, fragmented data sets, and
leaders can take steps to avoid once they become inordinate risk
aware of them. Here are some red flags to watch out
for: — Excessive complexity in products (with a
high proportion of bespoke products that
Strategy could be simplified), processes (with little
— A failure to clarify the overall business strategy, or no standardization between regions or
define the capabilities needed at the enterprise businesses performing similar tasks), or
level, or link the road map to these capabilities applications (with multiple apps serving the
same purpose)
— Poor alignment between IT and strategy, with
limited means to measure the impact of IT Architecture
initiatives on strategic imperatives — Legacy issues that continue to generate cost
for the business
— A mismatch between funding and strategy, with
resource allocation out of sync with portfolio — A failure to update hosting environments for
management and no agreement on how to applications, infrastructure platforms, and
estimate total cost of ownership back-end databases and servers

4 Tech debt: Reclaiming tech equity

— Inflexible software with custom-developed or becoming excessively high. For the best results,
heavily customized packages; monolithic blocks however, they also need a clear process for reducing
of code with poor interfaces that limit reusability the tech debt they already have.
and embedded business rules that are difficult
to modify; and insufficient infrastructure to cope
with usage peaks without slowing down How do you tackle tech debt?
The best organizations manage tech debt through
— Insufficient use of standard systems-integration a strategic process similar to the one they use in
approaches, resulting in a proliferation of point- managing their financial capital structure. They
to-point integration across applications follow seven principles:

— A failure to agree on a consistent data model, 1. Start with a shared definition of tech debt.
leading to poor data quality, rising costs, Business and IT leaders need to agree on what
inconsistencies in data access, and an inability constitutes tech debt. One organization defined
to enrich data with external sources it as the negative impact of technology on the
business, particularly as manifested in rising
Talent operational and technology costs, slower time to
— Internal and external skill-availability gaps market, and reduced flexibility.
that bottleneck organizational capacity, delay
delivery of products to users, and pose a 2. Treat tech debt as a business issue, not a
resource risk technology problem. The ownership of tech debt
for an app or system should be traced down to
— A failure to align incentives, with tech debt the profit and loss (P&L) it serves. Dashboards
routinely overlooked in decision making, teams tracking this debt enable leaders to reflect the
focused on short-term feature delivery, and “interest” costs for their business in their P&L
team capacity rarely allocated to reducing statements. To reinforce shared responsibility
tech debt for outcomes, efforts to tackle the debt must
be clearly linked to strategic priorities, such as
Process simplification and risk reduction.
— Poor prioritization of project backlogs, with little
use of task-planning tools and no clear link to 3. Create transparency to value the debt position.
business value Tech debt, like cost to serve, must be understood
at the level of individual applications and
— Weak management of development and journeys and valued according to objective
maintenance processes, with infrequent criteria. Each app must be clearly linked to
measurement of code quality, deployment 100 percent of the resources it consumes—
unduly reliant on developer input, and time- infrastructure, people, and so on—and to the
consuming manual testing business purposes it serves. Some organizations
triage their applications, classifying them as
— Unstable IT operations, with minimal “buy” (to invest in and grow), “hold” (to leave
instrumentation, significant blind spots, weak alone), or “sell” (to wind down).
disaster recovery, and multiple add-ons that
deviate from a system’s original intent, lack 4. Formalize the decision-making process.
proper documentation, and conflict with one Following a portfolio approach based on a clear,
another mutually agreed-upon set of rules and principles
allows IT and the business to work together,
Awareness of these red flags helps organizations align on decision making, and address any
prevent their future tech-debt burden from conflicts of interest that might otherwise lead to

Tech debt: Reclaiming tech equity 5

 inertia. Adjusting incentives in P&Ls and within matter of weeks, with implementation following
platform-aligned product teams helps reinforce almost immediately. Measurements of tech debt
the new process. will need to be built into financial models, tools,
and databases across the business.
5. Dedicate resources to tackling tech debt. Once
organizations have reached a unified view of
their tech-debt position and what their strategic Two companies, two approaches
goals are, they need to allocate funding, The best way to understand and manage tech
mobilize people, and send a clear message from debt depends on an organization’s starting
the top that addressing debt accumulation is a point, context, and targeted management model.
priority for the business. Some companies set Two examples illustrate some of the options
up a central board of architects to resolve tech- companies can pursue.
debt issues related to specific developments.
Agile organizations often dedicate a “spare pair” A global financial-services company was
in a ten-strong team to fixing any production experiencing frequent IT outages, sometimes
issues stemming from the team’s code or affecting the entire business, and decided
working through the tech-debt backlog when to address tech debt across all its assets.
there are no immediate issues to tackle. Parts of the organization relied heavily on
legacy systems whose depreciated running
6. Avoid a big-bang approach to writing down costs had been judged more attractive than
all debt. Tackling tech debt via infrequent IT the economics of modernization programs.
megaprojects poses high execution risk and Overall, the firm’s IT costs were better than the
often hinders the business’s ability to compete market average, but underinvestment and high
while a project is under way. Instead, companies operational and maintenance spending pointed
should earmark a portion of their IT budget for to an unhealthy cost structure. Moreover, its
paying down debt consistently, predictably, federated governance processes for managing IT
and over a strategic time horizon. This prevents investments made resolving issues challenging.
debt buildup, particularly during periods of
rapid change when multiple business priorities The firm decided on a four-part approach to
compete for attention. tackling its tech debt. First, it developed a
method of quantifying complexity that enabled
7. Determine which areas are “bankrupt” and it to identify where tech debt would arise.
explore shifting them to a greenfield stack. Connecting this capability to its overall financial
When a division’s tech debt exceeds 50 and performance-management systems created
percent of its tech asset value, the risk and transparency into the true costs of ownership
cost of existing systems start to outweigh across the organization. To ensure tech debt was
their benefits. Building a greenfield stack has factored into business decisions, the company
downstream consequences—such as the need then reworked its formal governance processes
to create new linkages to group data platforms and practices by, for example, adjusting ongoing
and customer-facing web portals—that make maintenance costs to reflect the “interest” on
it a last resort, but it can’t always be avoided. tech debt. Finally, to monitor the effectiveness of
Some organizations in this position look for the new approach, it tracked proxies of tech debt,
an “IT platform in a box” solution. Others such as IT stability.
break down marathon projects into smaller
components to quickly release tangible value Having an accurate view of the value and cost
back into the business. of technology investments in each business unit
has had a transformative effect on the firm. Some
By observing these seven principles, a company business units were identified as having up to 58
can design a process for tackling tech debt in a percent additional hidden cost in their IT total

6 Tech debt: Reclaiming tech equity

cost of ownership. With the rollout of a new global and change-management programs to facilitate
platform to unify IT governance, the transition the adoption of IT offerings. Each intervention
from legacy to new platforms is accelerating. The was prioritized by mapping implementation costs
economics of IT assets are now fully reconciled against value in reducing tech debt. Meanwhile,
with the architectural reality on an ongoing basis. performance management was reengineered to
ensure squads and teams were accountable for
Another organization, a US insurance company, delivery and operations.
saw digital as critical to reaching its next growth
horizon. However, a series of recent M&A deals Thanks to these efforts, the company was able to
had left it with redundant IT systems, overly develop and agree on an acceptable baseline for
complex processes, and outdated platforms, tech debt across the business. New dashboards
creating significant tech debt. To assess the introduced to track debt levels in individual user
impact on the business, leaders decided to focus journeys and capabilities have enabled leaders
on the areas that created the most value—in to monitor progress in paying down the debt and
this case, user journeys and the systems and unlocking value.
capabilities that supported them.

After estimating the tech debt for each main

journey, the company set a debt threshold and The long road of digitization has brought companies
identified journeys that exceeded it. These fantastic new technologies and capabilities, but
became the target of immediate efforts to “pay at a cost. Mountains of tech debt have left some
down” the debt. businesses struggling to bring innovations to market
at speed and within budget. The good news is that
Armed with insights from this process, the tech debt can be measured and managed. With the
company designed IT and business interventions right approach, organizations can regain control
to improve capabilities. These ranged from and refocus their technology resources on creating
rationalizing applications and raising standards value for customers and the business.
for software development to introducing training

Vishal Dalal is a partner in McKinsey’s Sydney office, where Rob Patenge is a consultant; Krish Krishnakanthan is a senior
partner in the Stamford office; and Björn Münstermann is a senior partner in the Munich office.

The authors wish to thank Dave Kerr, Jens Lansing, and Jorge Machado for their contributions to this article.

Copyright © 2020 McKinsey & Company. All rights reserved.

Tech debt: Reclaiming tech equity 7