Legal Business Analysis

In software development, technical debt is a term used to describe “required but incomplete changes” to the software or documentation. These small unfinished changes accumulate over time, just as a debt does, and if they are not eventually tackled they can lead to huge costs for even minor changes, or even outright paralysis.

There are corresponding ‘interest payments’ in the regular necessary maintenance required to keep the system working. If the underlying ‘debt’ is not ‘paid’, then this interest increases until the burden is intolerable and the system collapses.

As in the real world, a certain amount of debt can be carried, and in fact may be desirable (the permanent beta movement take the view that things are never finished, which could be interpreted as leaving things un-done), but technical debt is generally seen as a bad thing.

So what is Strategic Debt?

This is not about corporate finance strategic debt, which are techniques to balance different types of funding for businesses.

The definition here is parallel to technical debt described above, where:

Strategic Debt is the opportunity cost of mal-investment in non-strategic initiatives. It is the cost of not focusing on your strategy.

When might focusing on your strategy be bad?

You might not want to focus on your strategy if one or more of the following applies:

1) you have a bad strategy

2) you have multiple conflicting strategies

3) you have tactical or operational difficulties which threaten your existence

Note that there is no option saying ‘you have no strategy’. Every organisation has a strategy, even if it is ‘to have no explicit strategy’, and if you think you have no strategy then you probably fall into groups (1) or (2) above. To have no formal strategy is often a bad strategy because it allows multiple competing strategies to exist.

Three ways to focus on your strategy

Assuming you have a strategy, and that it is worth following, here are three ways of minimising strategic debt.

1) Make a single list of all the investments of time and money that your firm is making

This first step is fundamental. If you don’t know what is going on, you can never truly shape and focus the agenda. This list has to therefore include all significant work going on around the firm, including departmental pet projects and under-the-radar infrastructure upgrades.

Sponsors and department managers should not be too worried that their projects appear on the list – essential infrastructure and department projects that benefit the firm can and should continue. However, if people seem inclined to ‘hide’ their project, ask yourself why – are they acknowledging that it really isn’t that valuable?

2) Have a group score your projects

To assess your list of work, you need a diverse group who understand your strategy.

This does not necessarily mean the most senior managers, and the group does not need to contain senior decision makers, for the simple reason that it will make a report, not decisions.

This lack of decision-making power helps smooth disagreement, as any ‘sides’ can accept that the recommendation they disagree with can be overruled.

Scoring should be against the following criteria ( in descending order of importance):

– A) Does it explicitly further the strategy? A top score indicates that the investment is clearly and unambiguously a step down the strategic path. A zero score shows that it is not clearly supporting the strategy. A negative score indicates that it counters the strategy, or supports an alternative strategy.
– B) Does it address a non strategic, but otherwise essential, need? The most common is a regulatory requirement, or a security investment.
– C) Is it an operations activity, repairing or replacing an existing asset? This is most often thought of as meaning physical technology, but could also include other information or department assets such as HR policies or libraries of know-how.
The group should come to a consensus of the scores, and package the results for the decision makers to review.

3) Decision makers: review, shape, focus investments

Present the list of investments of time and money to a group of decision makers, and help them prioritise the list so the most valuable strategic projects get the lion’s share of resources.

This meeting will possibly be a bit of an eye-opener for some attendees first time around – and if it doesn’t raise at least a few questions, then you might not have the full true picture (people may have hidden projects from the list).

The most important time to have this meeting is the next time, when the group can start to see more of their decisions reflected in the balance of work going on. Every time the meeting is repeated – every month or two, for example – the programme should be more noticeably more strategic and focussed.

The basics of programme management

The three building blocks above are recognisably the basics of programme governance, and once the right sort of information is being routinely captured, more sophisticated management can begin.

Be prepared to face considerable push-back as decisions are questioned and favourite projects cancelled, and remember that the benefits of this approach grow with time and repetition. However, sticking with this simple, 3-step approach will start to reduce your strategic debt and improve return on investment.

Please also share your ideas, improvements, or experiences with me at @legalba.