On December 22nd, 2022, a winter storm struck across half the country and downed thousands of flights during the busiest travel week of the year. But while most airlines were able to quickly get their planes off the ground and their passengers off to their destinations once the storm passed, Southwest Airlines planes sat idly on the tarmac. They had the planes, the personnel, and good flying conditions. But they also had an incredibly antiquated software system holding everything together, and that system had failed.
Southwest Airlines had fallen victim not to a sudden, catastrophic error but to years and years of unmanaged technology debt that was suddenly called in at a crucial moment. And they aren’t the only ones who have left themselves in that vulnerable position. As firms grow, change, modernize, and merge, they often leave their technological foundations to slowly age and rot. And even before unmaintained technology fully gives out, the manual fixes and layers of digital bandaids required to fill its growing holes is a huge drain on company time and money.
In this article, we’re going to look at what tech debt is, and the best ways to manage it based on my 20+ years of experience working with financial services firms to optimize their tech usage.
What is Tech Debt?
All enterprise wealth management firms (and all legacy firms) have tech debt of some kind. Tech debt is old technological systems that either don’t run as well as they should anymore, or are completely defunct.
Like any kind of debt, there is a principal and an interest. In this case, the principal is all the work that would need to be done to bring your entire tech stack up to date. The interest is the “complexity tax” that the firm pays day to day by dealing with small pain points and gaps through various workarounds that often involve manual processes. The overall technical deficit compounded by increasing friction in daily tasks makes up a firm’s tech debt and can create a lot of drag on a firm’s efficiency and resources over time.
As firms grow over time, are acquired, or merge with other companies, their tech debt will naturally accrue as they build on top of their old systems.
That being said, fully eliminating tech debt isn’t a reasonable goal for firms, and tech debt is not bad– it’s a natural part of running a growing firm with advancing tech resources. It makes sense to focus your efforts on certain aspects of your tech stack while letting others fade to the background for a little while. All technical decisions should support business decisions, not the other way around. This means that there will always be a certain amount of tech debt in a healthy company. However, it is still essential that the debt is kept in check, that the choices to leave older systems and holes is intentional, and that nothing ever goes untended so long that it is at risk of breaking entirely.
Unfortunately, most firms aren’t allocating enough resources to managing their tech debt to be able to keep up with it. In a McKinsey survey from 2020, CIOs estimated that tech debt amounted to 20-40% of their technology estate before depreciation, but that only 10-20% of the technology budget was diverted to solving the debt-related issues.
So why don’t enterprise firms regularly update their old software or invest more money in maintaining their legacy systems? Because there isn’t much incentive to– until everything breaks, that is. Companies want to keep moving forwards and growing as fast as they can. That means new software, new systems, new hires. Focusing on fixing old systems takes away the time that could be spent on new ones, slowing down growth for few visible returns.
Where Are The Lemons Coming From?
Shouldn’t the firms care about maintaining their software systems in the long run? Not if the people in charge don’t intend to keep the business for very long. Though mergers and acquisitions have slowed globally in response to the economic recession, they have continued to increase in the financial services sector– up to 368 in 2022.
More and more private equity firms have been entering the market, buying up RIAs and broker dealers, packaging them together, flipping them, and then selling them. When a private equity firm buys a company, they’re much less worried about maintaining it than they are about growing it so they can turn a profit when it comes time to sell. That also means they don’t bother to consolidate the platforms of all the firms they’ve acquired and merged together, often leaving all the separate systems running but unintegrated or even completely unused.
When private equity firms buy RIAs and broker dealers, they want to be able to flip them in five to seven years. They’re looking for fast, short-term growth and have no interest in investing in long-term maintenance projects. Instead, they leave the digital holes for the next person who buys the business.
Reducing Tech Debt
As firms grow and their systems age, many keep everything running through a web of manual processes to solve for all the holes. While this is cheaper and easier in the short term, manual solutions to digital problems become very messy very quickly. Employees soon end up spending increasing amounts of time (and therefore money) on applying digital band-aids to technical issues.
Developers have been shown to spend over 30% of their time managing tech debt, and maintenance of legacy systems is the number one cause for productivity loss according to Stripe. Data takes longer and requires more effort to clean before it’s usable and reports take more time and work to put together, and advisors spend more time in front of their computers and less time in front of their clients.
A common solution by firms to the pile of manual processes is to hire more people to manage them. But with the cost of labor skyrocketing post-Covid and employee turnover increasing as well, bringing in more new people is not a tenable long-term solution. Compensation costs for employees increased around 5% in 2022, and employee turnover came to just under 11%.
Financial services is an industry built around client-advisor relationships, and having employees who have been around a long time and know your system and your customers is essential. Throwing more people at the problem will not improve your customer service, it will most likely only make it worse while adding to your increasing cost of managing aging technology.
And that’s the cost firms face while everything is still seemingly working– not to mention the effects when the outdated software inevitably fails. It’s not a matter of if the systems will end up eventually crashing but a matter of how and when– and what damage will be done when they inevitably do. Perhaps it will be the reporting software or in the compensation software or in the software that allows customers to interact with your systems. It will most definitely result in confusion, delay, and financial loss.
Balancing the Books
Well-managed tech debt isn’t a one-size-fits-all solution. Where your firm is situated along the path of its growth and development is the biggest factor in determining how you should approach its old tech solutions. Reforge breaks firm growth into four periods: traction, inflection, scale, and expansion.
At different points in a firm’s life cycle, they will be focusing their efforts on different issues and be acquiring and then settling different types of tech debt. For instance, as a firm starts to scale they may be able to resolve some of the tech debt on the developer side but may gain debt relating to their security systems as their product changes and new issues and vulnerabilities are exposed.
What’s most important is that even if one tech category is left behind for a period, it is managed again with regularity so that nothing is ever left untouched for too long.
In my experience as a fintech consultant, firms tend to be looking for the next new, exciting, tech offering to make them more efficient. And while there are many great new products hitting the market every day, often the biggest difference can be made by updating the technology they already have so it can properly support the rest of the system rather than slowing it down.
If you want to move forwards in a way that’s healthy and sustainable, my best advice is to slow down and take the time to make sure your entire tech stack is moving forwards as a unit and that nothing is left too far behind. By investing in what you already have, you can set yourself up for much faster growth in the future and prevent any Southwest-style tech crashes.
This article was co-authored by Leda Csanka, the owner and principal consultant at Strategic Tech Consulting.