How To Eliminate Organizational Debt

The debt that’s crippling your company isn’t on your balance sheet. Here’s what to do about it.

Debt has been around for thousands of years. You borrow money. The lender charges interest until you pay the money back. It’s simple. More recently, the software development community coined a term for another kind of debt: technical debt. Technical debt is the notion that taking shortcuts while writing code (or making repeated changes to code) has consequences later.

“Shipping first-time code is like going into debt. A little debt speeds development so long as it is paid back promptly with a rewrite … The danger occurs when the debt is not repaid. Every minute spent on not-quite-right code counts as interest on that debt. Entire engineering organizations can be brought to a stand-still under the debt load of an unconsolidated implementation…” ––Ward Cunningham

Financial and technical debt are now largely well-known concepts, and they play an enormously importantly role in organizations. But a third kind of debt exists — potentially more pernicious than either of its cousins — and anyone hoping to build a sustaining organization in the 21st century needs to understand it.

Last year, startup guru Steve Blank published, “Organizational Debt is like Technical Debt but worse.” In it, he introduced the concept of Organizational Debt. He defined it as “all the people/culture compromises made to ‘just get it done’ in the early stages of a startup.” The piece was shared thousands of times and sparked lots of conversation in the startup community. It seemed that the concept had struck a chord.

In spite of that success, the piece was too narrow in its focus. Organizational Debt is so much bigger than just a startup phenomenon. In fact, I believe the concept of Organizational Debt will turn out to be one of the most important concepts in the future of work. With that in mind, here’s an expanded definition to stir the pot.

Organizational Debt: The interest companies pay when their structure and policies stay fixed and/or accumulate as the world changes.

Let’s unpack that. As time passes, companies create roles, structures, rules, policies, and other norms that become fixed, and often, difficult to change. This is by design. For example, a company’s travel budget may balloon one year, only to be restricted by a travel policy the next — a well intentioned control designed to reduce expense. If that policy starts costing more than it’s saving (e.g. by reducing commercial success due to a lack of face time, frustrating top talent, etc.), it becomes an unacknowledged debt. The “interest” comes in the form of reduced speed, capacity, engagement, flexibility, and innovation that ultimately undermine the macro objectives of the firm: to survive, thrive, and achieve its purpose.

From our experience in coaching organizations toward more adaptive and self-organizing practices, we have noticed that Organizational Debt tends to manifest in two ways: through issues of obsolescence and accumulation.

Obsolescence-based debt occurs when structures or policies become unfit amidst new market conditions.

We live in a VUCA world now. Everything, both inside and outside the organization, is changing faster than the organization itself. As a result, our roles, structures, rules, and policies are becoming obsolete all the time. This lack of “fit” with the environment is the interest on the debt, building up over time. If you’re Kodak, and your capital allocation process aggressively favors film (or any incumbent technology), that’s debt. If you require customers to fax or mail you written instructions to make changes to their account in 2016, that’s debt. If you can’t give a reasonable customer the thing they want because “our policy says,” that’s debt. These policies may have had the best intentions, but circumstances have changed. The true cost of not having the requisite structure and governance for the context you’re operating in may be hard to quantify, but it is real, and it is growing all the time.

Accumulation-based debt occurs when structures or policies are repeatedly added but never removed.

Every time something goes wrong, or we figure something out, our instinct is to codify that knowledge and prevent future mistakes by instituting a new role, structure, rule, or policy. Unfortunately the creation of new ways to eliminate variance is all too common, but we very rarely eliminate them. And so a one-step process becomes a twenty-step process over the course of a decade. Or worse, ten different processes intersect over time. Ten different roles are required to make a decision. And the list goes on and on. This increase in complexity creates risk, and we create derivative roles and rules to manage that risk (they’re called PMOs). Because we change jobs with increasing frequency, no one knows why we do things the way we do. It’s the bureaucratic machine as Chesterton’s Fence. We should understand the origins and intent of our policies. And, if they no longer apply or create unintended consequences, they should be removed.

Organizational Debt is so pervasive and elusive that we can experience a kind of paralysis about it. It’s too big to address with a sweeping edict or a task force. And yet, if we accept that it’s created through obsolescence and accumulation, we can prevent or even reduce it (“refactor” it as an engineer would say). Here are three ways to take back your company:

1. Launch a bounty program.

In the world of software development, some companies offer a “bug bounty” — a small cash bonus — to anyone who can find an error in their code. One of our clients within GE recently launched a related program called Process Bounty. With Process Bounty, any employee that encounters a policy or process that is hindering their ability to deliver value to the customer can submit the policy/process (and a recommendation) to the program website. The Process Bounty team is then empowered to explore the intent of the policy/process through an advice process with relevant parties and then revise or eliminate it.

2. Practice continuous participatory governance.

You can offer your team(s) a regular mechanism for editing the organization itself. If individuals have the power to recommend changes to their own roles and rules, and teams have a process for vetting and shaping these proposals, something extraordinary happens: the firm gets smarter every day. The most popular flavor of this is the governance process from Holacracy, but there are many ways to do it, including some emerging software options.

3. Don’t rush to a policy and process for everything.

As we discussed, our natural instinct is to create a role and rule for everything, especially after something goes wrong. But the truth is that we can get away with a lot less structure if we hire smart people and let them figure things out. One incident is just that… one incident. Don’t overreact. Let the culture learn. Jason Fried at Basecamp wrote about this in a recent post — referring to knee-jerk policies as scar tissue. There may be an efficiency cost to keeping things open-ended, but in a rapidly changing world that’s often worth it.