How To Avoid Technical Bankruptcy? 10 Practical Tips

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Last updated on
November 21, 2023

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Avoid technical bankruptcy - Early warning signals

Early warning signals o technical bankruptcy

TABLE OF CONTENTS

How To Avoid Technical Bankruptcy? 10 Practical Tips

When tech debt becomes a problem

Tech debt, to some level, is something pretty normal in an organization – the day-to-day operation sometimes requires compromises. The problem begins when the consequences of shortcuts and poor decisions build-up, maintenance and repair of a flawed system brings more losses than benefits and eventually becomes non-functional. If you are reading this article, your technology debt is probably out of control and you are getting dangerously close to tech bankruptcy. This is a serious matter and can look like a dead end. But we can help you find a way out.

From this guide, you will learn

  • Differences between tech debt and tech bankruptcy.
  • Causes deepening tech debt.
  • Early warning signs of tech bankruptcy.
  • Examples of companies that have failed through technological negligence.
  • Tips to avoid tech bankruptcy.
  • Basics of tech debt repayment strategy.

<span class="colorbox1" fs-test-element="box1"><p>The cost of technical debt management in large companies can reach up to 25% of the whole development time. </p><p>43% of executives said tech debt led to limited ability to innovate. </p><p>41% of project managers experienced difficulty meeting service level agreements due to tech debt. </p></span>

Tech debt vs. tech bankruptcy

Technical debt and technical bankruptcy are related concepts in software development. Both result from a lack of a long-term development strategy, taking shortcuts or making suboptimal decisions. However, technical debt is, to some level, a natural and manageable situation, resulting from business dynamics. It's a progressive process that is harmless at first, but if neglected can lead to serious consequences, difficulties in maintaining the system, high costs and eventually tech bankruptcy. Technology debt resembles that of finance in this regard. 

How to know which stage your company is in? Tech debt is an unfavorable situation, but the organization remains functional and can carry out projects, even if they require more resources. Tech bankruptcy is the point at which an organization becomes paralyzed by a faulty system and is unable to carry out its business operations.

Technical Debt

Definition: Technical debt refers to the accumulated cost of poor tech-related decisions, such as using quick-and-dirty code, not following best practices, skipping documentation, or delaying necessary system upgrades.

Nature: Tech debt can be intentional or unintentional. It often arises from the need to meet tight deadlines, resource shortage, or simply a lack of understanding about the long-term consequences of a particular approach.

Impact: Deepening technical debt can slow down development, increase maintenance costs, and make it challenging to introduce new features or fix bugs. Over time, if not addressed, it can lead to system instability and tech bankruptcy.

Technical Bankruptcy

Definition: Technical bankruptcy refers to a situation where a software project or system has accumulated so much technical debt that it becomes impossible or highly impractical to continue development or maintenance in its current state.

Nature: It typically results from severe and prolonged neglect of best development practices, resulting in a system riddled with issues, errors, and inefficiencies. In this situation, system development and scaling become impossible, as bug fixing and maintenance consume most of the company's resources.

Impact: When a project reaches technical bankruptcy, it may require a significant and costly overhaul or a complete rewrite to make it viable again. This can result in substantial downtime, team turnover, and potential business disruptions.

Tech debt vs technical bankruptcy

Technical debt out of control – how did it happen?

Technology debt is so tricky because its first symptoms are easy to overlook. One redundant project, incomplete documentation, the need for a quick profit – after all, it happens in every company from time to time. The problem begins when rash decisions become standard and their consequences spiral out of control. Technological debt begins to resemble dominoes, and pieces tumbling straight into technical bankruptcy. What factors lead to such a situation?

Short-Term Focus

A short-term approach to organizational development leads to less caution and the "here-and-now" mindset. Unfortunately, immediate reward and neglect of preventive measures lead to serious consequences. A long-term development strategy and implementation of good practices may not seem so attractive initially but will pay off with growth and stability in the future.

Lack of tech knowledge update

Many companies prioritize new business opportunities, sales and rapid growth over the development of internal structures and knowledge. Such thinking is understandable – another customer means an increase in profits, while the investment in training the team, at first, mainly involves costs. As a result, the organization begins to resemble a lavish palace on a fragile foundation. 

According to ATD's research, companies with comprehensive training programs have a 24% higher profit margin and 218% higher income per employee than companies with less focus on internal development. Competency and knowledge update is therefore the basis for staying in the market and meeting ambitions of growth. 

Rewarding speed, not innovation

In the business world, time is money, as a deadline is one of the most important factors determining the price of development. With this approach, speed of execution = efficiency. And efficiency is rewarded. However, such a philosophy has its dark side, as it leaves the team no time to find the best solutions, improve quality and optimize. 

Prioritizing speed over quality is then a simple way to higher costs and increased technology debt over time. According to the CISG 2022 update report, the cost of poor software quality in the US has grown to at least $2.41 trillion. Innovation and accuracy take time, but it is an investment that will pay off and reduce costs in the future. 

“New” is more important than “good”

It is known that the new is sexy. The marketing of products, services or brands teaches us this when the word "new" shines before us like a jewel. This effect also translates into the work culture. A company is much more likely to praise developers who implemented a new application or functionality than those who fixed an old bug. Even if the latter's task was much more important and useful. With such an approach, it is no wonder that specialists are not involved in system optimization and prefer to build new solutions on flawed foundations.

Legacy systems

Upgrading legacy systems is a bit like renovating your bathroom. You may be annoyed by the old tiles and leaky shower, but until the ceiling starts to collapse on your head, there will always be better ways to spend your money. Legacy systems outdate slowly, and the team consistently gets used to inconvenience. As long as the application works (even if poorly) no one pays attention to it. In this way, it's easy to neglect necessary upgrades and cross the tipping point of technical bankruptcy. This has particularly serious consequences for key structures on which the work of many others depends. As an internal Microsoft study shows, while problematic files only make up 2-8% of the total system, they are responsible for 60-90% of defects within the organization.

<span class="colorbox1" fs-test-element="box1"><p>Time for modernization? Take a walk through the legacy system modernization strategy, step by step.</p></span>

Developers Deprived of Ownership and Agency

Despite the digital transformation of the market, many companies still separate business from technology. Engineers and developers are responsible for the project execution, but they are deprived of agency and ownership. The most important decisions in the company are made by business management, which often lacks expertise in modern digital solutions and the possible consequences of technical bankruptcy. This absence of communication and symmetry in decision-making processes often leads to stunted internal development of the company and, at a critical stage, to disruption of the company. 

Early Warning Signs of Technical Bankruptcy (with real-world examples)

Technical Bankruptcy is not a situation that happens overnight. It is usually the result of long-term negligence, ignoring good practices and ad-hoc decisions. Responding early to warning signs can save you from significant financial losses and failure. Do you think we're overreacting? Take a look at the following stories of large and successful companies hit by the consequences of tech debt.

Frequent System Outages or Errors

Definition: Recurrent disruptions or malfunctions in the system, leading to reduced reliability, performance and user satisfaction.

Example: The New York Stock Exchange (NYSE) experienced a significant technical glitch in 2015, leading to a four-hour trading halt. This outage impacted trading across various markets and caused substantial financial losses.

Slow Development Cycles

Definition: It indicates extended periods required to develop and release software updates or new features.

Example: MySpace, once a leading social networking platform, had slow development cycles and couldn't keep up with the pace of innovation set by Facebook. This sluggishness contributed to its decline and eventual obsolescence.

Lack of Automated Testing

Definition: Lack of Automated Testing leads to the need to commit more resources to routine testing and increases the risk of overlooking errors. 

Example: Knight Capital Group, was the largest trader in the U.S. In 2012, the company lost $440 million in 45 minutes due to a software glitch resulting from a lack of automated testing. 

Aging Technology Stack

Definition: It means using outdated or obsolete technologies and software components that are less effective and harder to maintain than modern solutions.

Example: Internet Explorer became a symbol of an aging technology stack. Organizations continued to use it even after its security and performance issues were well-known, leading to compatibility problems and security vulnerabilities.

Inconsistent Code Quality

Definition: This signifies variations in the quality of code, leading to inconsistency and complexity of the system and maintenance challenges.

Example: The codebase of the healthcare.gov website, launched in 2013, had issues with inconsistent code quality, making it difficult to maintain and leading to a rocky initial launch with widespread technical problems.

High Team Turnover

Definition: It indicates a high rate of employee departures, due to dissatisfaction with the project or difficulties within the company structures.

Example: The development team at Zynga, a once-prominent mobile game developer, experienced high turnover due to the pressure to produce hit games and the challenges of working with dated technology. This contributed to the company's decline.

Increasing Maintenance Costs

Definition: Building a system is one thing, but maintaining, updating and expanding it generates ongoing costs for the company, which increase for outdated and faulty systems as they require more work to function. 

Example: Blockbuster was one of the most popular video rental chains with physical stores and an online presence. The company was slow to adapt to the growing trend of online streaming and video rental services. They initially overlooked the potential of online distribution and focused on their physical stores. As a result, their online strategy was delayed, giving competitors like Netflix a head start. Eventually, tech bankruptcy turned into financial bankruptcy, and the company ceased operations in 2014. 

Inability to Scale

Definition: It implies that the system cannot easily accommodate increased user loads, growing data volumes or new features.

Example: Twitter struggled with scalability issues in its early days, leading to the famous "Fail Whale" error message when the platform was overloaded. These problems hindered user experience and growth.

Incompatibility With Modern Solutions

Definition: It refers to the system's incapability to integrate or work seamlessly with contemporary technologies or solutions, making it unattractive to users and investors.

Example: BlackBerry, a once-dominant mobile device manufacturer, failed to keep up with modern smartphone technologies and platforms, resulting in incompatibility with popular apps and services like WhatsApp and Instagram. This led to a drop of customer interest, a financial crisis and a change in the company's business profile.

Practical Tips to Prevent Tech Bankruptcy

  1. Regular Code Reviews 

It's natural that when working on something for a long time, you stop perceiving it objectively. That's how exposure and habit work, which is why it's much harder to catch errors in text or code that we already know – the familiar seems correct. To avoid building an application on flawed code, implement regular reviews conducted by other experts. This is one of the most effective and relatively simple to carry out quality improvement methods, and as many as 73.5% of the most successful developers use peer review to ensure code quality

  1. Automated Testing and Continuous Integration 

Many procedures to prevent tech bankruptcy are neglected due to lack of time, budget or capacity. That's why you should implement automated testing right away. 73% of organizations perform automated testing of their applications. Moreover, test automation can reduce the cost of overall software testing by 85%. Such a method saves resources while giving you system control and responsiveness to errors. 

  1. Refactoring 

It's usually easier (and more cost-efficient) to refactor an existing system than to create a new one from scratch, so when tech debt starts to get dangerously large, act before it's too late. Refactoring is the process of restructuring existing code to improve its readability, maintainability, and performance without changing its external behavior. To reduce your tech debt and prevent tech bankruptcy, find an experienced digital agency or software house to identify your system's vulnerabilities and refactor it. 

  1. Documentation and Knowledge Sharing

A chain is only as strong as its weakest link, so sharing knowledge and competencies within a team is the basis for efficiency and high quality. Employees who know the documentation, status and requirements of the project can react vigilantly to potential bugs and maintain project continuity. Introduce standards for accumulating and transferring knowledge in your company and reinforce the good habits of your team.

  1. Technical Debt Tracking

Many organizations are falling into technological bankruptcy because they lack the tools to monitor and control their debt levels. Introduce a system for identifying, tracking, and prioritizing technical debt items, allowing your team to address the most critical issues first. Such measures ensure you that tech debt remains visible and can be managed proactively rather than accumulating unnoticed.

  1. Setting Technical Debt Limits 

Technical debt, up to some level, is a natural state in a growing company, but you need to know when enough is enough. Set acceptable limits of tech debt that will allow you to stay in control of the situation, set priorities right to the situation, and react when needed. 

  1. Assess Dependencies Regularly 

You should regularly evaluate and assess the third-party libraries, components, and dependencies used in their projects to ensure they are up-to-date, secure, and well-maintained. Vendor and dependencies management will help you reduce the risk of accumulating technical debt due to outdated or vulnerable components. This practice is also a key to avoiding vendor lock-in, which hinders system scaling and modernization. 

  1. Technical Leadership 

To prevent tech bankruptcy, you need a person on the management board who is responsible for technology development decisions and overseeing execution processes. Such a role is filled by a CTO, an expert at the intersection of business and technology. A good way for you to see if such a position will bring value to the company is to partner with a Fractional CTO or use CTO as a Service

  1. Training of developer and management teams

Training programs provide developers and managers with the necessary skills and knowledge to make informed decisions and implement best practices. Well-trained teams are better equipped to prevent, identify, and address technical debt effectively and reduce its impact. Invest your team's time not only in projects for clients, but also in expanding  internal knowledge through training and developing skills. This will definitely pay off for you in the future. 

  1. Long-term development strategy

Having a well-defined long-term strategy helps guide development efforts, prevent shortsighted decisions, and reduce the accumulation of technical debt over time. The threat of tech bankruptcy can be a good opportunity to change your current approach to business development, plan for long-term goals and modify the practices that got you into serious tech debt. 

How To Start Building a Debt Repayment Strategy

Is it time to build a debt repayment strategy? The prospect of technological bankruptcy can inspire panic and a desire to rapidly invest all resources in preventing it. But first things first. At this stage, focus first on addressing the most pressing issues, resolving critical errors and maintaining your company's operational liquidity. In the next step, focus on creating a tech debt repayment plan that will allow you to increase efficiency and avoid the threat of tech bankruptcy in the future. In this article, we have prepared a complete guide on strategies for prioritizing technical debt repayment.

Remember, that getting out of technological debt requires as much thought and a well-planned strategy as avoiding it. If you suddenly divert all of your engineers and developers to fixing old mistakes, you could drive your business into a state of paralysis. 

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Authors

Olga Gierszal
github
Software Engineering Editor

Software development enthusiast with 6 years of professional experience in the tech industry.

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