Leaders are constantly presented with decisions that will impact both today and tomorrow. At Cronofy I try to think about tactical and strategic business decisions through the lens of debt. It is a useful mechanic for understanding the true cost.
There are four ways a company can get into debt:
- Financial
- Technical
- Organisational
- Cultural
Used wisely they can be a powerful lever. However used badly or, worse, unknowingly they can stall, cripple or even kill a company.
Debt can allow a company to maintain speed and seize opportunities as they prevent themselves. This use though must be deliberate and concious to avoid sacrificing tomorrow for today.
They are all interlinked but considering them separately is a useful way of framing the decisions that are being made.
Financial Debt
Borrowing money in order to invest ahead of cashflow is the most conventional form of debt. Once you have revenues and a clear, repeatable business model it can be a relatively efficient way of accelerating growth. You have to be super careful though, as it has to be paid back. That sounds obvious but if something changes to impact your ability to grow revenues to cover the repayments, you can quickly end up in serious trouble.
Lenders will often require agreements, covenants, on key financial indicators or ratios of your business. Typical examples are:
- Debt:EBITDA (an accountancy measure of profitability)
- Debt:Equity
- Interest Coverage (EBITDA or EBIT / Interest)
For more on these this article on Debt Covenants is a good primer.
If you fall outside of the agreed levels of these, the lender will have rights to act to recover their debt. How they decided to do that will have a major impact on your business and quite possibly its survival.
You absolutely must have a handle on business accountancy if you’re planning to use a loan to fund your business. Being able to read and interpret a P&L, a Balance Sheet or even a cashflow statement is not something every founder can do. Which surprises me every time. It’s not as exciting as sales or building a product but it does provide the oversight to know whether you can afford to do those things.
Technical Debt
Developers talk a lot about technical debt. It’s the reason why the system is slow, it’s the reason why features can’t be delivered as quickly. As software systems grow and evolve, decisions taken earlier in the life of the system are not necessarily applicable to the reality of now.
Ironically enough, one of the key revealers of technical debt is rapid success. Whilst the commercial teams are rejoicing, the technical teams are trying to keep the service operating under load that wasn’t previously worth investing in supporting. Instead, they were building features that enabled the rapid success.
This can lead to significant mistrust between teams. Unaware of the trade-offs previously made, the commercial team can feel let down by the technical team. The perception being that sales and marketing are working hard to deliver revenue whilst the technical teams are floundering trying to keep up with demand and delivering a poor experience to customers.
Navigating this requires strong leadership across the business and a high degree of trust. Everyone needs to recognise that trade-offs like accruing technical debt are whole business decisions. Compromises have to be made on all sides.
Perhaps sales need to only sell what exists rather than what is coming for the next few months. Maybe marketing need to cobble together a content delivery solution that’s not tightly integrated with the product. Engineering have to recognise that they are in diminishing returns territory with an infrastructure upgrade.
Most of all, leadership have to decide whether they want sustainable growth that the product can support.
Organisational Debt (& Surplus)
What we’re talking about here is processes. Organisations are an area where surplus can be just as much as a problem as debt. In my experience more so.
Debt in organisations means things fall through the cracks. A customer on a custom billing plan doesn’t get their invoice generated correctly so finance have to fix each month; buying laptops for new employees is an ad-hoc process involving founder credit cards; or one-on-ones aren’t recorded in a central record.
All of these things are pretty obvious, if the organisation is communicating reasonably well, so it’s easy for people to make a decision whether to prioritise fixing or optimising them. Either by introducing documented policies and thus processes or automation to solve these repeated problems.
Where things get really challenging and hard to pull back from is a surplus or organisation, ie too much process. Too many times processes/policies are created as a result of a specific incident. The second order consequences of policies created in haste can be crippling. Take the following examples.
An employee wants to come in late so they can attend a doctor’s appointment. They offer to work their lunch to make up the time. This becomes a common practice. Then someone needs a couple of hours because they couldn’t get an early appointment. However they offer to work late to make up the missing time.
This all sounds reasonable until you consider what this is saying to the entire team: The company values the time you spend more than the outcomes you deliver.
Another example is when an engineer writes a status report during a service incident that is a bit clumsy and, is considered by senior leaders as presenting the company in a bad light. A new process is introduced to ensure that senior technical leaders have to sign off status reports. I even know of some companies that insist marketing have the sign off on these.
Clumsy notices are avoided, but they now take longer, and will often get stripped of detail by committee. The interests of the company have been put ahead of the customer’s desire for timely, accurate information at a time of crisis.
Worse than all of that though is the impact on the team. They’ve been told that they can’t be trusted.
If they can’t be trusted with something as important as keeping customers up to date when the service they are paying for is failing, what does that tell them about the rest of their role. Next time they’re tempted to take the initiative on resolving something they will inevitably think twice. The business suffers as a result, silently.
The answer is training and coaching not process and keeping people in boxes. Help the on-call team develop the skills to author incident status reports. Empower them to deliver great service even in the midst of a failure of service.
Cultural Debt
The silent killer. This is the type of debt that’s by far the hardest to pay back.
There is a lot that’s been written about culture and how high performing teams invariably have a strong, deliberately crafted and maintained culture. Whatever the culture of your organisation, if it’s working you probably don’t want to break it.
If culture is best represented as how people behave when no one is looking, then anything that threatens that is cultural debt.
Avoiding it requires a relentless and deliberate focus from the entire team. A clear definition of your company’s principles and an atmosphere of trust makes it possible for everyone to identify and challenge behaviour that’s not consistent.
Hiring is an obvious area where you can acquire cultural debt. It is probably the hardest aspect of assessing a prospective hire especially when you want to cultivate a diversity of approach and backgrounds in your team. All you can do is constantly review, reflect, and try and improve your cultural senses and processes to smoke out possible cultural misfits.
At Cronofy one of things we do is try and involve as much of the immediate team in the hiring process. Getting a feel for how people interact, especially in fora that require exhibiting key behaviours, can be an enlightening indicator of fit.
Cultural debt can be masked very effectively by a few good people. The adage that people leave managers not companies is very true in this regard. People will put up with a lot of poor aspects of working in a company if their manager is loyal and supportive to them.
If you find yourself thinking that no one is leaving so everything must be fine, you should definitely be looking deeper. A great manager finally having enough of the inter-team dynamics and leaving could precipitate the whole department moving on over the next few months. Potentially ruinously.
Make sure your 1:1s with your management team are used to properly understand their concerns and the dynamics at play within the organisation. Are they papering over cracks that would reveal themselves all to quickly if they stopped.
Another tactic we’re going to be experimenting with at Cronofy is Skip Levels. Making cross-level communication normal will take a lot of trust but should give us a really strong finger on the pulse of the organisation and detect any emerging malaise.
Is Any Debt Good?
In my experience, cultural debt is the one to try and avoid at all costs. Unfortunately it’s also the hardest to avoid. Financial debt requires your business to be in a particular state with strong financial governance. You’re either there or you’re not.
In my career organisational debt is the one I’ve leant most heavily, most successfully on. Having some wobbly plates which require a bit of manual attention now and then is really just a forcing function for prioritisation. You soon learn which plates are the wobbliest for your business and thus which processes are worth investing a bit of time in to streamline or automate.
It takes a strong, experienced technical team with the backing and trust of the commercial team to successfully navigate technical debt. It can be a powerful tool to support growth.
A true partnership between these sides of the business can enable winning those key accounts that really move the business forward. Sometimes though, you just have to let those attractive but distracting prospects go in order to maintain your organisational speed.
Debt can be good but only if it’s used deliberately and with full awareness if the consequences.