Operational debt: The hidden cost of convenience

Have you ever made a quick decision, thinking it was the easiest way to solve a problem, only to regret it later? 

Operational debt - What is it? 

In software development, this concept is called “technical debt”, used to describe the future cost of rushed coding for quick delivery. Similarly, we have “management debt” - the debt that piles up from short-sighted management decisions. 

With borrowed money, you can do something sooner, but you'll be paying interest.

- said Ward Cunningham, who coined the original term. 

Businesses often cling to familiar ways under the name of convenience, thinking they're saving time and resources. But just like credit card debt, ignoring the interest adds up. It’s the same way as choosing fast food for a quick meal, only to face hefty medical bills and endless hours at the gym later.

Operational debt comes in too many different forms. For this post, I will give 3 examples of the more popular types, and then we will talk about how to address these hidden costs before they spiral out of control. 

Neglecting documentation because it is too complicated

Writing policies like SOPs and work rules can seem tedious, especially for managers who always think they have immediate fires to put out. It’s easy to assume the “way we’ve always done it” is enough. But this mindset creates management debt.

Consider a new employee joining the company. Instead of preparing an SOP, the manager chooses to micromanage and guide them through every step. Though initially helpful, the new employee struggles to gain independence and the manager also finds it exhausting. 

Another example: A leader notices an employee consistently arriving late to meetings but avoids confrontation due to the lack of a clear punctuality policy. Soon, others start showing up late too, thinking it’s acceptable.

Without SOPs, tasks are performed based on individual preferences and memory, leading to inconsistencies and errors. Without formal work rules, substandard behaviors become the new standard. 

Working policies provide clear guidelines and ensure everyone is on the same page. While informal agreements can work in small teams, standardization is a must once the team gets bigger. 

Operating without all this documentation might feel liberating at first. But in the end, it’s not just about rules; it’s about creating an efficient and reliable system that drives your business forward.

Sticking to outdated methods for the sake of "safe"

Picture a bustling office where employees spend hours each day manually entering data and filling out forms on paper. Sounds like a scene from a bygone era. Yet, this is how many businesses operate, clinging to manual working methods like a culture. This is a classic case of management debt.

Business owners have the right to fear the changes innovation can bring. The costs, the potential disruptions, and the resistance among employees can discourage any leaders, especially those with little experience with technology. 

However, manual processes are the productivity black holes: they’re slow, prone to errors, and eat up valuable time that could be spent on more strategic, impactful tasks. And by this, you’re not just wasting productivity; you’re also falling behind competitors who are embracing automation and innovation.

What’s worse is that the debt accumulates. The more your business expands, the harder it gets to implement technology and the more productivity loss you have to suffer. What starts as a minor inefficiency can snowball into a major operational challenge, making future transitions to automated systems even more daunting and costly.

Ignoring data thinking it is out of reach

Have you ever waited ages for your subordinates to prepare a report, only to doubt the numbers they submitted? That’s the problem with underestimating a real-time data system. 

Many businesses often fall for the thought that they’re too small to need data analytics or that gathering data is too time-consuming and expensive. Manual methods as mentioned above make this even harder. 

But running a business without operational data is like making your way through a dense fog, hoping you’re on the right path but never really knowing. You might know how to drive, but without seeing the road clearly, you’re more likely to encounter severe accidents. 

Operational data helps businesses understand what’s working and what’s not. It can highlight bottlenecks, reveal trends, and uncover opportunities for improvement. Without it, decisions are based on guesswork and intuition, which often leads to poor outcomes and missed opportunities.

How do we relieve management debt?

You might wonder: "How do we handle priorities in the business, knowing any of them could later become operational debt?" It’s a common concern.

The goal isn’t to eliminate all debt. Borrowing - whether financial or operational - isn’t inherently bad. Even top companies like Apple carry debt. The key is balance: managing debt wisely while driving innovation and growth.

Not all debts are equal. That's why you need a structured approach to understanding what debt you're having and what to prioritize. You can refer to this Debt Matrix to help organize your debts based on their potential impact and how they were created.

Intentional vs. Unintentional:

• Intentional debt: Deliberate shortcuts for short-term benefits, like launching a product quickly or delaying automation.
• Unintentional Debt: Unnoticed issues that emerge over time, such as outdated systems or unclear workflows.

Reckless vs. Prudent:

• Reckless debt: Rushed decisions without proper planning, such as implementing a system without assessing scalability.
• Prudent debt: Thoughtful shortcuts taken with a plan to address them later, like starting with manual processes but budgeting for automation as you grow

Once debts are mapped on the matrix, you can: 

• Start with riskless debts, which are actively harming the business.
• Upgrade intentional shortcuts to turn them into scalable solutions 
• Make continuous improvement a part of your business DNA by regularly reviewing and refining your processes.

By integrating the Operational Debt Matrix into their strategy, your business is setting up a foundation for Operational Excellence. This means creating systems and processes that are not only efficient but also adaptable and resilient.

Remember, the longer we put off maintaining our operation system, the higher the price we will pay. So rather than sweeping all of those tasks under the rug and wondering what is the best time to change, why don’t you take a look at how much debt you are carrying and start paying it off before it leads you to "operational bankruptcy"?