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The Disruptive Strategist: Technical debt in a digital world - The Darwinian imperative

In the digital world only those able to keep up with an ever-evolving technological landscape survive. GAM Investments’ David Goodman explores how technical debt, the accumulation of compromises in the development of software, can threaten businesses if not addressed. But for disruptive technologies, technical debt in legacy operators can present huge opportunities.

31 August 2023

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Technical debt is a problem that all businesses face in the digital world, but what is it?

In a nutshell, it is the accumulation of shortcuts and compromises that are made in the development of software. Shortcuts which seemed like a good idea at the time might well hijack businesses in the long run.

In the digital world, businesses burdened with technical debt are likely to be disadvantaged, vulnerable to being disrupted by new entrants deploying the latest technologies. But it does not have to spell disaster; businesses that can manage technical debt can reap the benefits of enhanced efficiencies and new opportunities.

What are the risks of not managing technical debt?

The Darwinian imperative, ie evolve or die, is a good metaphor to explain the issue businesses face. In the natural world, organisms that are not able to adapt to their environment are eventually replaced by those that can. The same is true for businesses in the digital world, with only those able to keep up with an ever-evolving technological landscape surviving.

For those burdened with technical debt, this can prove challenging. For example, a business that chose to build on existing legacy software as it was cheaper and easier to implement may find it unscalable in the long term and future growth could therefore be compromised. In addition, technical debt can hinder innovation, with new features and functionality difficult to add to legacy software systems, preventing businesses from keeping pace with competitors. Both situations can make disruption a major risk.

 

Having highlighted the risks, let us look at how technical debt can be managed to the point where it can become an opportunity, with businesses reaping the benefits of enhanced efficiencies.

The case of Delta Airlines

Delta was using a legacy software system so outdated that it could not be integrated with the company's new customer relationship management (CRM) system. Consequently, customer data had to be manually entered into two systems – an unsatisfactory fix which eventually led to millions of dollars being spent on replacing the outmoded software.

The case shows how technical debt can be a barrier to innovation, with the legacy system acting as a roadblock preventing Delta from integrating with its CRM system and making it difficult for the airline to track customer interactions and provide personalised service.

By replacing the legacy system, Delta swiftly improved its customer service and increased customer satisfaction. In addition, the dramatic reduction in manual data entry brought welcome cost savings.

This case study is a classic example of how technical debt can be a costly problem to resolve, but life-threatening to ignore. By taking the hit and spending on a new system, Delta overcame the problem, embraced the increased productivity and quite possibly saved itself from extinction.

Disruption by new entrants

It is clear that technical debt creates opportunities for new entrants to disrupt established businesses. Think Uber and Airbnb; without the hindrance of a legacy system, startups can develop new products and services that are not possible with older systems and enable a competitive edge.

For example, Uber entered the taxi industry and was able to disrupt by using a mobile app to connect riders with drivers. Conventional taxi companies with legacy systems were unable to catch up, giving Uber a significant advantage.

Disruptive technologies

No surprise, disruptive technologies benefit from technical debt, with new technologies displacing existing systems. For example, the rise of cloud computing has disrupted the traditional IT industry, with its innovative technology delivering more efficient IT services, allowing businesses to reduce their IT costs and improve agility.

Technical debt is a real problem for incumbents, but it can also be an opportunity. Businesses that manage their technical debt by investing in new systems help ensure their longevity by keeping pace with the competition; they facilitate growth and can enjoy greater efficiencies and new opportunities that the latest technologies usually bring.

On the contrary, businesses that ignore technical debt are at risk of being disrupted by new entrants or disruptive technologies.

Remember the Darwinian imperative: adapt or die. Businesses that are able to adapt to the changing technological landscape will survive and thrive. Those that are not will eventually be replaced by those that are.

Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.

This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

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