Best in class SaaS CFOs measure the percent of R&D spend associated with tech debt, just like they track financial debt.
Tech debt simply defined is the accumulated cost of development short cuts and outdated technology. It is the interest a company pays for trade-offs made between quality and time to market – short cuts that may come back to bite you in terms of security vulnerabilities, outdated platform or integration issues. Over the long run, tech debt can seriously inhibit your ability to innovate, develop new products and acquire new customers. Tracking and benchmarking a company’s annual spending on tech debt as a percentage of R&D spend should be part of every SaaS CFO’s KPI reporting.
The benchmark that enterprise SaaS companies spend on tech debt is about 30% of total R&D. Most companies have to invest just under a third of their development resources into maintenance of the products.
Best in class companies keep tech debt below 30%, targeting 25%.
Best in class companies have lower spend on tech debt because of more efficient product development processes, not because they are putting off fixing their tech debt where it can snowball into a much bigger (more expensive) problem. Like financial debt, it is usually better to make regular payments against debt, rather than putting off payment and paying higher interest.
Measuring Tech Debt
Most SaaS companies track tech debt by estimating R&D activity associated with tech debt, or establishing cost centers associated with tech debt. Often it is a very rough estimate, an estimate from the CTO or VP Engineering on how many head count out of total are involved in fixing and maintaining the company’s products.
What Causes of Tech Debt?
Tech debt is often incurred when short cuts are taken to rush a new product or feature to market. Pressures to finish a product, insufficient planning and design, and poor quality developers who write bad code all contribute to tech debt. Just like low sales productivity and low quota attainment are indicators of sales issues that should be analyzed, debt and grumblings among developers are indicators of development or R&D management weakness. Every tech company contends with debt – standards change, no code is perfect – but how much productive R&D resource goes into maintenance instead of new product and features to drive new revenue should be monitored by CFOs to ensure a healthy balance in R&D investment.
Key Contributors to Tech Debt:
- Time-to-market pressure/unrealistic expectations. Similar to poor project management, management pressure to cut corners and bring a product to market is a leading cause of tech debt for many companies.
- Poor project planning. Instead of the problem originating from management pressure to cut the development project short, development commits from the start of development to producing a new feature or product in an unrealistic timeframe and to in order to meet the schedule, short cuts are taken. Often times, the short cuts are taken at the end of the project, usually in testing, so bugs and problems aren’t fixed before bringing the new product into production.
- Low quality developers – not all developers are created equal and it is almost impossible to hire all A quality developers. Some experts suggest tracking development quality by tracking lines of code. High quality developers write efficient code. Problems here could indicate a need to improve hiring, training and overall development management.
- Procrastination on bug fixing. All code has bugs, although good testing can minimize bugs. If bug fixing is not well managed, bugs multiply into unacceptable tech debt.
Tech Debt is Ultimately an Indicator of SaaS Health
Snowballing debt interferes with new product development and affects new customer acquisition. In addition, too much tech debt affects customer satisfaction which impacts customer retention. Even if customers don’t churn, they are less likely to expand usage of your product or platform if it is buggy.
And given the intense competition among SaaS companies to hire top quality developers, a development environment where too much time is spent on fixing bugs or on maintenance will not retain the best developers who want to spend the bulk of their time innovating and delivering cool, new products.
If a SaaS CFO’s job is to have their fingers on the performance pulse of a company, they should look at tech debt as a leading indicator of R&D health – and driver of key SaaS KPIs like revenue growth, customer acquisition velocity, customer retention and customer expansion. Too much can indicate systemic problems and R&D weakness. The percentage of R&D expense spent on tech debt is a good indicator of the resource allocation between paying down tech debt while the majority of R&D investment goes into new product development to drive revenue growth.
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