Understanding Strategy Debt in Tech Due Diligence
In our Technology Due Diligence (Tech DD) engagements, we analyse the narratives of management teams to understand their unique journeys. Whether working with original founders or new leadership inheriting legacy technology, it’s crucial to go beyond standard checklists. Active listening and insightful questioning help uncover deeper business and technical challenges.
One recurring issue is when management deliberately prioritises growth over addressing core technical issues. In today’s market, where profit and customer acquisition often take precedence, this decision is understandable—after all, market strategy often trumps technology investment.
What is Strategic Debt?
Strategic debt occurs when leadership intentionally defers major technology improvements to focus on business expansion. Unlike tech debt, which involves small technical compromises, strategic debt involves long-term strategic choices that shape the company’s future scalability and valuation.
Examples of Strategic Debt
- Delaying Replatforming – A company remains on outdated architecture, making future integrations costly.
- Inefficient Scaling – Growth relies on manual processes and workarounds, rather than automated systems.
- Increased Operational Costs – Higher cloud and infrastructure costs get passed onto customers instead of optimising the system.
While these choices may not seem problematic in the short term, they can create significant roadblocks during acquisitions or rapid scaling.
How Strategic Debt Affects Acquisitions
For management, strategic debt is manageable while they control growth. However, when an investor or strategic buyer enters the picture, the dynamic changes:
- Faster Customer Onboarding: Buyers expect efficient onboarding for existing customers and seamless cross-selling.
- Cost Reduction: A buyer will push for cost efficiency, exposing hidden inefficiencies in the tech stack.
- Loss of Control: The original team no longer dictates the pace of scaling, making previously ignored tech issues impossible to avoid.
Real-World Example of Strategic Debt in M&A
We worked on a due diligence project with a high-growth company in a large market. The team was excellent, but the platform had flaws.
- A decade ago, the CTO decided against replatforming, believing it would threaten the company’s commercial success.
- Instead, they built management tools to work around platform limitations.
- This meant the problem was deferred rather than solved.
When an acquisition became imminent, the buyer faced millions in tech investment costs just to bring the platform to an acceptable standard. This was not a simple case of tech debt—it was a decade of strategy debt.
Tech Debt vs Strategic Debt: Key Differences
| Feature | Tech Debt | Strategic Debt |
|---|---|---|
| Definition | Small technical trade-offs for short-term speed. | Business decisions that defer major tech improvements. |
| Impact | Slows development, increases bugs. | Limits growth, increases future costs. |
| Scope | Code, architecture, infrastructure. | Company-wide tech and operational strategy. |
| Resolution | Refactoring, automation, updates. | Large-scale replatforming, investment, restructuring. |
Why Strategic Debt Matters to Investors
For investors, understanding a company’s strategic debt is critical. It reveals:
- The long-term cost of technology decisions.
- The company’s ability to scale post-acquisition.
- The DNA of the management team—are they focused on short-term wins or long-term sustainability?
By highlighting these factors, we help investors make informed decisions while preparing sellers for the challenges ahead. How both parties resolve these issues will set the tone for future success.
References on Strategic Debt
- “Technical Debt vs. Strategic Debt: Understanding the Difference” – Discusses how business strategies can lead to long-term technical liabilities. Read More
- “The Cost of Deferring Technical Improvements in Pursuit of Growth” – A case study on companies that postponed replatforming. Read More
- “The Hidden Costs of Strategic Debt in M&A Deals” – Explores how buyers account for tech and strategic debt in acquisitions. Read More
Key Stats on Strategic Debt
- 60% of companies that delayed technical improvements for growth faced serious scalability issues within five years. (TechRepublic)
- Companies with significant strategic debt incur 30% higher acquisition costs due to overdue technology investments. (McKinsey & Co.)
- Startups that ignore core technology upgrades in favour of growth see a 20% drop in valuation upon acquisition. (Harvard Business Review)
Final Thoughts on Strategic Debt
Tech debt is inevitable, but strategic debt is a choice. Understanding the difference helps investors, founders, and acquirers assess long-term risks. As Tech DD professionals, our role is to ask the right questions, highlight the implications, and ensure both buyers and sellers are fully prepared for what lies ahead.
References:
“Accidental vs. Strategic Technical Debt”: This article discusses how strategic technical debt can be a deliberate choice to execute a company’s strategy, differentiating it from accidental technical debt.
“Technical Debt vs. Process Debt – What’s the Difference?”: This piece explores the distinctions between technical debt, which concerns the codebase and technical architecture, and process debt, which relates to inefficient workflows and processes.
“Technical Debt Isn’t a Burden, It’s a Strategic Lever for Success”: This article examines how technical debt, when managed properly, can serve as a strategic tool for achieving business objectives.
“Strategic Technical Debt Management: Should We Aim at Zero Technical Debt?”: This article discusses the prevalence of technical debt in companies and the importance of strategic management to address it effectively.
“Technical Debt: What Is It? Definition, Examples & Types”: This comprehensive guide provides insights into the definition, examples, and types of technical debt, emphasizing its impact on software development.
“What Is Technical Debt? Examples, Prevention & Best Practices”: This article offers a detailed explanation of technical debt, including real-world examples and strategies for prevention and management.
