Articles and Advice

Organisational Debt: Ways to avoid the debt that takes most startups by surprise

In the early days of a fledgling startup all focus is one thing – launch. Time, energy and resources are thrown at that one task, often at any cost.

Whether it’s finding investors, setting up new suppliers, taking on staff or handling those precious first few orders, it’s all hands-on deck.

Chances are, there’ll be a few hacks along the way to get things up and running. Some manual fixes, a few short cuts. Temporary solutions are created with an intention to fix them at a later date.

Getting into (Organisational) Debt

Often these shortcuts can come back to haunt you. When the business is in full growth and operational mode, Organisational Debt can threaten everything that everyone has worked so hard for.

Organisational Debt is not uncommon in new businesses and normally accumulates when a startup transitions from the search and innovation phase to the build and growth phase.

Without keeping Organisational Debt in check, a new business risks becoming weighed down and disadvantaged. And worse still, heavy debt will erode into newly earned profits.

How does Organisational Debt occur?

It’s inevitable that most startups will accumulate some Organisational Debt. It would be risky for a new business to select a customer management system, set up full systems and processes, or employ the full quota of staff on day one. A new business would prefer to be flexible in its early days so that the best fit for business models, systems and processes and market can be identified.

The Temporary Fix. Organisational Debt occurs when:

  • Functions are carried out manually because IT systems are not yet in place.
  • Tasks are outsourced to contractors or agencies, leaving the business lacking in vital know-how.
  • The need to ‘launch at all costs’ means taking on staff without factoring in the long term cost of carrying a large workforce.
  • Lines of communication to customers or management are not clearly structured.

In the race to the finish line, new businesses will often operate with high overheads, high staff numbers, and inefficient ways of handling customer orders.

What happens when the business enters full-on growth mode? The 10 or 20 orders per month that a business can ‘hack’ its way through suddenly become 1,000 orders per month.

In the early stages of a new business the last thing you want to do is disappoint customers.

Rome wasn’t built in a day

Avoiding Organisational Debt means investing in growth and development processes as the company grows. It’s unlikely a new business will be able to set everything up perfectly in one go, but it is possible to make small tweaks and improvements as the business grows. If it means avoiding getting into ‘debt’, it’s worth paying attention to.

If a business is already fully operational and finds itself weighed down by cumbersome and inefficient systems and processes, then it’s worth taking small steps to fix things. Just make sure it’s done without disrupting the customer’s experience.

Paying back the debt

When it comes to paying back Organisational Debt, look at the processes closest to the customer first. It’s vitally important that these processes are tightened up as soon as possible and customers are unaffected.

Other areas to fix:

As things get busier, it can feel chaotic or frustrating if infrastructure isn’t keeping up. Keep an eye on staff to make sure they are happy and know that there is a plan to improve things.

Make sure founding staff members are kept happy. Is everyone in the organisation still on the same page? Some people are better suited to the research stage of a startup rather than the operational stage. Have culture or values changed since the organisation began to scale?

Initial IT systems or processes may fail to deal with an increased level of business. Don’t be afraid to ditch inadequate systems that are more trouble than they’re worth. It’s only going to get harder to make the switch when things get busier.

Are lines of communication still effective with the new level of activity? Can staff communicate clearly with senior management and vice versa? Vitally, is customer communication working properly?

When a startup gets going, the old way of doing things may no longer be good enough. Shifting from an attitude of ‘just get it done’ to long term viability and efficiency will save a startup from debt.

 

South Inc. can help you identify processes where short-cuts can be taken (thus accruing organisational debt) and alternatively where processes can be put in place that will make life easier in the future. Likewise, South Inc. works with established businesses to work out the best way to retire organisational debt by introducing better processes and systems that were overlooked in the early years of development.