I sit on a non-profit Board of Directors. This organization is very conservative. They have a line of credit they have never used and they have no long-term debt. The CFO of this organization is so busy preparing manual reports for the audit she is unable to produce statements on time. Forget about any analysis or special reports -- those are also manual and time consuming. The organization has fairly sophisticated software, but has an accounting system that is so old and unorganized that it cannot be used. The CFO is good -- great even, but is frustrated with her lack of time, inability to please key constituents, and produce meaningful data. This situation, or one like it, is fairly common in companies of all types (not just non-profits).
When an organization has failed to invest in its operations it creates what is called operational debt. It is a metaphor of course, but it is a useful one.
Much like bank debt, operational debt creates its own type of interest in that problems, like compounding interest, if unpaid or unresolved, become more and more difficult to cure.
Operational Debt has a cousin called Technical Debt where a company has failed to keep its technology up to date.
Both Operational and Technical Debt can have serious consequences, as we saw in the case of the Southwest Airline system meltdown. In this case, a well-regarded CEO, hell bent on delivering short-term results to Wall St. failed to make the investment in long-term fixes of old systems. At some point, things begin to crumble.
What Is Operational Debt?
Operational debt shows itself as inefficiency in your company and as we know, inefficiency leads to lost productivity and profits. Inefficiency is especially harmful in the age of worker scarcity, where employee productivity and technology can be incredibly important to maximizing profits. Operational debt shows itself as "workarounds," as manual processes, or as the phrase "we have always done it that way." Outdated and weird manual processes mask places where technology could be saving you money.
Operational debt has a cost other than profitability, it saps employee morale. The opposite of operational debt is an empowered and educated workforce that communicates with leadership about their needs. An operationally strong company is one that is willing to adapt and provide employees with resources.
There is a wonderful opinion piece by Zeynep Tufekci in the New York Times called "The Shameful Open Secret Behind Southwest's Failure" where she reports,
"Lyn Montgomery, the president of Southwest’s flight attendants’ union, told me that currently, when hiccups or weather events happen, the employees have to go through a burdensome, arduous process to get things sorted, because Southwest hadn’t sufficiently modernized its crew-scheduling systems."
"Burdensome" and "arduous" are strong words that conjure up a company that is neither agile nor employee resource-focused.
What do I do if I am drowning in (technical or operational) debt?
1) Determine where the pinch points are by talking to the people who perform the work
The employees know where manual tasks and ticky-tacky workarounds are. As a leader, you may only see a finished product and might have no idea how difficult it was to produce. Ask employees where productivity is slow and where their happiness is at its lowest -- chances are -- this is where you need to do some work.
2) Empower your employees to point out inefficiencies
The suggestion box existed for a reason. Don't be afraid of it. Sure, some of the things will cost money, but inefficiencies and employee turnover are also costly. An empowered employee will feel valued (which is a great way to keep them) and be a scout for operational and technical debt.
3) Don't be afraid to go into (some) financial debt to get out of operational debt
Investing in technology, automation, and upgrading operations can be lifesaving for a business or, at the very least, may allow you to avoid very costly pitfalls (see Southwest Airlines article). Some efficiencies don't cost any money other than the time and personnel needed to examine and implement better processes -- eliminating the need for paperwork to be done is triplicate, for example. Other improvements will require investment. Don't feel as though being conservative with your balance sheet is wise when you're being inefficient with your business. You are robbing Peter to pay Paul. Your balance sheet is there to support your business. In my non-profit example from above, spending some money to upgrade the accounting systems so that the software could generate reports made complete financial sense and freed up the time of the CFO to be more productive.
Chances are, as a business owner, you have a person or a department dedicated to the management of your finances. Keeping track of your balance sheet is important to be able to understand your financial flexibility. However, you probably aren't watching your operational and technical "balance sheet" as closely, but being nimble and efficient is more important than ever for business survival. Before you brag about your "debt free" business, make sure you don't have any hidden operational skeletons hanging around.