Organizational Debt: What Is It and Why Is It Bad?

This article is an excerpt from the Shortform book guide to "Brave New Work" by Aaron Dignan. Shortform has the world's best summaries and analyses of books you should be reading.

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What is organizational debt? What is the problem with organizational debt?

Organizational debt occurs when managers take efficient steps to ensure a company’s survival and success, but their actions end up doing the opposite. In Brave New Work, Aaron Dignan explains the drawbacks of organizational debt for businesses and their employees.

Keep reading to learn about organizational debt.

Organizational Debt Creates Inefficiency

Organizational debt comes from processes that may have provided an important function at some point but no longer serve the organization.

For example, if an employee once spearheaded a project without permission, and it didn’t go well, a manager might have established a lengthy review process for approving new projects. This rule might have been intended to prevent a negative outcome in the future, but it ultimately discourages people from taking initiative, and it slows the organization’s progress toward its overall goal. Dignan also notes that organizational debt is in part a holdover from early 20th-century management styles that emphasized rigid and detailed rules to streamline manufacturing processes.

A Different Take on Organizational Debt

The term “organizational debt” was originally used by the entrepreneur Steve Blank, who defined it as the collection of changes that should have been made by an organization, but weren’t. The phrase was a twist on the term “technical debt” which describes the accumulated cost of taking shortcuts when developing a technology or digital product. In both cases, the debt comes from making a choice with a short-term gain and a long-term compounding cost, just like taking on financial debt.

Based on this definition, organizational debt is even broader than Dignan describes and is often more like a shortcut. Most of Dignan’s examples include burdensome bureaucratic processes, but eliminating or failing to introduce a process for expediency also becomes organizational debt if it has a long-term negative impact on the organization.

For example, if you fail to implement a thorough onboarding process for employees, you might save money and time in the short term by spending less time training employees, but in the long term they will take longer to get up to speed and become productive members of the team.

Research confirms that workplaces with conventional management and structures (and thus organizational debt) are inefficient. Studies show that half of all manager roles are unnecessary, suggesting that organizations could increase productivity significantly by eliminating these roles altogether and finding new ways for workers to self-manage.

(Shortform note: Although Dignan doesn’t go into much detail on why many manager roles are unnecessary, some justifications for eliminating manager roles include the following: They add overhead cost because they receive higher salaries, they increase the risk of one person making a catastrophic decision, they slow down work when decisions have to go through the chain of command, and they disempower lower-ranking employees, decreasing their incentive to innovate and contribute to the team.)

According to one study, workers in the US spend 16% of their working time on internal bureaucratic processes (things like paperwork and getting approval from higher-ups). (Shortform note: In addition to spending a significant proportion of their time dealing with red tape at work, Americans also spend enormous amounts of time navigating the bureaucracy of government social programs such as Medicaid, food stamps, and unemployment benefits. As a result, vulnerable individuals have to invest more time in lengthy application processes and often fail to get the benefits they are eligible for.)

Dignan argues that minimizing these requirements is an opportunity for organizations to reduce costs and boost profitability. He suggests that this strategy is more effective at increasing profitability than other common strategies such as laying off general staff, eliminating key functions of the organization, and acquisitions and mergers that most often fail to produce the intended boost in revenue for all companies involved.

(Shortform note: Although Dignan argues for reducing bureaucracy over other cost-reducing tactics, some argue that strategies such as layoffs are sometimes necessary as a short-term, last-resort option for companies that are in immediate financial trouble. Therefore, it’s sometimes more practical for organizations to reduce bureaucracy in tandem with other strategies.)

Organizational Debt: What Is It and Why Is It Bad?