Shifting to SaaS may not eliminate the “Technical Debt”

One important consideration that investors have during due diligence of their target buy out is the financial strength of the target firm. However, when investors are going in for a buyout of a technology product firm (on premise or SaaS or hybrid model) it is also important to understand the “Technical Debt” that they will have to carry forward.

Many firms continue to develop product by only adding features, and they don’t align these to customer or business needs properly. They want to do something quickly, which results in taking debt on solution.

When you don't have a viable product it will take longer and longer to reach the desired end state. In other words, you accrue Technical Debt.

Technical debt is an incremental cost to the company that gets accrued while building a new product or maintaining existing ones. This can be due to a variety of reasons:

1. Delayed or Postponed launching of new features 
2. Maintenance, technical upgrades or improvement in coding and architecture are left for the future
3. Investing time and money in upgrading features that are not aligned to business models
4. The architecture design and quality of code is not flexible and/or scalable

As the customer base and business requirements for software products expands, it needs to scale and add new features and upgrades. This results in piling on technical activities that require time, effort, and money.

Just like financial debt, excess technical debt is not good for the buyer, as they will eventually have to spend money to clear this technical debt.

Having said this, Technical Debt is Part of the Job. Every product in the world will have some amount of technical debt to solve. The worst thing that we can do is to ignore these decisions that affect core components of the product and customer experience.

There is a sense of myth that shifting to SaaS models can help reduce Technical Debt or hasten the process of reducing it. That may not be the case.

While developing and releasing SaaS products is cheaper and faster, as they use cloud platforms and infrastructure, they still have to design and develop new features to meet customer demands.

Here is why technical debt may not be eliminated just by adopting an SaaS model:

1. Adopting SaaS does not solve for market and business requirements – If firms are focused on adopting the SaaS models and developing features without really understanding what business requirements are, it will only delay the eventual.
   
   
2. Incorrect Pricing Strategy – Unlike the On Premise model, SaaS subscriptions have multiple choices and pricing strategies, which allow firms to maximize revenue and value. However that’s easier said than done. In order to maximize the potential, firms have to adopt the right pricing strategy for the right type of users and customers. An incorrect pricing strategy means loss of revenue and puts pressure on the firm looking to clear technical debt.
   
   
3. Reduction in Productivity – Lower productivity if the architecture and system configuration is not upgraded or up to mark. More time is consumed in other unwanted activities rather than product development.
   
   
4. Inability to scale operations – As firms scale, they need to focus more on sales, customer services and various other operations. This demands significant bandwidth and if not set up properly can result in eating away at the productive time of engineers and developers, resulting in technical debt ballooning.

Just like financial debt, technical debt also incurs interest. More debt means that eventually firms will be required to carry the debt and spend money to fix it.

The investor community (PE or VC firms) will do well to conduct not only financial due diligence but also analyze technical debt in their evaluations.