The Problem and Opportunity of Organizational Debt

4 min read

What is ‘Organizational (Org.) Debt’?

As a rule, startups and companies in hypergrowth have two traits in common – high ambiguity and a fast pace. These are true regardless of product or industry category. While these traits affect all aspects of running a company – business strategy, commercial plan, product roadmap – it is most acutely felt in organizational/people issues – hiring, rewards, promotions, development etc. This is because once a startup reaches product-market fit, or when the company is ready to expand to multiple markets/geographies, reacting to customer or product issues takes precedence over everything else. It leaves very little oxygen in the room for investing in or upleveling organizational/people-related mechanisms. The investment gap in people mechanisms between what is needed vs. what exists is called ‘org debt’.

Here are examples of a few ways in which org debt shows up:

  • Inconsistent assessment methods leading to suboptimal hiring
  • Lack of rigor around job descriptions and scope of role leads to downstream performance issues
  • Individual contributors become people managers for the first time without adequate support and affect engagement and retention adversely, albeit inadvertently.
  • Decentralized decision-making on compensation without a well thought out philosophy leads to pay inequity, regrettable attrition and litigation
  • Culture and performance starts to lag because core values are insufficiently articulated or not integrated into hiring assessment.

How should leaders and founders think about org debt?

I realize that the list of org debt examples above has a decidedly negative ring to it. So is org debt really bad and to be avoided at all costs? Not quite! A good analogy for org debt is the way credit rating companies think about the  “credit utilization ratio” which is the amount you currently owe relative to your credit limit. We are encouraged to take on debt to meet our short-term needs, but need to pay attention to it and not allow it to spiral out of control. The reward of doing so is a high credit score which in turn builds financial credibility. In the same way, It is not a bad idea to accrue org debt. A strategic approach to taking on org. debt allows the organization to move fast and focus on the product or the customer in the near term. However, it is important to keep paying down that debt so you accrue revolving org credit to be able to solve higher order problems and raise the bar for the organization.

A couple of takeaways:

  • When it comes to managing org. debt, recognizing that an organizational mechanism needs to be improved is more important than ‘fixing’ right away.
  • Work with your HR/People leader to create a parking list of open items and monitor them over time to give you a real-time radar of debt that starts to burgeon and become unmanageable.
  • Create a scorecard for org debt that includes qualitative and quantitative indicators for when specific org. debt items need to be paid down.

How to identify org. debt accrual?

As with all things in life, timing is everything with organizations as well – particularly for hypergrowth organizations. While org. debt can accrue for all sorts of reasons, most of them can be attributed to the below reasons:

1.  The ‘scale’ factor:

Hypergrowth occurs when the company has decided to increase its reach of customers by expanding its portfolio of products/services or expanding geographically. As a result, hiring increases substantially, more managers are needed, more organizational layers are created to facilitate decision-making etc. A very common byproduct of this growth is a breakdown in ways your team used to work together. Leaders find that targets/deadlines are missed or not well planned, decision-making stymies and early employees, anecdotally, tell you that the hiring bar has gone down. Such a large amount of change requires the company to re-engineer the way employees are hired, onboarded and assimilated to produce results. In other words, the existing organizational mechanisms have started to accrue org. debt that is now slowing down the company.

2.  The ‘stage’ factor:

Another common observation during hypergrowth is that some employees who got you to where you are today, i.e. build and launch a successful product/service, may not be the right ones to get you to the next stage where the company needs to scale or launch many products/services. In most instances, it is not that the employees are underperforming. Just that the company needs employees who can flex different muscles or capabilities and not everyone has the interest or experience to be able to adapt fast enough to keep up with the company’s pace of growth. The same goes for organizational processes or mechanisms. As a leader, if you are hearing about things that “should have been” done a certain way or if there is a big spurt in “post mortems” your teams are doing as a result of something that did not go as expected, it is a likely indicator of org. debt due to the company stage factor.

Org. debt scorecard: A framework to quantify and pay down org. debt

If org. debt accrual is zealously monitored, it would be well-worth your time and effort to turn it into a scorecard that includes both qualitative and quantitative insights to help you decide which organizational mechanisms are acquiring too much debt and therefore, need to be paid down. Organizational issues require a tactful merging of art and science. The org. debt scorecard is the science part of the equation. To be effective, it will require leaders to combine the scorecard with good judgment that comes from experience. The scorecard and framework recommended below only touches on some of the organizational mechanisms that contribute to org. debt and is by no means comprehensive or customized to your company’s unique needs.

1.   List the organizational mechanisms currently in practice:

While every company has their own unique methods or mechanisms, they can be standardized by mapping the mechanism to the employee lifecycle. Here’s an example (sample only):

Employee Life-CycleOrganizational Mechanism
Hiring● Interview: 2-Stage Interview process: Phone Screen + Onsite
● Assessment: Functional case studies + Behavioral
● Offer Process: Reference Checks + Hiring Manager/Recruiter Call
Onboarding● Start date New Hire Orientation: Payroll, Benefits and IT set-up
● 30-day HR check-in with employee and manager
Talent Reviews● Manager nominated promotions - approval and review by panel
● Annual market-based compensation review
Talent Development● Internal transfer process for all roles
● Reimbursement for trainings, courses and certifications

2.  Track metrics over time to assign an org. debt score:

Metrics for each organizational mechanism should include both current state as well as future state. As you can tell, the current state is static because it is a report on what has already occurred. Future state is dynamic and needs to change depending on company needs by considering the two contributing factors to org. debt – scale and stage. In other words, future state metrics should be a derivative of the org. debt assessment and not the other way around. The example below is cumulative to the one above and is representative of an org. debt scorecard. An intelligent scorecard will include both qualitative and quantitative metrics to tell the full story. You will note that assessing the org. debt for each organizational mechanism is not a siloed exercise. Rather, it has dependencies on other org. mechanisms as well. For example, assessing the org. debt for the hiring mechanisms should factor in current state metrics for onboarding and talent development and whether they meet the company’s needs.

What to do with an org. debt scorecard?

  • An effective org. debt scorecard is more useful as a way to surface important questions and generate healthy debate rather than as a “fix-it-all”
  • There are very few truly objective or ‘gold standard’ good or bad metrics for each organizational mechanism. They are best evaluated in conjunction with other employee lifecycle mechanisms based on scale and stage.
  • Avoid making gut-based decisions on org. debt. Rather, use it as a way to involve as much of the company/team outside of leadership as possible. Even the best org. debt scorecard will only tell you what is happening, not why. Involving the organization in a diagnostic exercise to get to the root-cause is a terrific opportunity to amplify your culture and engagement.
Bharath Jayaraman Bharath Jayaraman is an Organizational and People leader with over 16 years of experience working for large, high bar tech companies such as Amazon and Facebook as well as with hypergrowth, innovative tech startups. His experience included working with leaders and founders across North America, Europe and APAC to seed, grow and scale high performing teams. Bharath is passionate about helping leaders make good people decisions every day and believes that all people mechanisms can and should be measurable to generate insights that drive business decisions at scale.

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One Reply to “The Problem and Opportunity of Organizational Debt”

  1. Organizational debt in its nature may arise from different sources, starting from procurement and finishing debt obligations. Some companies just should take control over the financial process, while others are already doomed to pass through the bankruptcy proceedings.

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