Technical Debt and Firm Performance

Abstract

Technical debt refers to the design, development, and implementation shortcuts taken by firms when deploying accounting information systems. Prior system-level studies have shown that such shortcuts decrease the reliability of systems and increase the long-term system maintenance obligations. On the one hand, technical debt may cause system disruptions that impair firm-level performance. On the other hand, incurring technical debt may aid firms to expedite their systems deployment and to implement idiosyncratic functionalities that may enhance performance. In this firm-level study, we examine the economic implications of technical debt accumulated by 26 firms in their customer relationship management (CRM) systems over an 11-year period. We find that firms operating in industries with higher “clockspeed” and higher competitive threats tend to accumulate more technical debt. After controlling for industry- and firm-level factors, our analysis reveals that technical debt embedded in the CRM systems negatively impacts firms’ performances, measured as gross profit scaled by beginning-of-year total assets (GROA). We estimate that a 10% increase in technical debt reduces GROA by 16% on average. The negative impact of technical debt on GROA increases over the lifecycle of the systems, which significantly reduces the long-term business value of those systems. Highly experienced information technology teams and the presence of a chief information officer in a firm’s top management team, however, serve to mitigate, at least partially, the negative impact of technical debt. We discuss the implications of these findings for research on the business value and governance of accounting information systems and performance evaluation. This paper was accepted by Shiva Rajgopal, accounting.