Financial Planning

As we approach the end of the third quarter, many agencies start thinking about budgeting for the coming year. For most, the process of thinking about technology has been relatively unchanged for years. The process goes something like this: Look at last year’s numbers, cringe, add 3%, scratch your head in confusion, briefly consider talking to your IT head, cringe, happily move on to the production forecast.

Technology isn’t cheap. We all we know we need it, we want more and we wish we knew what we were really getting for the spend. Sadly, many agencies consider IT spending just another “necessary expense.” This is a critical error. To maximize both your profits and the value created by your technology, think of your technology as an investment. In fact, consider it in the same way you consider the acquisition of new producers or agencies.

Why view it as an investment? Start with the cost. At most agencies the total technology spend is significant. We’re talking dollars that should be contributing a return to the firm. More important than this simple cost approach is the potential impact of a well-executed technology platform. Well-executed technology helps make your agency more efficient and represents an investment in resources for client-facing service staff. It’s an investment driver in revenue per employee, and it’s an investment in staff retention.

Each of these effects enables the agency to create or retain revenue, and they should be considered in this light. When an agency takes steps to aim technology at their customers, the technology should be viewed as a direct investment in client acquisition and retention. And as we all know, revenue from a retained client is usually the most profitable.

Technology—even more so, the lack of it—affects nearly every aspect of agency operations. It is inseparable from the rest of the firm. Once your technology mindset is shifted from an expense view to an investment, the next step is to dig deeper to determine how your return shakes out.

A Valuable Tool

As an agency leader you are likely obsessed with metrics that help define the health and value of your agency. A valuable addition to your toolbox is the concept of technology spend as a percentage of revenue (let’s call it TPR). Take the annual cost of your technology and divide it by your revenue for the same year. Every firm is different. The magic number indicating you are doing well depends entirely on your business structure, geography and target markets. This simple calculation can lead to valuable insight about your technology’s effectiveness.

For example, if your firm is geographically centralized and somewhat straightforward when it comes to how your business is transacted, a TPR of 15% may be considered quite high. This could indicate an ineffective system platform in need of modernization coupled with financial commitments in need of evaluation. If this TPR is accompanied by a high number of staff complaints and low revenue per employee, you will find yourself with valuable information on which to act. Conversely, a TPR of 2% in the same scenario could indicate an insufficient amount of overall investment as the cause of your agency’s pain.

You can derive even more insight when you drill this metric down one step further. Of the overall TPR, what percentage is spent on agency systems, staff, communications and customer-facing technology? For example if you find that your firm is spending 5% of annual revenue on technology systems, with 80% spent on your agency system, 18% on IT employees and 2% on customer-facing systems, you likely have a balance problem. You will need to reassess your allocations and perhaps adjust your overall technology investment numbers.

Keep in mind that metrics alone don’t necessarily tell a full story. They simply create an indication of something actionable. The insights they provide should be considered with the other metrics used to manage your agency. Just as you wouldn’t want to fly in an airplane that doesn’t have an altimeter, you shouldn’t invest in technology when you have no way to measure its return on investment.

Where is your agency spending its technology dollars? And how much of that spending is driving revenue? When you can answer those two questions, you will have taken the first step into a brighter future.