With the end of the 3rd quarter squarely in our sights, thoughts turn to budgeting for the coming year. When thinking about technology at most agencies the process has been relatively unchanged for years. It 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 and we all we know we (1) need it (2) want more and (3) wish we knew what we were really getting for the spend. Sadly many agencies consider IT-related spending to live firmly in the world of ‘necessary expense’. This is a critical error. In order to maximize both your agency profits and the value created via your technology you must first begin to think of your technology as an investment in the same way you consider the acquisition of new producers or acquired agencies.
Why view technology as an investment? Let’s start with the cost. At most agencies the total technology spend is significant. We’re talking dollars that simply 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. When technology is executed well it creates a dramatic impact on efficiency, represents an investment in resources for client-facing service staff, an investment driver in revenue per employee, and an investment in staff retention. Every one of these items enables the agency to create or retain revenue and they must be considered in this light. Furthermore when an agency take steps to aim technology at their customers the technology should then be viewed as a direct investment in both client acquisition as well as client retention and as we all know revenue from retained clients is usually the most profitable revenue for the agency.
Technology (and even more so a conspicuous lack of technology) 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 view the next step is to dig deeper to determine how the return on this investment shakes out.
A Valuable Tool
As an agency leader you are likely quite obsessed with metrics that help uncover the health and value of your agency. A valuable tool to add to your toolbox is the concept of technology spend as a percentage of revenue (let’s call it TPR). The calculation is quite simple but can lead to valuable insight. Simply calculate your total technology spend and divide it by your revenue for the same year. Every firm is different and the magic number indicating you are doing well is entirely dependent on your business structure, geography and target markets; however this metric can provide valuable insight into the effectiveness of your technology.
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 accompanied by 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 critical actionable intelligence. 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.
Even more valuable insight becomes clear when you drill this metric down one step further. Of the overall TPR what percentage is spent on agency systems vs staff vs communications vs customer-facing technology? For example if you find that your firm is spending 5% of annual revenue on your technology systems (seems reasonable compared to the above example) with 80% of this going to your agency system, 18% on your IT employees and 2% on customer facing systems you likely have a balance problem. You will need to reassess your allocations and potentially your overall technology investment numbers.
Keep in mind that metrics don’t necessarily tell a full story on their own, they simply create an indication of something actionable. Combine these insights 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 true return on investment. Where is your agency spending its technology dollars and how much of it is directly driving revenue? When you can answer this you will have taken the first step into a brighter future.
Your relationship with your CIO
Technology is a complex animal and you need the right partner to navigate these waters. You wouldn’t consider an acquisition without M&A expertise yet in the long term a poorly executed technology strategy can cost the agency far more than an acquisition that provides meager results. If you’re unsure of your technology direction or aren’t addressing these issues in a thoughtful collaborative way with your technology leader consider cultivating this relationship.
Agency leaders spend a lot of time on production strategies and for good reason. Clearly these strategies directly impact the growth of the firm and deserve thoughtful attention. This type of careful thought must be put into technology if your firm is to grow and thrive in the marketplace of today and tomorrow. The results will be dramatic.