Gordon Moore, one of the founders of Intel Corporation, is the individual who first observed that computer processing power doubles every 18 months. This observation is now known as Moore's Law. This unrelenting change creates one of the biggest frustrations that agents can experience. Technology changes so quickly it is hard for agents to keep up. Constantly changing technology is a fact of life, and the amount of change isn't going to slow down.
New technology developments such as the Internet, and improvements in electronic document storage, mobile computing, new generations of agency management systems, and increasingly sophisticated software make it essential to keep up. The question is how? In my travels, agents frequently ask me, "How do I plan for changes in technology and how much should I be setting aside to make sure I can keep up?"
In any discussion of how to budget for new technology it is important to remember that technology is a tool that supports the business, not the other way around. There are only two good reasons for buying technology. Technology must either help you reduce expenses, or it must help you increase revenue. If a new piece of technology doesn't clearly help you solve a business problem, you shouldn't purchase it.
What is the best way to plan for your technology future? There are a couple of models you can use. One model is to use a standard percentage of agency revenue. With this model, technology is considered just like any other line item in your budget. It is treated just like employee salaries, office rent or telephone expense. Technology is not a one-time expense every few years when you purchase a new management system, or upgrade what you already have. It's an ongoing investment that the agency makes each and every year. Using a percentage of revenue keeps this concept clear and helps level out the peaks and valleys of big-ticket purchases. It also assures that you'll have funds set aside for the smaller purchases that inevitably become necessary throughout the year.
Determining what the ideal percentage is depends on the philosophy of the agency owners. If technology is viewed as a strategic tool that keeps the agency ahead of its competitors, the amount to include in the budget should be higher. The most recent Agency Performance Results Study (APRS), produced by the Academy of Producer Insurance Studies, showed that agencies, regardless of revenue size, are currently spending between 1.09% and 1.72% of revenue on "automation and data processing." Based on 10 years' personal experience with a Dallas/Ft. Worth agency, setting aside between 3% and 5% works very well. Even with this agency purchasing a new agency management system a few years ago, the percentage has remained fairly constant over time. Some agents we have talked to, though, budget up to 10% of revenue on all technology-related expenses.
Depreciation method of budgeting
Another way to budget is to use a depreciation model. For example, if you purchase a new agency management system that costs $100,000 and determine its useful life is three years, you would budget $33,000 each year to replace it. At the end of the three years you would, theoretically, have set aside the money you need to upgrade or change to another new system. This model is more focused on replacing major computer systems, instead of looking at technology as an ongoing budget item.
Regardless of which model you decide is right for your agency, all expenses you incur related to technology should be included in your budget. This will include far more than just the cost of an agency management system. You need to budget for new software programs, software training, communication costs associated with Internet access, Web site design and management, new hardware such as workstations, scanners and printers as well as other soft costs such as hardware maintenance contracts and software support fees.
You also should budget for technology "toys." Many times the best way to find out if new technology will really help your agency is to buy it and play with it. Sometimes it doesn't work out the way you thought it would. But other times what starts out as a toy can quickly develop into a very useful business tool for your agency.
If planning or budgeting for future technology costs has been on your "to do" list for a while now, why not get started? Proper planning will reduce the stress associated with changes in technology and will allow you to reap the benefits new technology can provide your agency. *
The author
Steve Anderson is a licensed agent in the Dallas/Fort Worth area. He also heads American Insurance Consultants (AIC), which provides consulting services on how to maximize profits using commonsense technology; is a founding partner of MarTech, Inc., and is a member of the TAAR Network. He can be reached at (817) 581-6486 or e-mails are welcome at steve@SteveAnderson.com
©COPYRIGHT: The Rough Notes Magazine, 1999