May 28, 2015

Your strategic business plan is becoming more closely linked with your technology plan as the years go by. Technology can often be the strategic plan accelerator if you view it as a strategic asset rather than a cost. Either way, we’re all spending money on computers, software, copiers and telephones, so let’s have a plan to use them wisely and another plan to purchase them correctly.

Purchasing technology is a balancing act between speed, stability, and cost and security. If you give me three of these variables, I can give you the fourth. The relationship really is that direct. I know it’s obvious, but fast computers that don’t break down, cost more (cash) than slow unreliable ones. Notice the parenthetical “cash” because after a year or so, the slow unreliable computers will actually cost more in support, downtime, low employee morale and even employee turnover.

The first step is to admit that you don’t actually have a purchasing plan and the next step is to make the decision to create one. The term “purchasing plan” is far superior to the word “budget.” Budgets are subject to revision based on revenue volume, while a plan supports a vision with the idea that without support, the vision will not come to pass. Of course if revenues turn down enough, a progressive vision will quickly change to a survival vision and spending will be curtailed in all areas including technology. In this case, it’s good to have a plan for “minimum to keep the lights on” expenditures.

Okay, so management is convinced that we need a plan. Now our task is to translate technology dollars into something they can understand. Return on investment is easy to grasp, but there are a lot of ethereal benefits that are difficult to quantify, like employee job satisfaction due to having the best tools available. A more understandable approach is to find what the best organizations in your industry are spending on technology, and plan to spend a little more. Remember if you view technology as a strategic asset rather than a cost, you’ll find a way to create a competitive advantage with it.

The most common benchmark of technology spending is percentage of gross income, which can range anywhere from two percent to ten percent. Be careful to find whether or not your comparison includes copiers, telephones, training and payroll. Some organizations just report hardware and software as technology expenditures. Another good metric to track is the percentage of spending on new technology vs. maintenance and depreciation of previously purchased tech. 60/40 is a good ratio.

With all this in mind, here is a sample from the service industry of how to allocate your budget:

IT Personnel Expense: 20%
Equipment: 30%
Software & Software Maintenance: 35%
Communications & Website: 10%
End User Training Costs: 5%
Total of IT spending: 100%

IT spending policy development is important and can save a lot of annual planning and meeting time. Here are some examples of components in your policy: a smaller organization may have less IT personnel costs, but it may not see the hidden cost of IT management performed by a board member, a volunteer, or a senior person in the organization. Other hidden costs may include downtime, struggle time, and spam-virus-spyware time. There are also categories that span the above group such as security and disaster planning.

Office software and operating systems: Microsoft
Infrastructure: Cisco, or something less expensive
Hardware: Dell or IBM
Server lifecycles: 4 years
Desktop and laptop lifecycles: 3 years
Computer warranty: Life of hardware, 7X24 onsite with 4 hour response
Software: (a) Upgrade when available, (b) Upgrade based on features

Use your purchase plan history to help with current year planning. Link some spreadsheets and cells to show detail and totals of past spending, and be able to quickly see where you have deviated from your plan in order to take advantage of unforeseen opportunities. Without a progressive vision, an organization won’t grow, but without a technology purchasing plan, a growing organization won’t prosper.

© Clark Nuber PS, 2015.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.