Are you avoiding technology costs? A few months ago, a subscriber to our planning tools called with a tech support question. “Your software doesn’t work,” he said.
After some investigation, we identified the problem. He was using a version of the underlying engine, (a part of Microsoft Office) that was four or five generations past end-of-life.
When asked about his willingness to upgrade he said, “I don’t want to be forced into getting a subscription.” As a side note, no software developers try to develop for compatibility with end-of-life products.
I understand his issue completely. When Microsoft introduced Office 365 in 2011, I was as irritated as most folks were. We maintained generally up-to-date software but usually skipped a release or two. Upgrading applications happened when we began buying the next round of PCs with newer Windows operating systems. I protested the need to pay for software every year.
Clearly, we lost that battle a long time ago. None the less, I can understand our client’s issue. He runs a solo practice, and his software works just fine for his relatively limited needs.
What are “True” Technology Costs?
As I’ve coached for many years, true hardware and software costs should be measured by employee productivity.
Begin with hardware. Keeping an old computer alive isn’t efficient. (And this is from someone who drives a 17-year-old car!) An IT managed services client of mine described the “break/fix” portion of his business for a customer who didn’t want to “subscribe” to managed IT services.
“We get a call that the printer isn’t working and dispatch a technician. We haven’t looked at that particular PC in eighteen months. Employees have loaded new programs. They’ve done some, but not all of the required updates. The technician performs the updates, reinstalls the printer drivers, and gets it working after about 2 hours.”
“When we invoice the tech’s time, the customer has a fit. ‘I could have bought a whole new computer for that much!’ he says.”
No fooling. That’s why break/fix has become pretty much the domain of a walk-in trade for storefront technicians. Most IT companies can’t afford to do it anymore.
More importantly, what did the malfunction create in indirect costs to the company? What’s the cost of the idle employee, the job that wasn’t printed, and the boss’s time to fight over the invoice?
Let’s say for a simple illustration that an office employee’s fully loaded cost is $52,000 a year, or $1,000 a week. Buying a new PC every three years is about $500. How much time does the employee need to save to pay for the newer computer?
The answer is a bit less than 7 hours… a year. That’s 2 minutes per working day. So, the real question becomes “Will a newer computer save this employee 2 minutes a day?” It may not be immediately obvious, but if the tech support company is charging five times the employee’s salary ($150 an hour,) saving even one incident over the next three years more than covers it.
Technology Costs in Quality of Earnings Audits
Technology costs have become an integral expense item for almost every business. This hasn’t escaped the notice of business buyers, especially professional buyers.
Expect a Quality of Earnings (QoE) audit to encompass software licensing and subscriptions, hardware and equipment, IT support and maintenance, cloud storage, telecommunications (bandwidth and redundancy,) cybersecurity, and data protection insurance.
If a company is still working with the old “If it fails, then we’ll replace it,” you can expect a substantial downgrade of its EBITDA. A dozen new PCs, a server, new software licenses, cloud storage, annual costs for a bigger Internet pipe and a second carrier could easily cost $100,000.
Depending on the multiple being paid, each $100,000 deducted from the EBITDA means 3, 4 or 5 times that amount deducted from the price. That will get the seller’s attention, but by then it will be too late.
Technology coats for current (not cutting edge) equipment and software are money well spent both now and at the time of a sale. Expected and budget for upgrades on a regular cycle. Deferring the expense might be the definition of “Penny wise and pound foolish.”
