Budgeting For Technology
Employee Recognition Programs

QWe are a general lines distributorship selling mainly storage & handling equipment.
It seems that the cost just to maintain our technology infrastructure (server, network
maintenance, software updates, GPS, etc.) has been escalating every year. Is there a
budgetary percentage of total sales that you would expect to spend on technology each year?

Blair Shwedo SouthEastern Petroleum Systems PEI Treasurer   Scott Hafer Hafer Petroleum Equipment District 2   Joey Cheek JMP Solutions District 3   Andy Mercer R. W. Mercer Company District 4   Richard Dixon P. B. Hoidale Company District 8   Terry Cooper P.E.S., Inc. District 6

ABlair Shwedo: We spend less than one half of one percent of our sales in a typical year for the software and technology named in your question but have had times where it jumped to a little over one percent. I wish I could say we have a straight line budgeted figure for technology; unfortunately we find ourselves adjusting to new technology and ever-changing needs. For example, two years ago we bought new PCs, a server, accounting software and consulting services that amounted to about one percent of sales. This was done because the old system just couldn't keep up with our business. A GPS program was implemented this year, which required a rather large initial investment of about $5,000. We pay about $250/month for the service. This investment has helped tremendously from an administrative standpoint and stands on its own. To maintain our accounting software, we pay about $2,000/year for upgrades and patches. This is a budgeted number, as is about $3,000/year for consulting. Assigning a percentage can be tricky, as it is hard to draw the line on defining “technology.” Where do you put items like cell phones, digital cameras, training software, technicians' notebook computers and the monthly charges that go along with some of these items? Adding these to the list mentioned above will quickly bring the percentage higher.

Joey Cheek: When the budget is being formulated, we usually look at the expenses involved with this category over the previous three years, average it out, and bump it up slightly for use as our budget number. Generally we forecast capital expenditures for these items every year based on the age of our equipment (servers, soft

ware, etc.) and the number of vehicles we will purchase (GPS), using a simple spreadsheet to capture these expenditures per quarter. I assume that over time, based on past history, a percentage of sales number could be established that would accurately depict expenses for this category.

Terry Cooper: A $2,000 computer to a company that does $5,000,000 annually in sales is going to be a drastically different percentage than a $2,000 computer for a company that does $20,000,000 per year in sales. The computer industry recommends that all hardware be replaced every three to four years depending on the work environment it must endure, i.e., field laptops have a harder life than office desktops. Each company can make the determination between 25 and 33 percent of the current hardware and/or software costs to know how much to budget each year for replacement. Two exceptions to keep in mind are cost of living increases (luckily, computer equipment seems to get bigger, better and faster, but the cost stays relatively the same) and the forecasted growth of your company. A company looking for a 10 percent growth in the upcoming year versus one budgeting a 25 percent growth are going to have different hardware/software expansion needs to account for.

Richard Dixon: There are no hard and fast numbers. The cost of technology to a high-volume distributor may be only slightly more than the cost to a medium-volume distributor, but that cost is spread over a much higher volume of sales. I would strongly recommend that you participate in PEI's annual Distributor Profitability Survey and find out how your particular costs compare to other like-size distributors.

Scott Hafer: I don't feel it's appropriate to look at cost of technology infrastructure vs. total sales. As an example, the GPS truck tracking system only relates to our service fleet, and therefore GPS costs should only relate to our service department's sales. A different approach is to look at the number of your employees who use your technology infrastructure vs. your cost to maintain the technology infrastructure.

Andy Mercer: Depending on your size, geographics and business model, there can be a wide range of percentages. Most IT departmental budgets have been growing at a rate of 10 to 20 percent per year. Some companies spend a tremendous amount to drive sales, marketing and recruiting. Others focus their monies on internal software and hardware to run their operations as efficiently as possible. It really comes down to the business strategies of your company and what you are trying to accomplish with technology.

QWhat recognition programs are distributors using to complement
their employee compensation packages?

ABlair Shwedo: Some programs that we have either tried or that I have heard others are using include: billable hours for technicians; phantom stock plan for key personnel; deferred compensation program with a vesting schedule; annual end-of-year bonuses based on: years of service, overall company profitability, department profitability, or individual performance based on goals or quotas. I recommend applying a lot of thought to any changes in compensation programs, as they will have an impact on behavior.

Joey Cheek: Individuals who exhibit superior performance are given recognition with trips, gift certificates, cash gifts, days off, etc. When we have had a good year and met our goals, we increase 401(k) contributions and pay bonuses to all employees.

Terry Cooper: We've used a variety of items, including country club dues and expenses, low to no interest loans, tax return preparation, health club membership, deferred compensation, and personal tax and financial planning. Each works specific to the individual, i.e., some don't work at all. For example, to someone looking for $$$$, a higher paycheck or a bonus is all he is going to be happy with. For someone more seasoned, some of the long-term financial considerations work better.

ONLINE EXCLUSIVE! More Expert Advice PEI's Co-Directors take on these two questions. Read their responses here.

Richard Dixon: Check out the PEI Compensation Report. It contains information on how performers are compensated, including commission, bonus, etc.

Scott Hafer: We track gross profit by department and compare the department's GP to the employees within that department. This can then be used to compare an employee's performance to an employee's productivity and profitability.

Andy Mercer: We recognize employees in our company newsletter, and we give awards for years of service.

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The PEI Journal • First Quarter 2007 • Volume 1, No. 1 • Contents are Copyright © Data Key Communications, Inc.
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