The Bottom Line on Technology Spending

Knowing what you spend can increase what you keep.

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What should your firm spend annually on technology? Whatever it takes. Between 5 percent and 8 percent of a firm's revenue is the longstanding range often used. But a firm's investment will vary considerably depending upon numerous factors ranging from its existing systems capabilities to its age and the new applications required to support the firm's strategic goals.

Everyday, it seems, there are more new and updated accounting technology products flooding the market. And the expense isn't dropping as every day there are more things that are classified as technology.

That's what happened with Clark Nuber, a Bellevue, Wash.-based CPA firm that has classified spending on copiers and telephone systems as part of its technology outlay because they are tied into the firm's network.

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"Back in 1994, a copier wasn't included as technology," says Peter Henley, IT director at Clark Nuber. "Today, a copier is incorporated with a scanner, printer, and fax." This blending of office equipment that once sat on a receptionists' desk with indispensable back-office technology that supports remote access, document manager, and wireless also supports the merging of budgets. That has also meant that the firm has not realized savings as prices for displays, storage, and CPUs continue to drop.

"We have more technology in place, the cost of which has outpaced declining prices," says Henley.

Meanwhile, training staff to use all that new equipment also pushes technology budgets higher. In Clark Nuber's case, technology costs have risen to 7 percent of gross income, up from 5 percent a decade ago.

Clark Nuber's experience fits with the philosophy of L. Gary Boomer, who is known for his views on technology spending. Boomer says that firms must start classifying more expenditures as part of the technology budget. (See related story page 27.)

"If it plugs into the wall, its technology," says Boomer, the CPA who owns the Manhattan, Kan.-based Boomer Consulting. Boomer believes the technology budget should be expanded to phones, faxes, printers, and similar front-office equipment.

Additional components that fall under technology budgets, according to Boomer, include application and operating software, outsourcing and consulting, and training for both end users and IT professionals.

For more than a decade, Boomer has preached that firms must recoup these costs from their clients, not from their partners' pockets. His widely known method has been for firms to impose a technology surcharge on their clients' invoices. Not everyone agrees with this approach.

Clark Nuber does not impose a surcharge. It factors consulting services into its fees, which it termed "top dollar," and therefore its clients will not see an additional charge for technology on their invoices, says Henley "We don't nickel and dime our clients. When you do that it cheapens the whole experience," Henley says. "I know there are a lot of firms out there that do. I am a big fan of Gary Boomer's, but there I disagree with him."

The surcharge was instituted, Boomer says, to get partners and staff to realize that technology is a contribution to their efficiency and they should raise their rates-otherwise they are giving all the savings back to the client. "I don't think it is as big an issue today as it was 10 years ago when we started it," says Boomer.

Still, the issue of how much firms should spend and how to pay for it still remains. Some suggest that firms establish their IT budgets, at least loosely, as a percentage of the total budget.

"A firm should allocate 5 percent of its annual operating budget for technology," says Jim Metzler, vice president of small firm interests for the American Institute of CPAs.

However, Metzler, who has had experience counseling CPAs on their firms' technology, says budget percentages are fluid. Factors that establish the percentage are determined by the firm's prior investment in hardware, software, and training.

CPAs' sense of thrift often works against them. In some cases, it is difficult to calculate the return on technology investments or the costs of hanging on to old equipment.

Getting a Handle on IT Costs

After years of preaching the need for firms to understand how much they are spending on technology, L. Gary Boomer believes that many accounting firms are still victims of their own approach to accounting for costs.

"I feel they are still using 'peanut butter accounting,'" says Boomer, in describing the approach he often finds. "Spread it thin and no one knows how much your are spending."

Firms departmentalize budgets so that expenditures that should be classified with technology end up in the administrative budget, or in other categories.

Some firms, he continues, have outdated charts of accounts that make capturing expenses a challenge.

A major omission is usually training, which his firm's most recent surveys say account for more than 40 percent of the IT budget in larger firms, along with IT support. "Training is the key to the return on investment in technology," says Boomer. "The greatest return is in training of partners and administrative staff." Training, he notes, is also a key to attracting and keeping qualified staff.

Boomer still espouses the replacement of one third of a firm's desktop computers and all of its notebook computers annually. But hardware represents only about 6 percent of costs.

"Software costs are increasing as the number of applications that firms use continues to increase," he says. That includes programs for content management, virus protection, and Microsoft applications in general.

"They [accountants] know there are faster machines and equipment out there, but they say, 'Let's hold on and make do with what we have for the time being,'" says David Cieslak, principal of Information Technology Group, based in Encino, Calif. By the time they do, when something breaks down, Cieslak says, the price tag is higher because everything must be replaced.

Moving Ahead

It was the cost of holding on to its NetWare operating system that drove Schneider Downs, a CPA firm based in Pittsburgh, to switch to the newer Microsoft Server 2003. The NetWare operating system worked just fine, according to John Stafford, a shareholder. However, it was increasingly difficult to find technical support for its previous system.

"It [Microsoft] cost us money," Stafford says. "But, from a long-term technology standpoint, it was the right thing to do. It made us more compatible with licensing and software vendors."

The firm does not have a fixed formula for how much it should spend on technology. Instead, every two years it tallies the anticipated expenditures. In addition, every year, the $30 million firm examines the business case of taking on a new technology project.

For many firms, technology has become more than just an expense-it's a competitive tool.

"Technology is one of the ways we're looking to differentiate ourselves from our competitors," says Earl Edeburn, director of the technology group at KDV. "The role of technology has increased, that is why I was brought in."

Hired in November, Edeburn says that the Minneapolis-based CPA firm has already realized some of the benefits from new technology. A year ago, KDV installed FirmWorks, a practice management system, to help improve its operation. It also switched email platforms, moving from Novell GroupWise to Microsoft Exchange, to help provide collaboration between its three offices in Minnesota.

KDV spends between 5 percent and 8 percent of its annual revenues on technology. But managing technology is not just about budgeting. It's about selling the idea to the partners.

"It's a political process bringing together a combination of visions," says Edeburn.

Those who feel frustrated in IT budgeting may take some comfort in the fact that these issues aren't limited to partnerships in public accounting or to the United States. In a recent survey by the Economist Intelligence Unit, the majority of United Kingdom chief executive officers polled were at loggerheads with their IT directors over key technology within their organizations.

The CEOs stated that their company networks had not met their expectations, and IT directors said that senior management doesn't understand technology or provide adequate support.

Many advisors believe that formulas for technology spending often don't work.

"Percentages of revenue don't work," says Roman Kepczyk, president of Tempe, Ariz.-based InfoTech Partners. For instance, a firm generating $175,000 per employee will spend a much smaller percentage on IT than will a firm generating $100,000 per person.

Typically, Kepczyk links a firm's technology spending to the number of employees. He recommends between $6,500 and $8,000 per person annually. However, without having visited the firm to see what technology they have in place and how it is being utilized, it is difficult to assess.

"You can't do a blanket statement that they should spend [a certain percentage]; that is why we ask them to do an inventory," Kepczyk says. "You may spend more one year and less the following."

Costs are also affected by a firm's strategic vision, says Henley.

"Some goals require more technology than others," he says. "For example, if a goal is to push into a new market in a different city, more technology would be required than for a goal to streamline our recruiting process."

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