Tania Bengtsson says her agency’s approach to ­technology used to be “very reactive.”

Two years ago, she took on oversight of tech at Gibson, a 125-employee agency headquartered in South Bend, Indiana with four locations across the state. When she requested a copy of the technology plan, she received an Excel document with six or seven lines filled in.

“I said, ‘That’s not a plan!’” recalls Bengtsson, principal and director of marketing and innovation at Gibson. “There are so many intricate pieces of technology. It matters the age of your environment, it matters the health of your environment, it matters what your IT team looks like. This stuff is changing fast.”

The overall cost of technology is a top technological challenge for 32% of independent agencies—and it’s the No. 1 challenge for 11% of them, according to the 2016 Future One Agency Universe Study. The former statistic is down 10% since the 2014 study, but the ongoing struggle is no surprise when you add up the many tentacles of the technology beast at a typical 21st-century agency.

“10 years ago, it was pretty much your agency management system and maybe some website,” says Steve Anderson, an insurance technology consultant with more than 30 years of industry experience. “Today, agencies need to have a marketing system, they need to have an interactive website with a client portal, they need sales tracking—there are so many more components today that agencies are feeling the need to embrace.”

“It’s about how are we communicating with the insureds, how are we connecting with the carriers, how are we ultimately analyzing our data?” agrees Kris Hackney, executive vice president of customer experience at Applied Systems. “Agents have to look at where they are now vs. where they need to go.”

And that’s why creating a technology budget is so important. According to a 2016 survey from Vertafore and Hanover Research, the tech spend had increased at 51% of agencies over the previous 12 months, and another 63% anticipate additional increases in the next year.

“Our people can’t work if they don’t have technology. They’re crippled,” Bengtsson says. “We are so reliant on technology that everyone is great when nothing breaks, but when it does, it’s really, really painful.”

Although Anderson says most agents don’t bother, creating a technology budget can help you better prepare for the inevitable technology fires that crop up—and also help you prevent them.

Step 1: Take stock. Historically, the amount of investment an agency makes in technology has been below 1% of revenue, according to Anderson. “In my opinion, an agency should budget every year 2–4%, maybe even 5%, of revenue on technology,” he says. “I see a big gap between what I think they should invest and what they are investing.”

But because the tech umbrella is broadening, that number might mean different things to different agencies. “You need to take a look at what objectives you’re trying to accomplish and what your long-term goals are,” says Bruce Winterburn, vice president of industry relations at Vertafore. “The problem with saying it’s 25% or 5% is that then someone just assumes if they hit that number, they’re OK. It’s about needs and capabilities. What needs does your agency have to be able to compete, and what capabilities are out there?”

For example, “the digital marketing experience is a tech product per se, but you might still leave that under the marketing realm of your budget simply because it is a marketing expense,” points out George Robertson, principal at Rockingham Insurance in Eden, North Carolina, a small town of about 16,000. The five-employee agency spends about 3% of revenue on technology, Robertson says.

Gibson apportions about 2.3% of its annual $22 million in revenue to technology, says Ron Turpin, principal and CFO. That percentage includes current projects, the agency management system, telephones, hardware and pre-budgeted software purchases—but not special projects. “We’re still working through the list of things we know we have to roll out,” he says. “And there’s a separate bucket for ancillary items.”

For CoVerica in Dallas, it makes more sense to budget based on head count. When Leif Hurst joined the agency as director of IT in 2003, 19 employees operated on a 9–5 schedule. Today, staff count has surpassed 60 and includes a number of millennial and remote personnel.

“I’ve gotten away from the idea of control and ownership of everything,” Hurst says, noting half of CoVerica employees work from a Surface tablet instead of a desktop.

The agency’s technology budget structure is highly dependent on individual employees, so when the agency hires new staff or makes an acquisition, “I know down to the head what it’s going to cost us,” Hurst explains. “It’s about getting down to a per-unit cost for services, instead of a situation where this server or this telephone system will hold me up to X, and then once I go X+1, I’m in real trouble.”

Step 2: Map it out. “What I find in my work with small to midsize agencies is that they don’t have a formal budgeting process,” Anderson says. “Their approach is usually, ‘I spend it when I decide I need it.’ That’s one of the issues—do you actually budget in the first place?”

The best place to start is with the overall business goals of your agency. “Begin with the end in mind,” Hackney recommends. “Think about who you want to be and what you’re trying to accomplish as an agency, instead of starting with a disparate list of various technology solutions.”

For Bengtsson, that meant correlating Gibson’s overall business strategy with technology-related decisions. “Whoever’s in charge of the technology plan needs to understand what the corporate goals are,” she says. “If you can’t marry up your tech initiatives with those goals, you’re always going to be flying blind, and it’s always going to feel uncontrollable.”

Each year, Bengtsson compiles a three-year outlook for the technology budget, which agency leadership revisits at least quarterly. “What we’re trying to do is get more visibility—here are the projects we’ll have to do later, and here’s what we’re currently working on,” Turpin explains.

Rockingham sticks to an annual budget, which Robertson also revisits quarterly. “One of the things I like to do is look at the last three years,” he explains. “I take the chart of accounts and break it out, and then I look at the Big ‘I’ Best Practices Study to see how we compare based on revenue. You need to evaluate based on your peers of like size, or somebody that’s a little bit above where you currently are because you want to strive to get there.”

Similarly, NBT-Mang Insurance Agency, headquartered in Norwich, New York with nearly two dozen offices across New York and Vermont, performs an annual review of its wish list for product development and IT services, during which leadership estimates any additional expenses that may occur throughout the year ahead and vets the pros and cons of possible solutions.

The implementation timeline depends on integration requirements and service needs, but generally takes six to eight months, says Mark Harrison, agency operations and systems manager of the bank-owned agency.

Step 3: Prioritize. Hands down, the agency management system costs the most. “That’s an expense that’s not going away,” Robertson says­—and beyond the initial price tag, count on annual increases. “When you’re purchasing, make sure you ask, ‘What was the average increase over the past three or four years?’”

Next comes items like personal lines raters, client portals and other integrated services, followed by support services for staff. When it comes to updating hardware, stick to a fixed schedule. “If you have to replace all the computers in the office at once, it’s a huge expense,” Robertson warns. “But if you rotate those out on a regular schedule, you don’t have that issue.”

The lines become less clear when it’s time to go above and beyond tech table stakes. How can you make sure your agency balances core tech with tools that may not necessarily be essential, but will help agency thrive? “It starts with redefining what’s ‘essential,’” Hackney says.

“Years ago, all our decisions were based on the bottom-line number,” recalls Bengtsson, who is a member of Gibson’s leadership team and also serves on its board of directors. “There was no consideration for efficiency, productivity or what the long-term impact on our clients and employees would be. We ended up spending good money after bad.”

And it usually cost more to fix a mistake than it would have to do it right the first time. “It drives your agency into a technology crisis, and then it spirals out of control,” Bengtsson says. “If your people have no trust in your team or your technology, that is a core problem for your entire firm.”

Hurst asks himself questions like: What’s the usage scenario for this? How often do we need it? What is it going to do for my staff? “If I can take an employee and say, ‘We can do what you’re doing and give you 30% of your time left. Spend half that time cross-selling new business and the other half with your family’—things like that that make an impact on your employees’ lives, and that makes an impact on the client,” he says.

When Rockingham acquired an agency on the other side of the county, it decided to implement a voice over internet protocol (VoIP) phone system in order to get the most bang for its buck. “We saved almost $2,000 by making that move,” says Robertson, who notes that VoIP also enhances data and tracking at the agency.

But the most important benefit has been better customer service. “If a customer called the main office and the CSR was at the other location, we would have to ask the client to call that location,” Robertson says. “That’s not a great customer experience. No matter where they called, we wanted to be able to just hit a button and transfer them, and VoIP gave us that ability.”

“The bells and whistles drive people to you,” adds Harrison, who performs a cost/benefit analysis before every tech decision. “It comes down to a business case. What’s the overall benefit? Does it increase productivity, retain our customers and overall make us more profitable? Sometimes you have to spend a few dollars in order to make a few more.”

Step 4: Be nimble. Technology fails sometimes—there’s no getting around it. How can you make sure your budget is flexible to accommodate unwelcome surprises? Most agencies are solving that problem by shifting away from server-based systems and into the cloud.

“As long as you keep an open mind and have a cloud strategy and a social strategy and try to look for software vendors who are open to working with other vendors—that in itself allows you to be more nimble,” Winterburn says.

Typically, cloud vendors house all the necessary equipment and respond when there’s a problem. “You’ve got people that are there watching it 24/7, and they’ve got backups of the data,” Robertson says. “All these systems go down periodically, but if they do, they’ve got people working on that immediately. If you had that happen in your office, you’d have to call the IT person, and maybe they don’t have time to come over until the next day, or if it’s an emergency call you have to pay a higher dollar amount.”

Another best practice for budget flexibility: Plan for growth. When Hurst bought CoVerica’s phone system four years ago, he didn’t buy it to accommodate the agency’s then-current situation—he thought about where the firm would be in five and 10 years.

“This gets down to how we handle anything at the agency—does it work at 50 people, and does it work at 500?” Hurst explains. “I know that at a moment’s notice, the owner could walk in and say, ‘Hey, we just bought an agency. There’s going to be 20 people in here next week—figure it out.’ So option B may be more expensive than option A, but in the long term, it’s going to be a better fit.”

Bengtsson plans three years out, but understands that the agency’s tech needs change so rapidly that it’s impossible to set any plan in stone. At the end of each year, “our budget and our spend will be impacted by the results, because our plan was built on a certain goals,” she explains. “If we’re achieving those, that it makes it really exciting. If we’re not, how do we as a team make decisions that don’t negatively impact our users and, at the same time, continue with our fiscal responsibility? That mindset of ‘Spend it today and then forget about it’—that has to shift.”

Jacquelyn Connelly is IA senior editor.