How Cutting Costs Hurts Technology

I regularly hear from advisors seeking my advice on technology purchases. Too often, price becomes too big a factor early in the evaluation process, and then the advisor won't even consider solutions above a desired price point. This is not the best process for evaluating a technology purchase. Here are some ideas to challenge your cost expectations and determine how much influence price should have in your decision.

A good reality check is to ask yourself how you came up with your budget. What parameters influenced the actual dollar amount you expect to spend? If your answer is simply, “This is what we want to spend or can afford,” then you could easily have an unrealistic number — on either the low or high dollar range. If you are not sure what your budget should be, ask advisors similar to your firm what they are spending in your area.

If you are replacing an existing solution, be careful not to put too much weight on what you are paying today versus the cost of the replacement. There has been great progress since you bought your existing technology products.

Keep an Eye on Future Costs

Another critical question is, “What are your technology needs now and in the future?” Just as you encourage clients not to retire before they have saved enough to support their lifestyle, the same is true in regards to purchasing technology. You don't want to buy an inferior product based on a price you can afford today instead of waiting until you have the resources to purchase the right solution for your firm. It sounds simple, but for some reason it is easy for us to cut corners on our technology requirements in order meet a lower cost point. This is why it is always best to draft your minimum technology requirements before even considering cost. If nothing ultimately meets these requirements at the right price, then keep saving.

Another key component in understanding the true costs of your technology purchases involves knowing the direct variables that will impact the bottom line over several years. This could include changes in the number of clients you serve, your assets under management, number of employees, hardware and systems upgrades, and other business drivers.

Consider the potential conversion cost if you have to switch to another solution in the future, too. In fact, a common problem advisors face is that they initially select a low-cost technology solution that costs dramatically more when they try to switch systems later.

Consider Cost of Your Time

If you are easily attracted to a low “headline” price for a technology solution, it is especially critical that you fully evaluate other potential cost influences. For example, should you expect to pay any implementation, consulting or training costs with the new technology? If these are optional costs, evaluate what your time is worth and whether you are compromising successful implementation and adoption by not utilizing these services.

Finally, the overall service and support you receive with a new solution can be a significant cost influence, and something that is hard to quantify prior to making a decision. Sometimes it is worth paying for a higher service support tier or faster response time depending on how important the product is to your business.

I understand that money doesn't grow on trees (I heard that a lot growing up), but you do not want to make the wrong purchase simply because the price fits your expectations. You want to purchase the best solution at the right price for your firm. If you have to remove the word “best” in that sentence, then I encourage you to re-evaluate your purchase decision.

Your Clients Have No Idea What Technology Costs

Quantifying and evaluating the cost of a technology purchase is more critical for solutions that directly impact your clients. Whether it is for financial planning, performance reporting, a web portal or some other technology product, your clients probably don’t know what it costs (and maybe don’t care).

Of course, they do benefit from using the technology (and your firm, too). Therefore, if you are going to make the effort and take the risk of introducing a technology product to your clients, you do not want the cost to be the primary selection criteria. You need to manage the cost, but you should place a higher emphasis on the criteria that matter most to your clients, and cost is probably not one of them.

--- Read Fintech Innovation Picks Up the Pace on ThinkAdvisor.

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