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CompensationMaster Newsletter Article, Spring 2001 CompensationMaster estimates that over
90% of all brokers are affected by the technology sinkhole, and that total
losses may exceed $534 million.
How do you know you are in the technology sinkhole?
You invest in technology...
Your agents become more productive...
Your revenue goes up...
Your profit goes down.
About six months ago, we started to see a pattern in the
companies with whom we were consulting. Firms that had invested in technology,
and had seen significant revenue growth as result, were now losing money.
Worse in the second year
Interestingly, a number of companies did see the increase in profit they
expected in the first year. The losses didn't show up until the second year,
making it difficult to identify the cause of the problem. We found it because
of the thorough financial analysis we do as part of our consulting. When we
noticed the same problem in company after company, we realized this was a
problem affecting the whole industry.
How does an investment in technology
cause this problem?
What we discovered was that the investment in new computers, new software, and
the Internet worked the way it was supposed to—agents became more productive.
Revenue went up. But selling more pushed many agents up to higher split levels.
This reduced the company dollar, making it more difficult to pay for the
increased technology expense. As an example, let's look at a company where:
GCI = $5 million
Company dollar = 32%
Profit = 2% (or $100,000)
Technology investment = $50,000 annually
Let's say the technology investment results in a 5% increase in
revenue.
5% of 5,000,000 is $250,000. So revenue goes up by $250,000.
32% of $250,000 is $80,000. So the company dollar increases by
$80,000.
$80,000 less the technology investment of $50,000 leaves a net profit increase
of $30,000. So in the first year, profit increases to $130,000.
So far, so good. Now, let's look at what happens in the second
year.
Let's say all the agents benefited equally from the technology,
and everyone moved up to a higher split. Say they go up 2.7%.
Now company dollar drops to 29.3%. You now have $135,000 less
to pay your bills than you had last year. Your revenue is up, but your profit
is gone.
The situation can be even worse if all agents do not benefit
equally from your technology investment, which is what happens in the real
world.
Suppose the entire increase in revenue comes from your top
producers, who are at an 80% split level. The company dollar on those sales is
just 20%, so instead of gaining $80,000 you only increase profit by $50,000—just
enough to pay for the technology investment. Although revenue increased, profit
stayed the same. That's in the first year. It could be worse in the second
year.
How do you get out of the sinkhole?
You need to be able to recover your investment in technology. Some firms do
this by charging user fees for technology or referral fees for leads that come
in over the Internet. Other companies increase off-the-top fees, like
relocation, for business directly attributable to the new technology. However,
these fees are not popular with agents, who feel they are being
"nickel-and-dimed" on one thing after another.
The best approach
Your best strategy is to re-design your compensation plans so they are based on
your current costs of doing business, including the amount you invest in
technology. When you use CompensationMaster's software to design your plans,
you can make sure your expenses are covered and build in the profit you need to
grow your business. Our consultants can help you design compensation plans that
are aggressive and highly competitive in your market. We can also work with you
to introduce them to your sales force and managers, ensuring that the
introduction occurs with a minimum of disruption and that you get the results
you need.
Contact us for more information and an initial consultation.
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