How ready mixed concrete producers can tackle information technology expenses while staying competitive.
Provided you haven’t spent the past decade off the grid hiding from doomsday in a prepper shelter, you know that modern businesses run on information technology. Advanced IT systems have become a hallmark of leading companies in every industry—and while each sector has different needs, all need IT.
IT impacts every aspect of a business. It sprawls as a living organism into everything we do, with no exceptions. What’s included in IT, how much should it cost, and how do we create a structured budget? These questions would torment even the father of accounting, himself—mathematician Luca Pacioli, the Franciscan friar and friend of Leonardo da Vinci who was the first to explain the double-entry bookkeeping method still used today. But let’s explore.
What is IT? Beware of the Shadow!
IT wraps around everything with a computer chip, including procurement, implementation, support, service, and upgrading. CalPortland CIO Luis Angulo and Ozinga CIO Keith Onchuck are leaders in the ready mixed concrete industry and the National Ready Mixed Concrete Association’s IT Task Force. They worked with the NRMCA Business Advancement Committee (BAC) to establish a baseline general ledger (GL) code structure that can be used by producers to define and track technology costs:
Direct: batching computer depreciation, plant software purchases, plant software maintenance, plant hardware purchases, plant hardware maintenance, IT plant subscriptions, plant telecommunications, and other IT expenses.
Overhead: accounting software, other software purchases, cybersecurity/IT security, other software maintenance, other hardware purchases, other hardware maintenance, other IT subscriptions, outside hosting, telecommunications, wages, fringes, education/seminars, travel and entertainment, depreciation, outside services, and consulting/contract labor.
What’s not listed, but is absolutely the most expensive, is the “Shadow.” Shadow IT happens when an individual or department circumvents the process and directly purchases IT-related items. These might range from innocuous things like phones and laptops to business process software or camera systems for trucks. Unsanctioned purchases introduce hidden, unaccounted-for expenses that can quickly consume an IT budget. Considering the hours it can take to configure, integrate, support, and maintain technology, poorly managed purchases can potentially double IT costs. Shadow IT also presents unforeseen security risks for the department.
What does IT cost?
IT spending varies by industry. Transactional industries, like finance, allocate a higher percentage of their revenue to IT because they deliver the vast majority of their products and services electronically. Industries that produce and deliver physical products, like ready mixed concrete, use IT to streamline processes. They allocate less because they have fewer value-based targets for digital transformation.
For our industry, it is good to remember the wisdom of Albert Einstein in that “Not everything that can be counted counts, and not everything that counts can be counted.”
Angulo and Onchuck observe that foundational IT investment must grow in tandem with business needs, whether driven by scaling operations or adopting competitive innovations. Using data collected from NRMCA’s Performance Benchmark Survey, the IT Task Force developed an anonymized template that producers can use as a benchmark for IT spending (see chart). Note the costs are in terms of the overall IT budget, often called the annual operating plan (AOP).
Emerging technologies like artificial intelligence (AI) are further reshaping the IT landscape, potentially increasing future costs—especially in cybersecurity. AI is putting cybercrime on steroids. Given that the most significant vulnerability of any organization is human (not computer), including endemic, repetitive security training for all staff will dramatically increase the AOP spend.
The second important aspect is that to keep up with competitive necessity, IT will scale in line with the growth of the business. Growth by acquisition is particularly taxing on the AOP as new people, processes, and tools must be integrated. Finally, to exploit new advances that offer a competitive advantage, overall spending as a percent of revenue must increase.
In terms of what IT does cost, as a general rule for our industry, you must be prepared to spend at least 2 percent of revenue on IT. Consider an average selling price of $160 per cubic yard (CY) and load size of 8.25 CY. The cost of IT is then $3.20/CY and $26.42 per load.
What should IT cost?
Consider the 25th and 75th percentiles of spending for discrete manufacturing are 1.4 percent and 3.2 percent, respectively, versus 4.4 percent and 11.4 percent for finance. While our industry can and does spend less than finance, as the confluence of requisite functionality grows, so does spending. To set general expectations, be prepared to spend:
- 2 percent of revenue ($3.20/CY) to tread water with competitive necessity.
- 3 percent of revenue ($4.80/CY) to harvest competitive advantage.
- 4 percent of revenue ($6.40/CY) for foundational modernization required for strong inorganic growth, including the addition of enterprise resource planning (ERP) platforms.
While tempting, reducing appropriate IT spending to increase EBITDA brings significant risks. In the short term, cybersecurity is critical to protect against the explosive growth of cybercrime. In the long term, market share will be lost to others who provide a technology-driven business platform for their customers that reduces the friction and cost of doing business.
Prepping for the future
If we fail to prepare for the increasing complexity of the IT ecosystem, we are simply preparing to fail. Cutting costs related to essential IT utilities is possible, but investing in knowledge will yield the best returns. Moving forward, the perplexing IT choice is rather simple: embrace the romanticized 1990s version of “prepper IT” to minimize spending and maximize risk, or lean into the complicated, uncertain future by provisioning for the future. Forward-thinking producers understand that IT isn’t just an expense; it’s an investment in innovation, growth, operational efficiency, and resilience in an increasingly digital world.
The NRMCA IT Task Force is gathering and sharing much-needed insights about IT investment and its returns in our industry. To share input or learn more about their efforts, reach out to task force co-chairs Luis Angulo at [email protected] and Keith Onchuck at [email protected].
Note: This chart is for illustration only. The GL code categories have been revised (as shown above, on page 8) and will be updated accordingly and available upon request. — CY
Craig Yeack has held leadership positions with both construction materials producers and software providers. He is co-founder of BCMI Corp. (the Bulk Construction Materials Initiative), which is dedicated to reinventing the construction materials business with modern mobile and cloud-based tools. His Tech Talk column—named best column by the Construction Media Alliance in 2018—focuses on concise, actionable ideas to improve financial performance for ready-mix producers. He can be reached at [email protected].