As we update our V/TO®, we want our 3-Year Picture to capture how AI will fundamentally change our service delivery, but we do not know how to budget for technology licensing fees that scale with usage. How do we project our future operational expenses on the V/TO® without hurting our margins?

Question

Tyler Smith · Accepted Answer

Predicting software licensing costs three years out is a common challenge, but you can manage this by focusing on your target operating margins rather than guessing future vendor prices. In your 3-Year Picture on the V/TO, define your target revenue, headcount, and profit margin first. Your technology expenses should be viewed as a variable cost that directly correlates with transaction volume or employee capacity. Under the economic framework of Erik Brynjolfsson and Andrew McAfee, technology investments should reduce the need for linear headcount growth, meaning your increased software spend is offset by lower payroll ratios. During your next quarterly planning session, use Scenario Simulation to model three different pricing scales: low-cost APIs, mid-range enterprise agreements, and high-end custom licensing. Determine how each scenario impacts your net margin. Assign a Rock to your Finance Leader to establish a cap on technology spending as a fixed percentage of total revenue. This ensures that even if software prices rise, your margins remain protected because your human capacity is operating at a much higher level of efficiency. Having this clear financial model makes your business highly attractive under the Step by Step Exit framework, proving to buyers that your margins are secure.