Case Study: Employee-Owned Distributors Investing in Digital—What Small Distributors Can Learn

Hook: For employee-owned distributors, digital decisions are ownership decisions

If you run an employee-owned or co-op distribution business, your two biggest headaches are familiar: finding reliable, vetted talent and convincing a risk-averse board to fund technology that promises payoff only after months (or years). In 2026, with AI, composable commerce and automation rewriting the rules, those headaches become strategic risks. Border States — a 100% employee-owned distributor — just created a vice president of digital transformation to accelerate ecommerce, AI and automation. That move is a practical template for small, co-op and employee-owned distributors that need governance and funding models built for collective ownership.

The move that matters: Border States appoints a VP of Digital Transformation

In January 2026 Border States named Charlie Hoertz as vice president of digital transformation, charging the new role with enterprise ecommerce, data and automation initiatives. The company's CIO, Jason Stein, framed the hire bluntly:

"The pace of change driven by technology and AI is unprecedented, and success requires bold leadership and a clear vision." — Jason Stein, CIO, Border States

Border States is a 100% employee-owned electrical distributor with more than 3,500 employees across 31 states. The appointment signals a shift: employee-owned distributors can (and must) build centralized digital leadership to generate measurable returns from technology investments.

Why this matters in 2026: Macro trends shaping distributor digital bets

Before we prescribe governance and funding models, keep these 2026 realities top of mind:

• AI-first operations: Generative AI and domain-specific LLMs are being deployed to automate quoting, demand forecasting and customer self-service, reducing order cycle times and headcount needs in repetitive tasks.
• Composable commerce: Headless platforms and modular microservices let distributors iterate customer-facing services without ripping up core ERP systems — critical for tight capex budgets.
• Vendor co-investment and platform partnerships: Large ERP and marketplace vendors are offering outcome-based financing and co-funding pilots to accelerate footholds in mid-market distributors.
• Data as an asset: Data products (pricing intelligence, inventory health dashboards) increasingly deliver recurring margin improvements that can justify capitalized investment.
• Regulatory and cyber environment: Increased scrutiny on supply chain data, privacy and operational resilience pushes boards to favor secure, auditable digital projects.

What small employee-owned distributors can learn from Border States

Border States' hire is not just a headcount decision — it's a governance signal. It clarifies accountability (one executive owns cross-functional digital outcomes) and creates a forum for measurable KPIs aligned to ownership incentives. For small co-ops or ESOP companies, this maps to three practical lessons:

1. Centralize digital accountability: Even if you don’t create a VP role, assign a single accountable lead and a cross-functional steering committee.
2. Define outcomes, not projects: Tie investments to measurable outcomes (gross margin lift, order deflection, reduced days sales outstanding) and publish them to members.
3. Use phased pilots to derisk: Start with tightly scoped pilots that deliver clear ROI in 6–12 months to build board confidence.

Governance framework: A practical model for co-op & employee-owned distributors

Employee ownership changes the governance calculus. Members expect transparency and often vote on major capital uses. Use this framework to move from debate to execution.

1) Digital Steering Committee (DSC)

Purpose: Provide ongoing oversight and prioritization of digital investments.

• Composition: CIO/IT lead (Chair), CFO (funding lead), Operations head, Sales/Customer Experience lead, two employee-owners/reps, and an external digital advisor (part-time).
• Authority: Approve projects up to the strategic threshold (suggested: projects under $250k or representing under 0.5% of revenue). Higher amounts escalate to the Board.
• Deliverables: Quarterly scorecard, pilot recommendations, vendor shortlists, risk register.

2) Board-level Digital Oversight

Purpose: Ensure alignment with long-term ownership objectives and fiduciary duty.

• Role: Board retains approval of strategic digital spend above the threshold, signs off on capital allocation strategy, and monitors compliance and cyber risk.
• Reporting: The DSC provides a concise board pack (6 slides): investment thesis, milestone timeline, spend-to-date, realized benefits, top 3 risks.
• Voting considerations: For co-ops with member voting, define which digital investments require member approval (e.g., equity dilution, >5% of retained earnings).

3) Investment Policy & Scorecard

Adopt a clear policy so digital is treated like any other capital investment:

• Score projects on: Strategic alignment (20%), Financial ROI (30%), Operational risk reduction (20%), Time-to-value (20%), Compliance/Resilience (10%).
• Approval buckets: Rapid (under $50k, <6 months), Moderate ($50k–$250k, 6–12 months), Strategic (>$250k or >0.5% revenue).
• KPI requirements: Every approved project must publish 2 leading indicators (e.g., online conversion rate, quote-to-order time) and 2 lagging financials (e.g., incremental gross margin, cost savings). Measurement windows: 3, 6, 12 months.

Funding models: Practical options for small, co-op and employee-owned distributors

There’s no single way to fund digital. Mix-and-match options to balance member preferences, tax efficiency and risk tolerance.

Option A — Retained earnings + a dedicated digital reserve

Structure: Allocate a fixed percentage of annual retained earnings to a ring-fenced digital reserve.

• Recommended allocation: 5–15% of annual retained earnings until reserve equals 1–3% of revenue (scaled by strategic need).
• Pros: No dilution or debt. Keeps decision-making internal.
• Cons: Slow to accumulate; may compete with member dividend expectations.

Option B — ESOP loan refinancing / internal credit facility

Structure: Use refinancing of ESOP-related debt or establish an internal subordinated loan to capitalise digital projects.

• Use case: When interest rate spreads are favorable or company can restructure debt to free cashflow for technology.
• Pros: Keeps ownership intact; avoids member voting for each project.
• Cons: Increases leverage; requires strong cashflow forecasting.

Option C — Non-voting digital shares or member bonds

Structure: Offer members the option to invest in non-voting digital shares or fixed-term member bonds that fund a digital fund.

• Pros: Preserves governance balance while sourcing capital from willing members; aligns investors to project success via dividends or discounts.
• Cons: Regulatory compliance and member appetite vary; requires clear redemption terms.

Option D — Vendor co-investment and outcome-based contracts

Structure: Negotiate with ERP/ecommerce vendors for deferred fees, risk/reward pricing, or vendor-funded pilots.

• Pros: Low upfront cost, incentives aligned to vendor performance.
• Cons: May lock you into vendor stack; read contractual exit clauses carefully.

Option E — External debt & government programs

Structure: Use local bank loans, SBA 7(a) or targeted digital modernization grants (state-level or industry associations).

• Pros: Affordable capital in many geographies; grants reduce effective cost of adoption.
• Cons: Application timelines and reporting can be heavy; covenants may limit flexibility.

How to choose the right funding mix

Use a three-step decision rule:

1. Classify the investment: Is it operational (cost-saving), commercial (revenue-generating), or regulatory (must-do)?
2. Match risk tolerance: Operational works for internal funding; commercial and strategic can justify external co-investment or debt.
3. Time-to-value: Short payback (<12 months) → internal reserve or vendor financing. Longer, transformational bets → blended funding with staged release tied to milestones.

Board buy-in playbook: How to sell digital to member-owners

Boards and members worry about dilution, hidden costs and failed pilots. Use this playbook to convert skepticism into support.

• Start with a pilot promise: A 6–9 month pilot with a $50k–$250k cap and a 2–3 metric guarantee (e.g., +15% online conversion or 20% fewer manual quotes).
• Offer staged funding: Release capital in tranches tied to milestones and KPI thresholds.
• Use real comparables: Benchmark with peer distributors (e.g., Border States’ publicized digital leadership hire) and show expected lift ranges (5–15% revenue from ecommerce within 12–18 months for similar distributors in 2024–2026 studies).
• Protect downside: Add exit clauses, vendor performance SLAs, and third-party milestone verification for large spends.
• Democratize success: Publish quarterly digital dashboards to members, showing wins, spend and next steps — ownership wants transparency.

Phased operational playbook: Pilot → Scale → Embed

A replicable three-phase sequence reduces risk and builds institutional muscle.

Phase 1 — Pilot (0–6 months)

• Scope: Focused outcome (e.g., online ordering for top-100 SKUs or AI-assisted quoting in two territories).
• Budget: $50k—$250k (or vendor co-funded).
• Team: Product owner, IT lead, one business SME, vendor implementation partner, DSC oversight.
• KPIs: Time-to-quote, conversion rate, order accuracy, incremental gross margin.

Phase 2 — Scale (6–18 months)

• Scope: Roll features across business lines; integrate master data and pricing engines.
• Budget: Add 1–3x pilot spend depending on scope; use mixed funding (reserve + vendor finance).
• Governance: Monthly DSC reviews and quarterly board updates.

Phase 3 — Embed (18–36 months)

• Scope: Operationalize continuous improvement, reallocate savings, and invest in upskilling staff.
• Outcomes: Routine digital ROI reporting, continuous deployment pipeline, and a stabilized digital reserve for ongoing innovation.

Practical templates: Scorecard and approval thresholds

Use these quick templates to speed decisions.

Digital Investment Scorecard (out of 100)

• Strategic fit: 20
• Financial ROI (NPV / payback): 30
• Operational risk reduction: 20
• Time-to-value: 20
• Compliance/resilience: 10

Suggested threshold: Approve if score ≥ 65. Require board review if score 50–65. Reject or rework if <50.

Approval thresholds (example)

• Rapid decisions: < $50k — DSC chair approval + CFO notification.
• Moderate decisions: $50k–$250k — DSC approval and CFO sign-off.
• Strategic decisions: > $250k or >0.5% revenue — DSC recommendation + Board approval.

KPIs to track (must-have dashboard)

Lead with metrics that matter to owners and the business:

• Commercial: Online conversion rate, % of revenue online, average order value, new vs returning customer revenue.
• Operational: Quote-to-order time, order accuracy, order fulfilment cost per order, stock turns.
• Financial: Incremental gross margin, payback period, NPV of the project.
• People & risk: % of staff trained on new tools, cyber incidents, vendor SLA adherence.

Common pitfalls and how to avoid them

• Pitfall: Treating digital as an IT project. Fix: Assign a business owner and measure revenue/ops outcomes.
• Pitfall: Over-investing before pilots prove value. Fix: Stage releases and tie to KPIs.
• Pitfall: Ignoring member expectations on dividend timing. Fix: Transparent funding policy and member purchase options for digital shares.
• Pitfall: Vendor lock-in without exit plans. Fix: Use modular architectures and negotiate data portability clauses.

Real-world example: What a $250k pilot might look like

Scope: Implement headless product catalog + AI quoting assistant for top 100 SKUs and two sales territories.

• Estimated cost: $150k vendor fees + $100k internal effort (data cleansing, integrations).
• Expected outcomes (12 months): 10–12% increase in online orders for those SKUs, 20% reduction in manual quoting time, payback in 9–14 months.
• Funding mix: 50% digital reserve, 30% vendor-deferred payment, 20% member bonds (optional).
• Governance: DSC oversight with monthly KPI reviews; milestone-based vendor payments.

Closing recommendations: A six-point action plan for 2026

1. Create a Digital Steering Committee and name a single accountable leader (doesn't have to be a VP at first).
2. Adopt a digital investment policy with clear scorecards and approval thresholds.
3. Fund an initial pilot with a blended model (reserve + vendor financing) and cap exposure at 0.5% of revenue for strategic bets.
4. Use phased releases tied to KPIs and publicize quarterly results to members to build trust.
5. Negotiate outcome-based contracts with vendors and include data portability and exit clauses.
6. Invest in people: allocate 10–15% of digital spend to upskilling and change management so technology sticks.

Conclusion: Digital leadership is a governance decision — make it explicit

Border States’ creation of a VP of digital transformation is a reminder: in an employee-owned distributor, digital is an ownership issue, not just an IT checkbox. By centralizing accountability, defining clear governance gates, and using blended funding that respects member priorities, small co-ops and ESOP companies can modernize without sacrificing the ownership model that differentiates them.

Next steps — quick checklist for your board

• Assign a digital accountability owner within 30 days.
• Form a DSC and draft a one-page digital investment policy in 60 days.
• Approve one pilot (cap $250k) with staged funding and a 12-month payback target.

Want a plug-and-play digital investment scorecard or a template DSC charter tailored to employee-owned distributors? We’ve built downloadable templates and a 30‑minute board briefing kit that adapts the Border States model for small co-ops. Reach out to get the kit and a 1-page funding calculator to present at your next board meeting.

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