There is no one-size-fits-all answer for firms allocating resources for IT solutions.
All law firms want to be successful, and we know the old adage that you need to “spend money to make money,” but what does that actually mean, and where should you be spending your firm’s money? To grow your firm, you will always need to invest, whether it’s in people, clients, knowledge, new technologies, hardware or software. To invest properly we need to understand how much we can spend and where that spend will be most effective.
Small and midsize law firms allocate financial resources for aspects of their practice like rent, payroll and other known expenses, but not necessarily IT solutions. The reality is that how you choose to leverage IT solutions at your firm will have a large impact on how effectively and profitably your firm can operate in the long run. Having an IT budget to ensure that you are spending your IT dollars wisely is imperative, especially when as a small business, funds to invest may not be plentiful.
How Do You Know How Much to Spend on it?
In determining how much your firm should spend on IT, there is not a one size-fits-all answer. One approach is based on a percentage of your revenue. On average, industries spend 3.28 percent of revenue on IT budgets, according to Deloitte, with business and professional services spending as high as 5.82 percent.
Another method is to calculate your spend per employee—the smaller the number of staff, the higher this number tends to be. As firms get larger, the investment per employee trends down as there are more people to spread the cost over. You can also plan your spend based on your firm’s equipment life cycles and the ongoing maintenance and support of software and hardware. Network and server hardware operates on a five-to seven-year life cycle, while desk-side equipment generally has a five-to-eight-year life cycle.
There is No Right or Wrong Way to Budget
An IT budget needs to fit your firm—there is no one size fits all. But, once you choose a method, it should be used consistently, and based on the reality of your firm’s past spending and needs. The budget should not be viewed as rigid or static and should be adapted as the firm’s needs change over time.
The budget should not be created in a bubble—involve other decision makers within your firm who have the proper insight as to what is required.
Finally, have the right mindset. The IT budget is set to help regulate your investment, not to curtail it or save you money.
What Key Categories Should Be Included in Your Budget?
Every law firm—and actually every business—needs to spend on the same basic categories of IT expenses: fixed and recurring.
Fixed expenses are the needed software and hardware for a firm’s IT needs. Software includes the procurement, upgrade and replacement of line of business applications, including standard office applications. Hardware consists of desktops, servers and network equipment that require life cycle management and replacement. Importantly, firms need to look at what hardware is required to enable their IT to scale with their business.
Recurring expenses include the people and services needed to run the IT, whether staff, managed or cloud services. Regarding staff, there are several key considerations, such as staff salaries (including any increases or decreases in staffing levels) as well as the cost of licensing courses, training certifications or training materials.
For many firms, managed services are a component of the budget, including outsourcing of management, monitoring, maintenance, security and support of IT infrastructure. Firms need backup and business continuity to protect their IT. The budget should account for rate changes and possible expansion of needs.
The final category is the cost of cloud services. Five years ago, this would have been a much smaller (or nonexistent) list for most small businesses; however, this feature of IT budgets is now growing quickly and likely to continue expanding in the aftermath of the coronavirus pandemic, as even more firms move away from on-site hardware. By adding additional, strategic items to the cloud services category, firms can reduce fixed hardware and software costs and better leverage IT in a way that also enhances their ability to practice law.
What Do Firms Need to do Differently?
In the last ten years, up-to-date IT has become essential to even the smallest law firms. Increasingly, firms need infrastructure to operate their business day-to-day, allow access to data and files when working remotely and to allow the business to continue to operate through a business interruption, such as the coronavirus crisis. Moreover, all this needs to operate securely, continually, effectively and efficiently. Complexity can be the enemy of productivity and most definitely increases costs. This is not a good equation for small firms.
Just like a decade ago, when small law firms first started investing in IT like larger firms, another paradigm shift needs to take place. Small firms need to continue to invest in IT that supports the productivity required to operate the firm, while breaking the cycle of creating systems that result in increased and unmanageable complexity. Cloud technology is the best way to achieve this, enabling small firms to obtain the technology, expertise, productivity and security required for their business without the added overhead of owning the actual technology hardware.
Over the past ten years, the position of a managed service provider (MSP) has increasingly become a trusted IT advisor and support team for a firm. An MSP procures, designs, builds, secures and supports the infrastructure that enables a firm to operate. One area for a firm to consider is extending outsourcing beyond IT management and support and instead, outsource the actual IT services, including the applications and infrastructure that the firm requires.
For many small firms, it does not make sense to invest in multiple complex systems that serve only a single function of protecting the business (i.e., remote access, backup, business continuity, “elastic” security systems, etc.). There is no longer such a thing as working remotely or mobile, rather there is just working at any time, from any location, securely, no matter the circumstance. Cloud investment is one of the easiest ways to allow your firm to achieve this, be that by leveraging SaaS (Software as a Service), IaaS (Infrastructure as a Service) or DaaS (Desktop as a Service).
Regardless of the technology, what matters is that it continues to support the firm’s ability to operate no matter the circumstance. The “it will never happen to us” scenario happened with the coronavirus pandemic, and it happened to every business around the globe within a relatively short time frame. When the pandemic hit, it hit hard. Was your firm ready? If it was not, now is the time to re-examine the firm’s technology and budget to be prepared for the next “it will never happen to us” scenario.
What does this mean from a budgetary standpoint? It means that a firm needs to heavily weigh its IT investment toward a higher recurring operating model, rather than the typical high capital investment model. In the latter, the firm spends less money over a period of time, but then spends heavily over a cyclical one-to-two-year period. This is a big change for firms, and short term, it will increase the firm’s IT budget; however over the next three to five years, the benefit of that investment will be paid off by the firm’s ability to not only overcome the next what-if scenario, but to thrive in it.
View the article on ABA's Law Practice Magazine.