As featured on ALM’s Accounting & Financial Planning for Law Firms: https://www.lawjournalnewsletters.com/2023/03/01/financial-strategies-that-improve-security-and-optimize-your-technology-spend/ The economic outlook for firms in 2023 is challenging. Law firm overhead expenses have risen to their highest levels in over 15 years, demand growth is slowing, and for the first time, the annual average rate of inflation (5.0%) is exceeding the average worked rate increase across the market (4.8%) and clients, feeling their own inflationary pressures, may be challenging invoices more frequently and aggressively or simply slowing down their payment cycles.
On top of this, overhead expenses have increased by 10.9%, the highest level since 2008. In an environment where revenue generation is slowing, such an expansion in expenses is alarming should it continue. While the largest portions of overhead expenses are attributable to support staff compensation and occupancy, growth in technology expenses remain in firms’ top five greatest areas of growth in overhead.
Many firms are responding to these challenges with significant layoffs for staff and attorneys — but there are alternative options to reign in expenses. Uncertain and challenging markets are times when firms and organizations of all types conserve cash. If this can be achieved without cutting needed projects, equipment or services to ensure successful returns to the office, then this is clearly an ideal financial strategy. In fact, leasing and financing not only helps firms conserve cash, but when done right, helps firms also maximize their IT budgets. Here’s more on that.
Benefits of Shifting to a Monthly Expense
Shifting large IT purchases over to a predictable monthly expense is a pricing model that has taken over most industries with the introduction of cloud services, and this can be a particularly useful model during challenging markets.
The difficulty of achieving budgetary approval for large cash expenditures, especially during a down economy, can potentially disincentivize projects that would aid the firm’s delivery of legal services overall. A much smaller, monthly expense that remains predictable can be much easier to achieve. The decision process is often quicker especially knowing that with leasing, the firm is maximizing its cash in reserve.
As well, for law firms, profits per equity partner (PPEP), for the first time since 2009, may decline this year. While the actual profit figures should still be comfortably high when compared to pre-pandemic levels, if the effects of inflation are taken into consideration, many partners may feel significantly less well off than in 2022.
This is a one of the top benefits of leasing and financing: leasing and financing helps firms shift large capital expenses that cut into partners’ profits to a monthly expense that spreads these costs out over time. In fact, leasing can offer custom arrangements that are tailored to partner distribution preferences to accommodate retirees or new onboards or other circumstances.
Hedge Against Inflation
Inflation, which is still affecting the US and global economies, reduces purchasing power over time. A key selling point of financing is that it affords clients the opportunity to pay for equipment with future dollars utilizing current interest rates, whose value would be reduced by the effects of inflation, creating an effective hedge against inflation.
Equipment leases follow fixed monthly payments (in dollar amounts or in percentages), shielding law firms from currency fluctuations as well as market inflation, creating some protection from inflation.
Match Payments to Useful Life
It is oftentimes overlooked that law firms — as businesses — are successful based on their use of equipment and not from the ownership of that equipment — and it is clear that the useful lifespan and the security lifespan of your firm’s technology and equipment are decreasing. This means it may not be strategic in the current environment to own equipment, as the depreciable life will most likely outlast the equipment’s useful life as well as its security protocols.
Leasing and financing help ensure the firm has the right technology for the right amount of time and can be customized to match payments to its useful life. Technology is now mission critical to your firm’s efficient and productive delivery of legal services.
Law firms are faced with increasing pressures from both corporate and private clients when it comes to cybersecurity and proof of an asset management system or strategy.
Decreasing useful life of the technology and equipment the firms have come to rely on to compete, adapt and succeed means refreshing the fleet more often which can be operationally challenging.
As part of the solution, your firm should:
Put together a workable disposition plan combined with a technology refresh mechanism that will protect the firm from keeping outdated equipment in use that doesn’t adhere to new and increasingly high security standards. A refresh cycle, tailored to the firm’s needs, streamlines operations and keeps the firm on a fixed monthly payment while ensuring attorneys’ devices are up to date.
Don’t Delay Software Projects
Law firms are often not aware that software projects can also be 100% financed, reaping the strategic benefits of financing, conserving cash, and spreading out costs — including partner contributions. Not only that, but the associated training, implementation and consulting fees that can even outsize the original purchase can be wrapped into a finance package.
It is important for firms to avoid Fair Market Value leases for software, but rather to work with a lessor who is transparent and can provide financing with these benefits:
Monthly expense vs. total cost. Monthly payments may secure a more cost-effective solution over the life of a lease.
Spreading costs over a 36-to-60-month lease is less taxing on cash reserves, allowing partner distributions to proceed regularly.
Software costs also carry associated soft costs that may not be factored into an outright purchase price.
Financing terms may offer more flexibility and incorporate upgrades that would otherwise pose additional after-purchase costs.
A fixed rate financing in an interest rate increase environment
Leverage Tax Incentives
Section 179 accounting rules help leasing and financing customers save money on taxes at the end of the year and means that for most small businesses the entire cost of qualifying equipment can be written off on 2023 tax returns.
For 2023, the Section 179 deduction and phase-out limit were increased for inflation. In 2023, the Section 179 deduction limit for qualifying equipment purchases is $1,160,000, and the phase-out threshold is $2,890,000.
Also, in 2023, bonus depreciation is 80% for equipment placed into service from Jan. 1, 2023, through Dec. 31, 2023. Bonus depreciation applies to used equipment, though it must be “first use” by the business purchasing or financing the used equipment. These benefits should be discussed with your firm’s financial officer.
Asset Management to Improve Security for Hybrid Operations
Leasing and financing also come with the additional benefits of asset management that further enhance a firm’s security efforts while reducing costs. With modern asset management, IT can know in real time the location and chain of ownership tied to any piece of equipment. Finance can manage all contract expirations and lease language from a single place, putting them in an optimal position to proactively manage terms and conditions and reduce costs.
In light of today’s hybrid operations, however, asset management needs to be taken to the next level including mobile and remote capabilities with a mobile app to enable barcode scanning of both in-office and offsite assets. IT will know in real time the location and chain of ownership tied to any piece of equipment. Finance can manage all contract expirations and lease language from a single place, putting them in an optimal position to proactively manage terms and conditions and reduce costs.
Conclusion: Total Cost of Ownership Factors to Consider
To fully optimize the financial opportunity of leasing and financing, firms should analyze closely the total cost of your Master Lease Agreement (MLA): the total cost of ownership is not solely determined by the lease rate. Some MLAs contain onerous terms and conditions that significantly increase the true total cost to your firm.
When selecting a lessor partner, it is important to pay attention to contract details and ensure your firm understands the true total cost of a lease transaction. Bad contracts aside, many banks often do not offer a Fair Market Value lease option for technology acquisitions, negatively impacting the financial benefits of leasing.
An independent lessor not affiliated with an equipment platform or bank means your firm is in control of procurement and you can reap the benefits of platform flexibility throughout the life of the lease. When it comes to seeking custom solutions that optimize flexibility, an independent lessor is going to be the best choice in both the short and long term.
These are the challenges we face now — and the only thing we know with guaranteed certainty is that things will continue to change as we rise to the challenges laid before us. Great challenges are always met with great opportunities. Ensuring the firm has financial and operational flexibility, a continuously up-to-date equipment technology fleet to improve security as well as mobile asset management to manage it all are the tools needed to compete successfully moving forward — and leasing is the financial strategy that supports these requirements.
Mike Henderson is the Regional Manager at CoreTech, the legal industry’s premiere, independent lessor serving over 100 of the nation’s most distinguished firms. Mike brings over two decades of knowledge capital and dedicated experience in the high-tech corporate leasing industry. Whitney Jones (Morris) is a Senior Account Executive at CoreTech, the legal industry’s premiere, independent lessor serving over 100 of the nation’s most distinguished firms. Whitney has nearly a decade of expertise and a demonstrated passion for technology and equipment finance in the legal industry. Bill Pitcairn is a Senior Account Manager with CoreTech, the legal industry’s premiere, independent lessor serving over 100 of the nation’s most distinguished firms. Bill has a distinguished track record in the finance industry, leading all facets of sales functions with an emphasis on strategic planning and revenue growth.
The views expressed in the article are those of the authors and not necessarily the views of their clients or other attorneys in their firm.