By Mike Henderson, Whitney Jones, Bill Pitcairn
See original article published in Law Journal Newsletters
The Cost of Operating a Law Firm
The cost of operating a law firm is becoming more expensive. From increases to associate pay, to rising costs of recruiting, to the additional costs of hybrid operations and increased cyber security needs, there’s a variety of reasons as to why overhead expenses have been steadily increasing quartile by quartile, with Q1 of 2023 ending at an 11.7% increase. 1
Even more challenging is that—for most firms outside the top 50-- incoming revenue is not meeting this steady increase in expenses. This year as of the end of Q1 2023, expenses were outpacing revenue by 6.3% across the industry, mainly for firms outside the top 50 firms which reported revenues outpacing expenses through record breaking rate increases. 2
While challenging overall, firms are stable, profitable businesses posting solid profitability projections through the end of 2023—but not quite breaking the records as was the case in 2020 and 2021. Profitability is important, however, when recruiting high value laterals into the firm, and so protecting every inch of the firm’s margin is key—especially when the macroeconomic outlook is volatile with whispers of recession and a heated political environment heading into the fall.
So what do the market challenges ultimately mean to law firm leaders? Reduce risk. This can include shrinking overseas dealings to increasing liquidity—and that’s where leasing comes in. Leasing is a strategy that goes straight to the core of cash management strategies to help firms reduce risk.
In fact, there’s a wide range of business benefits to leasing that hep firms better manage current market challenges beyond cash management – so we asked our law firm clients what they saw as the most compelling business benefits of leasing in today’s challenging economy. Here’s what they came up with.
The Business Benefits of Leasing
Advisory + Service
First thing’s first, leasing – when done right – is not a transactional relationship. Just like other invaluable business partners, the right leasing partner provides expertise and services that help law firms navigate the economic ups and downs of our industry and reduce or eliminate financial and operational risks they are facing in today’s market. This means that the right lessor can take on an advisory role with their law firms--a reason to look for a lessor with significant understanding of the legal industry when partnering with them.
Law firm executives are notoriously overscheduled and understaffed and simply don’t have the time to ‘do it alone’ trying to figure out the right leasing schedule, the right mix of finance solutions, the right bank with the right rate for the right type of equipment or software. That’s why there are leasing experts. In a good relationship, law firms can rely heavily on their leasing partners’ expertise to coordinate with banks, resellers, VARs, etc.
1 Citi Law Firm Group Q1 2023 Report
And this includes at the end of the term where the right leasing partner can be invaluable, providing wiping services, for instance for the firm’s equipment to ready for return, leading the reselling process and keeping everything on track to its final destination.
Of course, probably the most well-known business benefit of leasing is cash flow management. Leasing helps law firms plan their cash flow, inserts control levers and strategy over that cash flow, and overall provides predictability over the business costs year over year. In an uncertain economy, these control levers and predictability can be invaluable tools in the hands of the firm’s finance professionals.
Here’s an example of how leasing can help finance create a strategic plan around cash flow. One firm we work with recently converted to Aderant from Elite Enterprise. This was a long term project—over 18 months--that incurred not only significant costs for the software but included many soft costs such as the consulting, training and implementation hours.
In trying to manage the cash flow, we helped the firm set up a lease schedule every six months to ensure that the cost of the conversion was spread across the firm’s partnership appropriately –ie, retiring partners were not hit with the full cost of the project, but nor were the newly promoted partners. Instead, the cost was absorbed across a number of years through a number of classes of partners.
Today, asset management is one of the most important business benefits of leasing. In fact, according to the 2023 ILTA Tech Survey, asset management – especially of WFH devices – is the number one security concern of all law firms.
For many firms that lease, they really look to their leasing partner to offer asset management as a service because many firms do not have the infrastructure to manage assets in the most secure possible way. Asset management means having access to the firm’s entire inventory, even assets that were not leased (a good leasing partner will provide asset management for all assets) at the firm’s fingertips, including all the serial numbers, make, model, location, disposition, expirations, return information and more. It’s invaluable to have this information in a system that is easily exported for insurance purposes, inventory, or even client audits.
It only takes one misplaced laptop for the firm to be exposed to significant risk; this is why many firms prefer the additional help of their leasing partners when it comes to asset management.
Refresh Cycle + Performance
Leasing helps put firms on a refresh cycle to make sure the firm’s attorneys always have the latest technology available. The important thing to note here is that updated technology and equipment provides multiple dividends that flow throughout the firm.
Some of those dividends, for instance, are operational. For example, a law firm may have hundreds, if not thousands, of laptops and it’s simply not operationally feasible to update all laptops at one time. By cycling laptops through a planned refresh, the firm can parse out the updates in a controlled and less painful manner.
Some of our clients have a refresh cycle of updated 100 laptops every twelve months. This planned upgrade also keeps the firm’s attorneys happy in the latest and greatest tech – but has the additional benefit of calendaring the event for the upgrade which quells anxious queries from the firm’s professionals about when and why new equipment is provisioned.
Other benefits regarding the refresh cycle specifically impact IT and the performance of the firm. If a firm doesn’t keep up with the latest technology, that firm is really risking their network and ability to communicate. Having a refresh cycle tied to a leasing partner and leasing schedule facilitates this next generation of technology and reduces that risk.
For firms that are virtualizing desktops, leasing and the refresh cycle can have a huge impact. We’ve witnessed leasing increase the performance of the virtual desktops across a firm by almost 50% when it’s tied to a continuous refresh of the firm’s servers. The desktop experience increases because of the powerful, up to date hardware behind the scenes.
This is similar to issues of storage. At one of our partner firms, the firm replaced the array in the data center and the impact double the speed of Microsoft products opening, a significant increase that the firm’s attorneys and professionals feel immediately.
Create a Strategic Project Timeline and Hard Cost
Some of our law firm partners leverage leasing above and beyond the traditional benefits and use the operational and financial structure of leasing to push through a strategic project. We’ve seen firms do this for disaster recovery projects, major software upgrades, or a common one recently is to leverage the structure of leasing as a “bridge to the cloud.”
In going to the cloud, for instance, leasing creates 1. A hard cost line monthly line item that can serve as a baseline cost to the firm that can be converted to the cost of the final project 2. A finite deadline to hand in equipment. One firm in particular leases the equipment that ties into Azure and other cloud infrastructure and, because there is a defined lease schedule, can actually know when the firm’s cloud project is going to be up and running because the equipment has to be returned on a specific date.
Plan Your Lease Strategy Well in Advance of Budget Season
Finally, we asked our law firm partners to provide some insights as to what works best for them in terms of timing. One item they all agreed upon was to start the process early, start budgeting early and to work closely with a leasing partner well-versed in law firms requirements to create a strategy in advance.
Our law firm clients work with our legal finance experts on a cyclical basis to discuss what their firms are doing in the upcoming year, and what’s on their roadmaps. For example, if a firm is replacing their entire network infrastructure to on ramp directly into Azure, we sit down and plan that out, create a budget with timeline and costs. We make sure to work in maintenance contracts as part of any hardware purchase and work through any consulting or training fees if software is involved so that our law firm partners are prepared by the time budgets are set and approved in the fall.
In conclusion, while there is a good deal of market uncertainty, a strong relationship partner with leasing expertise for law firms can help firms reduce risk and create a financial and operational strategy that helps the firm run more efficiently.