The world has changed since the pandemic and effective lockdown were implemented, highlighting the need for law firm IT functions to be prepared for adverse situations. The sudden change we are experiencing has ushered in a host of new concerns and responsibilities for law firm IT leadership, not the least of which is cost management. Some law firm IT leaders have found themselves locked into some vendor contracts, with their associated costs and reduced flexibility. As law firm IT leaders plan for 2021 and beyond, exercising strong vendor governance principles can help them better address the current downturn and be prepared for future economic fluxes.
Vendor governance involves identification of potential threats, mitigation of unacceptable threats and monitoring of ongoing risks. This post focuses primarily on managing financial risk through application of an identification, mitigation and monitoring framework.
- Identify means gather and analyze relevant information related to contractual terms, cost drivers, commitments, and flexibility. We often see spend analytics at a general ledger or vendor level, which is not sufficient for a robust vendor governance program. Ideally, the details “below” the simple GL categories are tracked to provide greater visibility into expense trends and opportunities.
- Mitigate means to act on the opportunities that were defined during the “Identify” phase. Can a “Business Downturn” clause be exercised? Is there a window to “true down” licenses at the end of the year? Mitigation is the execution phase of your vendor governance program.
- Monitoring is the process of continuing to evaluate the firm’s needs and where those needs intersect with opportunities from the “Identify” stage. It is a proactive approach to refining the alignment of firm requirements with identified opportunities.
Here are three important areas where we recommend you apply the “identify, mitigate and monitor” framework in order to best manage costs and emerge stronger from a financial downturn.
Understand licensing flexibility
Many software and application providers continue to offer “per user” licensing models. The rationale is simple: predictable revenue streams for the vendor and budget predictability for the client. But financial downturns highlight the inherent conflict when the goal of predictability clashes with the need for flexibility.
- Identify. Identified which of your software licensing models are fixed at certain user counts. What levers, if any, can be adjusted downwards during economic downturns?
- Mitigate. Where you have little current flexibility, consider exploring alternative licensing models. Sometimes “pay as you go” models are available (particularly through managed services providers), offering greater flexibility than standard licensing options. Act first where existing agreements provide the flexibility to act.
- Monitor. How are you tracking licensing requirements as compared to your vendor commitments? Software audits can be a concern or a worry if you do not have a grasp on your firm’s actual licensing needs.
Playbook creation or execution.
For firms that have a “playbook” in place, being able to quickly execute to it can instill confidence in the face of uncertainty. For firms that do not have a “playbook”, developing one becomes a key priority. A playbook helps IT functions be more adaptable in the event of a financial downturn.
- Identify. Have a plan for how to manage expenses if demand drops suddenly. Are there identified “plays” that you can call, business downturn clauses you can exercise or demand management initiatives you can launch to align costs with new run rates? Do you have a plan for how to deploy personnel and resources in new ways (e.g., remotely)
- Mitigate. Determine which IT expenditures present the greatest financial risks to IT and the firm in the face of a downturn. What alternatives have you considered to reduce or eliminate those risks? Is it worthwhile to absorb a cost increase if it provides additional flexibility or if a reduction would adversely affect necessary service levels? It is critical to balance financial risks and priorities and address the tipping point between cost and flexibility.
- Monitor. As you execute the playbook, can you quantify its impact, or are financial results each month a surprise? Make sure you are able to measure the results so that you can adapt the playbook as needed or move to the next “play.”
Centralization to improve overall vendor governance.
Mitigation of financial risk requires control and documentation. Firms are often navigating the balance between centralized control and dispersed autonomy. When local offices are permitted to negotiate contracts, choose (or ignore) preferred providers or grant exceptions to firm policy, the number of variables makes it virtually impossible to properly understand, mitigate or monitor financial and supplier risk. Additionally, firms with less centralized control are at a competitive disadvantage during an economic downturn because creating and executing a playbook is too complex.
- Identify. Determine where you have good controls today and where controls are potentially weaker. Are there “blind spots”? Identify areas where there is current flexibility or autonomy, and whether that decision was strategic or abdicated. Identify common elements that can easily be centralized.
- Mitigate. Take steps to close the largest current centralization gaps and to control “shadow IT.” Is there a proactive plan in place to better prepare for next downturn? The current environment is the best time to begin to make cultural changes that will put the firm on more secure footing for the future.
- Monitor. Determine a definition of “success” in your efforts to centralize control and standards for measuring progress.
Understanding your license flexibility, having and executing on a “playbook” and centralizing control are critical steps in managing IT costs and financial risk. The more of these areas that you can confidently address, the better prepared you will be for a downturn, now or in the future.
If you are interested in additional dialogue around IT vendor governance, “playbook” creation or developing solutions for a specific vendor governance concern, please contact me.