Law firm spending on technology continues to grow faster than other categories of firm operations and is now the third-largest area of overhead spending, behind only salaries and occupancy expenses, according to the 2019 Report on the State of the Legal Market by Managing Partner Forum.
Meanwhile, there is greater pressure on law firm IT executives to rein in that spending as much as possible. These operational cost pressures are driven by factors such as declining revenues at some firms, especially those in the middle tier; tighter budgets, with firms trying to reduce their overhead to compete more aggressively in the market; the soaring cost of cybersecurity that has saddled many firms; and the talent pinch for top technology workers who require more each year to be attracted to law firm jobs.
Many law firm executives are discovering the hard way that the “true” cost of law firm IT – known as total cost of ownership, or TCO – is sometimes an elusive number to pin down. That is because while some of the cost elements are obvious, other components are less obvious when reviewing an internal budget spreadsheet.
I had the pleasure of participating as a speaker at ILTACON 2019, where I was joined by Tim Soto — director of IT at Shook, Hardy & Bacon — in a featured session on this topic: “How Much Will This Really Cost? Calculating the True Cost of IT.” Tim and I tried to unpack the key elements that drive the true cost of law firm IT by challenging law firms to think about this vexing question in terms of total cost of ownership. We also explored the similarities and differences of building cost models for on-premise, private, and public cloud offerings.
There are three key categories that contribute to the true cost of law firm IT:
- Direct costs. These are the costs that can be attributable to a specific service, product, etc. Direct costs include all dedicated IT infrastructure for computing, network, and storage resources, including disaster recovery infrastructure. They also include all software licensing expenses for the operating system, databases, security tools and other applications that are attributable to a specific server instance or service.
- Indirect costs. Indirect costs are shared across services and can therefore be difficult to identify at first glance. These include shared infrastructure expenses, such as the firm’s various networks and firewalls. Wide area network (WAN) circuit costs are especially important to capture, as these can be one of the highest drivers of IT costs yet may be in the firm’s “telecommunications” budget and thus easier to miss. Another indirect cost frequently overlooked in an initial IT budget review is the data center and associated environmental needs, such as power and air conditioning expenses. These costs are often metered and charged separately from the facility contract, so they also need to be identified. Also, make sure to consider salary and benefits for IT resources including engineering, operations, project managers, and contract workers — necessary costs that are easily missed or underestimated when tracking IT expenditures.
- General and administrative costs. These are the costs associated with the firm’s general overhead to support the IT workload. These include training expenses, law firm administrative headcount (Finance, HR, etc.), shared services for vendors, office expenses, and data archiving/records costs. The key to allocation of these general and administrative costs is consistency, so you are comparing “apples to apples” each year. There is no single “correct” formula; we recommend working with your firm’s finance team to find an allocation model that works for your firm and then stay the course.
Consideration of these three components will help you get to a true cost of ownership for your firm’s IT function. This understanding can then drive higher-level internal conversations about whether your existing IT delivery model is the optimal approach for your firm. For example, some law firms are discovering that it is more cost-effective to partner with an expert third-party service provider to handle the day-to-day IT operations and free up their internal IT professionals to focus on more strategic activities that propel the firm’s business strategy. Public cloud is another increasingly popular option and can be more cost effective in the right circumstances, though it can just as often be as if not more expensive, especially if not done right. The best way to understand the financial impact of those kinds of high-level decisions is to compare different IT models’ total cost of ownership over a specific time horizon, usually three or five years.
The presentation materials and an audio recording of our ILTACON session can be accessed on the ILTACON website. If you would like to learn more about how to model total cost of ownership, compare different IT models, or learn more about managed service offerings, please contact me or a member of the HBR team.