Perhaps now more than ever, technology is critical to law firms’ businesses, even as the threat of an economic downturn makes it particularly important for firms to manage IT costs. In-depth reviews of multiple law firm IT environments have shown a tendency for many to rely on their IT suppliers — including the original equipment manufacturers (OEMs) and the value-added resellers (VARs) from whom they purchase hardware, software and services — when they need external advice on design and configuration (not to mention optimal pricing) for the products and services they need. If this describes your firm, you may inadvertently be inviting the fox to guard the henhouse.
There is a vast IT supplier ecosystem that influences a firm’s ability to obtain the best pricing and outcomes for its technology budget. This ecosystem consists of multiple players, each with their own set of guidelines and financial incentives. These financial incentives are often not aligned with a firm’s when it comes to the best technology procurement strategy and pricing models.
Three Inside Tips
Based on HBR’s experience on the inside as an independent advisor and service provider to law firms, here are three important tips for navigating the law firm IT supplier ecosystem:
1. Don’t overbuild or overbuy. Civil engineers often design bridges to hold more weight than most would anticipate as necessary. This is a prudent practice for safety reasons. Likewise, IT engineers frequently design technology infrastructure that exceeds the maximum capacity needed by the firm. On the surface, this may be justified as a safe measure — purchasing up-front more capacity than is needed today, to mitigate the risk of future IT needs outgrowing the system. It is important to note that there is distinction between general overbuilding and thoughtfully engineering bandwidth and infrastructure to allow for significant work-from-home or other mobile requirements of today’s lawyer. We are cautioning against the former.
Overbuying is a risk because many hardware, software and telecommunications representatives (the OEMs) and supplier-paid advisors (the VARs) are incentivized to overbuild your IT infrastructure during the “requirements” phase of the project. To guard against this tactic, ask your team some key questions, such as:
- How difficult is it for us to start small and then grow as needed?
- How easy would it be to right size our purchase over time if it becomes clear that we have overbuilt for our actual needs?
- Do we have the internal expertise to challenge or validate the OEM/VAR’s sizing recommendations?
2. Explore multiple pricing models. As with virtually every area of law firm procurement, there is more than one way to pay for IT products and services. In fact, this principle is even more applicable to the IT supplier ecosystem, as there are seemingly countless ways to design a solution to any given need. The key question for a firm’s IT team is how to decide which approach will deliver the best value for the firm.
A good example of this conundrum is software procurement, where there are often multiple licensing models and supplier price lists for the same solution set. How can a firm be sure that the licensing model proposed by the sales manager or VAR is the best fit for its needs, as opposed to merely the preference of the supplier because it generates their most desirable revenue outcome?
There are a few things to which firms should be alert. Watch out for pricing model proposals that may underestimate the firm’s requirements, as those models can expose the firm to performance issues or unplanned variable charges. Also, look for the break points in volume or scale when an alternative pricing model will become a better fit for the firm’s needs. Some questions you might want to ask of your rep or VAR include:
- How much control do we have over the specific contents of the licensing package?
- What would be the pricing impact on our decision to procure individual pieces of the solution as opposed to a bundle?
- What strategic partner benefits can you offer (in addition to acting as a “middle man”) to add value to the firm?
- How many different channel options are there to procure the solution?
3. Use accurate benchmarks. We have seen first-hand over the years that, for certain products, it is common for there to be a pricing variance of 100% or more when the same product or service is purchased by two different, similarly sized law firms. You read that correctly. One law firm may be paying double the price that a peer firm is paying for the same IT product or service.
How is this possible? In many cases, it happened because one of the firms relied on the wrong source for price benchmarking when they negotiated their contract with their IT supplier. This is simply the byproduct of an immature strategic procurement process and/or the absence of an independent advisor tasked with the job of fully benchmarking the pricing prior to signing the final agreement. In other cases, it can be the result of poor asset tracking or service inventory tracking that fails to capture the information needed to effectively manage IT expenses.
For example, VARs often claim that their clients benefit from their pricing leverage. But if that were true, then all clients of the same VAR would pay the same price for the same product or service. The fact is that IT suppliers evaluate pricing and offer incentives on a deal-by-deal basis, so it is crucial for a firm to do its own pricing validation — or work with an independent advisor who represents it in the negotiations — to make sure that the firm is relying on accurate benchmarking.
Here are some specific details to seek out in order to do a complete and independent price benchmarking exercise:
- SKUs/product IDs — ensures that you are identifying the precise offering for evaluation;
- Standard/list price vs. net price — enables you to verify yourself the incentives you are being offered, if any;
- Deal registration information — helps you discover whether the supplier is registering your project with the OEM, a move that prevents truly fair competition on pricing since the details are made visible to others;
- Alternative channels — informs you of other possible data sources that can operate outside of the standard OEM rule book, which places strict guidelines on VARs regarding how they can operate within their ecosystem; and
- Volume vs Achievement Based Agreements — lets you know what the supplier pricing desk considered when establishing the price points in their proposal, and your comfort level with the commitment.
Options for Navigating the IT Supplier Ecosystem
Law firms have three options when evaluating the risks inherent to the IT supplier ecosystem: (1) Build the internal processes, capabilities and team to develop deeper procurement and vendor governance expertise so the firm is better protected; (2) Maintain the status quo if the firm is convinced that its existing structure is sufficient to mitigate the risks and keep pace with peer firms; or (3) Partner with an independent advisor or managed service provider with deep expertise in navigating the IT supplier ecosystem.
Regardless of which approach your firm chooses, it is important to understand that the IT supplier ecosystem can influence the value you obtain from your technology budget. The central players in this ecosystem have their own goals and financial incentives, so make sure to take charge of the IT procurement discussions in order to be certain that your firm’s best interests are being served.
For more information regarding how to navigate the law firm IT supplier ecosystem or HBR’s related services, please contact David Cram.