Volume 18, Number 8
Buying New Technology
Making sure you get the return on your investment
By Edward Poll
For most, purchasing new technology represents a major commitment in time and money. Yet many lawyers and law firms seem to make decisions about when and what to buy without adequate preparation-and usually without fully understanding the impact the new hardware or software will have on their firms. For your firm, your investment decision should not be impacted by your method of financing; whether purchasing or leasing, the principles of the acquisition decision are the same.
Before taking the leap, ask yourself the following four questions:
- What is the return on the investment (ROI) of the purchase?
- Will the new technology increase the competence of my staff and make the office more efficient?
- Will the new hardware/software allow me to do something I couldn't do before?
- Will the quality of my services be improved?
If you cannot answer those questions, you are not ready to buy. Let's look at each in turn.
What Is the Return on Investment?
One method used to determine the benefits of a technology purchase is measuring its financial results. The most common measure is ROI. There are several ways to approach ROI. Here's one: Say the slated expenditure is $1,000, and the expected savings or the expected increase in net revenues is anticipated to be $200 annually. Taking the savings as the numerator and the expenditure as the denominator, the percentage is 20 percent per year, which is the return on investment of the purchase.
Another way to look at this is to figure that the $200, if it occurs each year, will result in a recovery of the entire investment after five years, or, put another way, that the payback period is five years.
A 20 percent or five-year return used to be considered a good return by most industries. Then, with escalating stock market prices and the dizzying successes of the dot-com companies, people thought that returns on investment had to be 100 percent in six months or something was wrong. However, after recent economic problems, people's expectations have returned to more reasonable rates of return. Another measuring stick for an appropriate rate of return is comparing the return percentage to today's general corporate interest rate (also called the prime rate). If your rate of return is a multiple of this rate, you're doing well.
When you have a number of projects and expenditures that are competing for your attention, calculating ROI is a great way to rank them in order of financial preference. Then, depending on the budget and resources available, you can select the projects to be undertaken by proceeding down the list, taking the most productive or profitable first.
This analysis, besides being important for your decision-making process, can also come into play if you need financial assistance. With bank borrowing or lease financing, the provider of the capital will want to know how the purchase will impact your practice and how you plan to repay the new debt.
Let's look at a real-world example of how ROI works. Jim, a personal injury lawyer, recently had a large turnover of personnel in his office, and he was upset because the productivity of the new staff was below that of the previous one. Jim thought he had two options that made sense. The first was to wait out the time until his new staff became more proficient under his watchful tutelage. The second was to purchase software created specifically for his type of practice.
Jim determined that the new system would cost $15,000 in actual expenditure plus the cost of training the staff for a period of three months. Jim also determined that the productivity of his staff would increase at least twofold. This would mean he could handle more cases and increase his cash flow. Jim also figured that the new software would save the cost of one half a staff person. He calculated that the net increase in savings and in profitability would amount to $30,000 in the first 12 months alone. Jim's ROI would be 200 percent the first year! And his payback period was six months, meaning that at the end of 180 days, he would have recouped his initial investment.
In Jim's case, the financial decision was a no-brainer, and he went ahead with the purchase. But he forgot to take into consideration the impact of the purchase on his staff. Jim reported to me that his staff was resistant to the change; that they were afraid of the new system; and that, because they hadn't participated in the decision-making process, they had no investment in the outcome. The new system sat on his staff's desks until it became obsolete. Jim did not experience the savings or the profits, he further lost touch with his staff, and he increased his own frustration at not being able to "push the work through the system."
This leads us to the second consideration.
Will Office Efficiency Increase?
Jim needs to go back to the drawing board to create a psychological atmosphere in which his staff will focus on the needs of his clients, as well as the firm's needs to settle or prosecute their claims as quickly as possible and to convert those claims to cash. One way to do that is to bring the staff into the new technology decision-making process early on. This is essential if they are the ones who will be working with the new hardware or software. While they cannot dictate the system, staff can offer ideas that will improve it, and their participation is essential if the system is to work. Without this buy-in, Jim's choice is: Get a new system or get a new staff.
Of course, the choice is rarely so extreme. Normally, the purchase of new technology can help staff increase their competency. For example, the purchase of a case management system such as Amicus or TimeMatters allows the office to become much more systemized and efficient. While the learning curve may be extended, the resulting efficiency and elimination of duplicative efforts can be significant.
Can I Do Something I Couldn't Do Before?
Purchasing a new system may allow you to enter a new practice area. For example, a major law firm performed work in the financial services industry. Its services were based on an hourly rate for significant matters requiring one-of-a-kind efforts. Yet, many of its clients also had work that was repetitive and more like a commodity, which the firm could not perform for a price the clients could afford.
To solve the problem, the firm crafted a new approach that included use of the Internet, a custom-designed database with all the information from the client, the results of litigation available for all interested parties 24 hours a day, and an almost paperless operation. While this new system was very expensive to create, it allowed the firm to enter a new practice area, compete successfully with smaller law firms, and expand its market share with many of its clients.
Will the Quality of Service Improve?
Many of us focus on technology that relates to litigation. But new technology can affect our day-to-day operations in many other ways. For example, Palm-type products let us have our calendars and contact information on hand at all times, and lightweight laptops keep us working whenever and wherever we want. These and other technology improvements allow us to be more available to our clients regardless of where we travel, and to improve our services across the board with timely responsiveness.
Technology is a tool, not a toy. In the legal profession, this concept is often given lip service, but the sexiness of the new toy may be what governs the purchasing decision. Don't be seduced by the toy. Instead, look at ROI, staff competence and office efficiency, exploring new practice areas, and improving the quality of service when making your purchasing decisions.
Edward Poll, J.D., M.B.A., CMC, is a certified management consultant in Los Angeles who advises attorneys and law firms on how to deliver their services more effectively while increasing their profits. He is the author of The Attorney & Law Firm Guide to the Business of Law, 2d ed., published by the ABA. He can be reached via e-mail at email@example.com.