Purchasing New Technology: Evaluating the Impact on Your Firm

By Edward Poll
Reprinted from The San Fernando Valley Bar Association in its June 2003 edition of "BarNotes"

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Purchasing new technology represents a major commitment in time and money. Yet many lawyers and law firms seem to make the decisions of what to buy and when to buy without adequate preparation and usually without fully understanding what the impact the new hardware or software will have on their firms.

Buying new technology is such an important step that I've come up with following four questions that can be used as criteria in the decision-making process. Before taking the leap, ask yourself:

1. What is the return on investment ("ROI") of the purchase?
2. Will the new technology increase the competence of my staff and make the office more efficient?
3. Will the new hardware/software allow me to do something I couldn't do before?
4. Will the quality of my services be improved?

If you cannot answer these questions, you are not ready to buy.

Return on Investment

One method to determine the benefits of a technology purchase is by measuring its financial results. And the most common measure is called return on investment or "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 $100 annually. Taking the savings as the numerator and the expenditure as the denominator, the percentage is 10 percent per year, which is the return on investment of the purchase.

Another way to look at this is to figure that the $100, if it occurs each year, will result in a "recovery" of the entire investment after ten years, or, said another way, that the "payback period" is ten years.

A 10-percent return is usually considered too low to make the purchase (investment) unless there are other factors involved (see below). There is no one right or correct rate of return. The return selected or expected is a function of personal choice, available alternatives, and available resources for investment.

When you have a number of projects and expenditures competing for your attention, using ROI is a great way to rank them in the 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 actually works. Tom, a transaction attorney, recently had a large turnover of personnel in his office, and he was upset because the productivity of the new staff was below the level of the previous one. Tom 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 choice was to purchase software that was created specifically for the type of practice he had. Tom 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 in its operation. Tom also determined that the productivity of his staff would increase at least two-fold from its current level. This would mean he could handle more cases and increase his cash flow. Tom 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 twelve months alone. Tom's ROI would be 200 percent the first year! And his payback period was six months, meaning that at the end of 180 days, Tom would have recouped his initial investment.

In Tom'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. Tom reported to me that his staff was resistant to the change; that they were afraid of the new system, and that, since they never participated in the decision-making process, they had no "investment" in the outcome. So, the new system just sat on the desk until it became obsolete. Not only did Tom not experience the savings or the profits, he further lost touch with his staff and increased his own frustration at not being able to "push the work through the system."

Which leads us to the second consideration.

Will Staff Competency and Office Efficiency Increase?

Tom 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 and the firm's needs to produce the clients' documents as quickly as possible and to convert their work product to cash. And one way to do that is to bring the staff into the new technology, decision-making process early. 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 ideas can improve it, and their participation is essential if the system is to work. Without this participation and "buy-in," Tom 's choice was: Get a new system or get a new staff.

Of course, this choice between new technology or new staff is rarely so extreme. The normal situation is where the purchase of new technology can assist the staff increase their competency and efficiency. 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!

Allowing Me to Do Something I Couldn't Do Before?

Purchasing a new system may also allow you to enter a new practice area. For example, one of my clients, a major law firm, was accustomed to performing services in the financial services industry. Their services were based on an hourly rate for significant matters requiring one-of-a-kind efforts. Yet, many of their 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-paper-less 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 lawyers focus on technology that relates to litigation. Yet, there are many other ways that new technology can affect your day-to-day operations. For example, Palm-type products let you have your calendars and contact information at hand at all times, and lightweight laptops keep you working whenever and wherever you want. These and other technology improvements allow you to be more available to your clients and to improve your services across the board.

Technology is a tool, not a toy. In the running of a law office, this concept is often given lip service when the sexiness of the new toy governs the purchasing decision. ROI, staff competence and office efficiency, exploring new practice areas, and improving the quality of service are all better measures for evaluating the decision to purchase new technology.