Having a strong IT capability is critical to all organisations, now more than ever. But like any budget category, you don’t want to overspend, and you need to invest effectively. For law firms, IT spend is likely to be the third largest expenditure category behind premises and staff so ‘Getting it Right’ needs to be taken seriously.
You are likely to know how much you are spending on IT however, is it a sensible amount? Every firm is different and budgets can go up and down from year to year. However, a general guideline can be useful to help determine whether your level is right.
Firms of different sizes will need to spend different amounts, so it is useful for comparison purposes to consider IT spend as a percentage of annual turnover. Our view is that 4-5% is a good, healthy figure. That said, it might be right for your organisation to spend more in any given year. Possible reasons for this would be earlier under investment or you may be hitting a peak in a normal investment cycle due to hardware upgrades or the need to replace a critical business system. If you ignore these periodic peaks, then the 4-5% of annual turnover figure is a sensible long-term average.
There are also different thoughts as to what should be included in the analysis of IT expenditure. The average investment figure should encompass all technology related items required to operate the business including hardware, software, telephony, communications lines (voice and data) and all IT staff costs. It should include all these categories whether onsite, offsite, hosted, owned or leased. Remember too to include IT security costs, business continuity arrangements and IT consultancy costs. There will be some costs that you will need to choose whether to include such as pay-per-click web services, online library services and some consumables.
Typically, your financial software package should allow you to aggregate spend across any major category such as IT. You will need to be sure that all the correct expenditure is being captured and categorised into the correct grouping.
As mentioned earlier, IT expenditure can be very cyclic as a major project such as a Practice Management or Document Management System replacement will only come along every ten years or so. In our experience it is best to ensure these items are coded in such a way to allow you to separately analyse the day to day running and special projects costs.
Once you have reached a position to understand your real IT spend, and if you find that you are spending more than the industry average, the next step should be to analyse the causes. If the spending level isn’t for one of the valid reasons mentioned above, you should be looking at the costs in more depth. There are numerous reasons for a higher than average spend, but a few examples are:
- Enough effort may not have been made over time to review costs and to stay on top of expenditure. Telecoms is a good example. Most organisations, especially those with multiple premises, are likely to have telephone lines, data lines, dedicated telephone numbers and even mobile phones that are no longer needed. Regular review of what is being supplied versus what is still required is essential.
- Even when you are not paying for excess capacity or obsolete services, it is still important to regularly review supplier contract pricing. Suppliers regularly increase prices by a certain percentage year on year. Over time, these increases can be significant and as a long-term customer you can often negotiate some of these increases away.
- By its very nature some areas of IT are subject to price decreases due to advances in technology and the commoditisation of pricing. Examples of this are telecoms connections and data storage costs. If you have not changed suppliers or renegotiated your contracts in recent years, then you could be paying too much for such services.
Apart from reviewing the costs themselves you should also consider the strategic decisions you have made in terms of how your IT is structured and provisioned.
- A frequent cause of high IT expenditure is having a range of complex solutions. Having different, specialised systems for every business function has advantages and may be appropriate for your firm’s needs, but it can also result in having to pay for, and support, several solutions, with each solution having an associated licence, support and maintenance cost. In addition, there may well be a cost for integrating these solutions and supporting such integrations. Without in-house IT resources to support complex systems and their integration, all of which could add to the IT salary bill, you may have to resort to expensive consultancy costs on every upgrade of even just one of the systems.
- You might also be able to reduce your IT costs by provisioning your IT in a different way. The IT industry now provides many alternatives to having your own hardware and software on-site and supported by your own IT staff. You could consider outsourcing your IT team which might give you a greater range of skills from a larger organisation but at a lower cost. Other alternatives are to have your hardware and software hosted externally or to have your data and applications delivered from a Microsoft Azure data centre. The options are complex, and the solutions need to be matched to your own requirements, but long-term cost savings can often be achieved.
- Fully outsourcing your IT infrastructure, either to an Infrastructure as a Service provider or to the public cloud, may result in some savings.
While the annual cost of a cloud infrastructure may appear to be high, once you have offset it against the costs of:
- replacing hardware
- having warranties or break-fix contracts in place for the inevitable disk failures and failures of other components
- backups, disaster recovery and business continuity
- electricity, cooling and standby power supplies
you may find that on an overall cost basis, you come out about even. When you consider the less visible savings such as your IT staff being able to devote their time to more value-added work, improving your firm’s security position and benefiting from economies of scale and expertise in a range of areas, you may find these options very much to your benefit.
And finally, while this will not have an impact on your IT spend as such, using technology effectively can drive down costs across the business. For example, many firms are using outdated business processes which can be streamlined and/or improved through automation. One example is electronic billing. Done properly, this involves the entire billing process from bill creation through to approval and then to the distribution of the bill to the client. Streamlining and automating this process can lead to reductions in paperwork, time consuming processes and payment delays. Many other business processes can be reviewed for similar improvements and cost savings.
With a bit of effort, you can get your IT spend right. It is simply a matter of accurately capturing the expenditure, analysing whether it is appropriate and then taking any number of possible actions to make improvements where needed.