Taking the initial spend out of IT expenditure

Law firms are beginning to view IT expenditure as a priority and there are plenty of ways to ease the burden of costs, says Iceberg Sales Director Anton Scott .

Technology is today viewed as a core investment by legal firms.

Research by HSBC found that 81% of law firms increased technology spend in 2024, with an average of 6% of revenue invested across a business’s tech platform, including infrastructure, software and people or skills.

Firms are not only investing to improve their efficiency, but also to increase protection. Cybersecurity was identified as the top pressure point in 2024.

IT expenditure is not just a case of buying new hardware and the software to match.? All aspects of the provision of legal services must be considered when looking at possible solutions.

How much should firms be looking to spend?

IT expenditure for law firms is likely to be the third largest spend after investments in staff and premises, or at least it should be.

Each firm has different characteristics and the amount of spend will fluctuate, which can make it difficult to budget for cash flow. The accepted spend level is approximately 5% of turnover per annum, averaged over the longer term. For example, spend nothing this year and a firm would need to spend roughly 10% of turnover next year in order to maintain the average.

As highlighted above, IT expenditure can cover a myriad of different technological items, and it is vital to incorporate all possible costs when budgeting. Costs can range from consultancy fees, hosting, leasing and embedding additional communication tools.

All possible expenditure will need to be considered and thought should also be given to which costs are annual, and which are only required once every few years.

Cashflow considerations

Once a firm knows how much it needs to spend on IT and the accessories needed for any particular period, it has to decide how to pay for it.

Before looking at different funding methods available to the legal sector, it is worth noting how important it is that firms choose the correct method and help preserve cash in a business.? Firms often rely on an overdraft for large expenditures on investments in IT software and hardware, VAT, PI premiums or partner and members’ tax.

An overdraft is repayable on demand, giving a firm very little flexibility and is capped. Prudent cashflow management should therefore always look to spread the cost of large or capital expenditure items to allow for headroom should any unexpected costs arise.

Many firms fail to keep these cash reserves and partners should be more concerned with ensuring that they do.?

On average, large firms only have three weeks' wages worth of cash balances on hand. During day-to-day business, clients will pay bills before the next payroll is due, keeping the cash flow running smoothly.

Just a week’s delay would lead to a sudden reduction of around ￡1m for a ￡50m turnover business. For a ￡25m turnover business, there will still be a ￡500,000 hole appearing in the cashflow.

This is why cashflow must be treated with great care and ways of alleviating cash flow peaks must be found.

Alternative methods of funding

After establishing the importance of preserving cash in a law firm, alternative funding can be considered. These are in addition to any overdraft or other revolving credit facilities a firm may have.

As mentioned earlier, asset finance loans or leases are usually the preferred method of acquiring IT equipment and associated accessories.

The choice of whether a finance lease, hire purchase agreement or simple amortising loan is used will depend on the attitude of the firm to ownership of the items. With some methods you own the equipment but, for others, the business simply rents. There are risks and rewards associated with each type and every firm will form its own view, often with help from their advisers, as to which is best.

Invoice finance, whilst widely used in everyday commerce, is more difficult in the legal world due to the confidentiality that must be shown to clients. Certain funders offer a system that can avoid any regulations being taken, however these tend to be expensive.

Working capital loans, or cashflow loans as they are sometimes referred to, are usually unsecured and can be used for paying VAT, income and corporation tax, PI premiums and other such items. These loans are usually amortised over the period for which the funds are required, for example, three months for VAT and 12 months for a 12-month PI policy.

Unsecured loans of up to five years are also often used to buy IT equipment, to pay for refurbishments and for other areas of capital expenditure, such as recruitment costs.

Secured loans can be obtained for the purchase of property or other assets where good security can be taken and the loan can be repaid over a longer period.