Technology and the Law Firm Life Cycle

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The evolution of technology and the evolution of the legal profession have gone hand-in-hand.

Smart phones and e-discovery software are just the latest iterations of the trend that long ago made once-common law office tools like dictating machines and letterpresses extinct. There are many who passionately believe in the power of technology to transform our profession, but it should be remembered that virtually all of the innovations that have done so much to achieve time savings, efficiency and commoditization of routine tasks are just another turn of the wheel in the law’s evolution from guild to business.

One of the most important hallmarks of “The Business of Law” is that law firms, like the players in any other economic sector, have a life cycle. There are law firm startups, as new lawyers hang out their shingles in a solo or small firm practice. There are law firm buyouts, as lawyers reach retirement age or simply decide to head for greener pastures, and use the flexibility afforded by Model Rule of Professional Conduct 1.17 to sell their practices to another qualified attorney or firm. And there are law firm mergers and acquisitions, typically driven by the idea that combining law firms to make them bigger will make them better through skill synergies and enhanced economies of scale.

However, what often is missed as firms progress through this life cycle is that technology is not just an add-on or an afterthought. Technology has become so integral to how law firms operate that taking the time to assess and integrate technology concerns is essential to a healthy and growing legal services organization. The technology concerns at each stage of the life cycle continuum are different, and addressing them is essential for the financial and client service strengths of the firm as an effective, continuing business organization.

Technology and Law Firm Startups

Lawyers opening a new firm run the risk that they will be beguiled by more technology than they can afford. Lawyers inevitably want new technology because it’s cool and attractive (adjectives often applied to Apple products like the iPad or iPhone) or it helps them do more and do it faster. Lawyers also have a strong competitive streak, and they either want to be the first to tout using a new technology, or don’t want to admit others are using it and they are not. But for a new law practice, technology decisions should never involve this kind of emotion.

Particularly for new solo practices, substantial spending on new computer hardware and software may simply not be possible, particularly in light of the fact that it may take up to five years for a new practice to be profitable. Certain tactics can provide a high ROI on very modest technology spending, while still offering adequate capabilities from the standard of care viewpoint. A beginning practice can start with a refurbished laptop or PC, rather than a new one. Another possibility is to skip Microsoft Office and Outlook, and go with open source software and a free email management program. Lawyers can also use an email fax service rather than a fax machine, and go to a nearby quickprint shop rather than investing in an expensive laser printer. Purchasing an expensive online research service can also be postponed by regular visits to the library at the most convenient courthouse or law school. Finally, for a website, use the simple software and maintenance that most Internet service providers offer.

Any such tactics can give the benefits of technology to a lawyer newly in practice, without the big initial expense. But they are at best stopgap measures. Ultimately a real investment in new technology will be necessary. Determining the optimum ROI for this investment depends on the source of funds or financing used. Paying cash eliminates finance charges, but means a big up-front expense. Leasing equipment provides tax advantages, but typically only covers hardware. A third alternative is to borrow money from a bank, usually through an equipment loan no longer than the several-year depreciable life of the equipment and software. And because computers and software become obsolete so quickly, banks are reluctant to take it on as collateral. There is no one right answer – the needs and resources of the firm determine the choice.

Technology and Law Firm Buyouts

There are numerous valuation issues to consider when one lawyer sells an individual practice or small firm to another, and technology may not be at the top of the list in most such transactions. But this is a mistake. Surveys regarding law firm technology use indicate that while the majority of large law firms upgrade their computers and software every two to three years, many small firms and sole practitioners go as long as six years or more between upgrades. These lawyers may have justified this to themselves by citing cost, time to learn and implement the new technologies, and lack of certainty that new technology will increase efficiency and work quality. And of course the economic impact of the Great Recession has reinforced such justifications.

However, none of these reasons is sufficient to protect a firm against a client who alleges that outdated technology contributed to incompetent representation. And the potential for such allegations goes to the heart of one of the thorniest issues in selling a practice: “goodwill,” the reputation, client base and client loyalty that the selling lawyer has created over the life of the practice. Firms with bad publicity and malpractice and disciplinary matters hanging over them have little goodwill.

If a small firm lawyer, facing financial pressure, resisted buying or updating technology because of the high up-front expense, they may have outdated software and hardware, may not be using case management or document assembly software, or may not be backing up and storing client electronic files at all. Lawyers who do not use adequate technology may be committing malpractice per se, by not providing competent representation when measured by the prevailing standard of care. Such malpractice directly and negatively impacts goodwill. The practice value will be diminished in negotiations if a potential purchaser sees that a substantial IT investment will be necessary. The principle is the same as that of a house purchaser who wants $20,000 off the purchase price if the house needs a new roof that the purchaser will have to pay for.

By the same token if a lawyer has done the right things, keeping databases current and technology up to date, this has a direct and positive impact on selling price. The value may not be easily quantifiable, but it definitely supports the firm’s goodwill. These virtues should be communicated up front, so the value of hardware and databases can be agreed upon.

Technology and Law Firm Mergers

When mid-sized or large law firms merge, the lawyers in the combined firms typically concentrate on the visible elements of integration: marketing the new firm name, designing office space, allocating management responsibilities and staff. Assessing the current state of technology used by the lawyers or firms, including the age of the hardware and software and their replacement cycle, should be – but rarely is – central to the merger due diligence.

If at least one of the parties to the combination uses up-to-date databases, hardware and document processing and practice management software tools, it can serve as the foundation to make the combined practices more efficient. This should mean that legal services can be provided at a lower price with higher volume, increasing revenues and profits. But such benefits cannot be realized without adequate planning to integrate these technology aspects.

Client relationship management software. The firms must be willing to share their client data, and must decide what data is entered, how it is classified, who enters it, and who verifies accuracy.

Knowledge management systems. If the document management systems of the merged firms are not integrated completely from the start, with standard classification terms for each lawyer’s work, the result will be a haphazard, unsearchable mess.

Finance and accounting software. Some firms use integrated time, billing and accounting products, while others have little more than electronic worksheets. Either way, the members of the new firm must identify key financial benchmarks and how to track and reward them..

Communication tools. From how much time lawyers are encouraged to blog and do social networking, to how scrupulous or lax the firms are in making billable time entries for sending client emails, billable revenue is at stake – and conflict over it is always possible.

Technology is too expensive, and too crucial for effective service, not to be coordinated and integrated. One firm in a merger or acquisition will inevitably be more advanced and effective technologically. That firm’s IT personnel should lead the integration process

Afterward

Technology is not the driver of what law firms do, but it has become the number one law firm tool. Careful thought to assessing and integrating technology concerns in every stage of a firm’s life is essential to a healthy and growing organization. This is the only way to assure that technology will increase efficiency and quality of work. There is no one right way to combine technology systems and legal practice operations, but there are clearly wrong ways. Giving due attention to the integration process is the best way to assure that any law practice, wherever it is on the life cycle continuum, will efficiently serve clients and effectively reward lawyers.