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Imagine that an important healthcare group approached your firm with an RFP for a large engagement related to helping its members comply with the Health Insurance Portability and Accountability Act. You have been asked to demonstrate how you would use technology to improve the group’s delivery on this engagement. How would you respond? Some law firms would cite their modern networks and computers. Others would note their lawyer’s remote access capabilities, or use of BlackBerries. A handful might even point to internal knowledge management initiatives, no matter how rudimentary they may be. All of these technologies are fine, and can help improve the quality of service a firm offers. But chances are none of these technologies would be enough of a differentiator to win business. In this real-life example, a leading national healthcare group awarded a large engagement to Pittsburgh-based Reed Smith because it has a significant practice in healthcare law, and, importantly, because it was able to provide strategic technology for this engagement. Reed Smith developed an innovative, online delivery system that could be used directly by employees of the hospitals, healthcare networks and other providers that comprise the healthcare group’s member organizations. Employees of subscriber organizations can now access plain-English interpretations of federal and state healthcare regulations drafted and compiled by the firm’s healthcare attorneys, on a secure, subscription-based, specialized Web site. This application was one of the first of its kind. A WIN-WIN For the client, the technology revolutionized the engagement, making it possible to provide a service to its members that they could not have otherwise provided. The members access a knowledge base at a fraction of the cost of retaining counsel by the hour. For the healthcare group, subscription revenue more than offsets the legal and technology work, and the service dramatically boosts its value to the membership. In turn, Reed Smith has been able to grow closer to its client by providing not only the highest quality legal work, but also an innovative delivery system. The deployment of the delivery system has also opened the door to new possibilities for the delivery of legal services in other practices and for other clients, because the concept can be applied to any number of similar scenarios. This is a compelling example of strategic technology yielding concrete returns. And yet, most firms are not prepared to seize these kinds of opportunities. Part of the problem is that this kind of technology — an online subscription system for a single client — simply does not exist in a traditional IT budget. Developing these kinds of applications, and locking in new clients as a result, requires a reworking of traditional law firm IT thinking and budgeting. This is why IT spending should be divided into two categories: operational and strategic. The strategic budget contains expenditures for technology that truly help the firm win, expand or keep business with clients. The operational budget contains everything else. The strategic technology budget should not include any “minimum ante” services (such as phone systems, networks, computers, document management, billing), no matter how important, and it should not contain any technology that a client will not clearly recognize and appreciate, such as operational systems like e-mail or billing systems (despite their obvious benefits). Operational technology supports the current practice of law, and the primary objectives are cost reduction and incremental service improvement. The return on investment (ROI) equation is most often an analysis of cost savings: “If we upgrade to the next version of XYZ, how much time and money will be saved over how we are operating today?” Operational technology investments will often “save” a firm costs — in headcount, in efficiency gained or simply in reduced technology costs — but they cannot alter old service models and change client relationships. The ROI equation for strategic technology is very different because the return creates an absolute increase in value. “If we implement this kind of system, how will this expand revenue with new and current clients?” Strategic technology is about adding new value to the firm. DEFINING STRATEGIC TECHNOLOGY All software vendors and technology consultants will argue that their technology is strategic, an example of “sales speak” that simply devalues the meaning of the term and makes it difficult to identify truly strategic investments. Technology investments can be beneficial, even essential, without being strategic. But strategic technology is technology that clients value but do not already expect from a law firm or its competitors. If a client already expects the technology from all providers, there is no opportunity to differentiate or add value above what another firm is providing. The question of whether a particular technology is strategic or operational is not absolute, but is linked to the moment in that technology’s evolution. The window for strategic technology is not very wide, and shrinks with the acceleration of new technology development: Currently, the opportunity for maximum benefit is usually within two to five years of emergence. Before then, the technology is too experimental and immature, and after that time any successful strategic technology will be adopted by at least half of the major firms. In other words, it will have shifted to the operational end of the technology spectrum. Investing early in this technology generates returns; investing later on becomes a matter of survival, as clients will expect the technology as a minimum requirement. All major technologies follow the same course. For example, a decade ago, having e-mail might have won business from a competitor; today it represents a huge investment for firms but has no competitive value. Wireless today (except for wireless e-mail) is largely experimental, but within five to 10 years it will be operational. Client extranets are a good example of strategic technology. Five years ago, they were experimental. In a couple of years, they will be pervasive: no RFP for legal services will be without the demand that an extranet be deployed. But today, there is still an opportunity to differentiate with effectively implemented client extranets. IDENTIFYING OPPORTUNITIES It’s not always easy to identify opportunities for strategic investment, and it is even more difficult to execute on them quickly and effectively. There are two litmus tests for whether technology is truly strategic: Did the client select the law firm in part because of its technology; and is a client willing to directly pay for some or all of the technology costs (if a firm chooses to charge the client)? For example, in the last two years, has a client identified your e-mail or billing systems as the reasons why your firm was selected for the work over others? Has a client offered to pick up all or part of your investment for any of these technologies? Probably not. In most cases, clients will value operational technology, but expect the costs to provide them to be built into the firm’s rate structure. In some cases, clients may not value the technology at all, which is often difficult to detect because the client is not paying for or interacting directly with the technology. Strategic technology has a different role in client relationships. Clients of law firms with strategic deployments are often eager to identify the strategic technology as a big part of their selection process. In more cases than you might expect, clients either offer or insist on making all or some of the investment in the strategic technology because they value it that much and want to secure the benefits of it for themselves. Budgeting for strategic technology is a challenge, particularly since the return on these systems in dollar amounts can be difficult to establish, even when their value is obvious to most involved. Furthermore, individual strategic investments tend to be more risky than those in operational technology, but with a much greater potential return. A useful exercise is to perceive an IT budget the way you might perceive an investment portfolio. If a law firm’s IT budget is divided into operational and strategic spending, it is much easier to optimize investments in both. The operational portion should be much larger, usually about 90 percent to 95 percent of the total. Furthermore, given its limited perceived value for clients, the goal of managing it should be firmly focused on cost and risk reduction. Lowering cost and risk should be tempered with a realistic expectation for what kind of return this investment will provide over a multiyear period. If the operational budget resembles, say, a fixed-return, high-grade bond portfolio, then the strategic portion is more similar to a venture capital portfolio, where the overall goal might be a 25 percent or 50 percent ROI, but the individual returns are going to vary widely. Some projects may amount to very little. Others have the potential to transform your firm. This is not to say that a firm wants to “place bets” with its resources. It must manage a strategic IT portfolio with the same discipline applied to an operational IT budget. The objective is to “win big” for the firm with several strategic investments that will carry the return for the portfolio. The overall risk of investment in strategic technology is no riskier than investing in operational technology, but the potential return is much greater. Unlike venture capital, however, for law firms the financial return of the strategic portfolio is only one measure of the overall return. The positive externalities from a strategic portfolio often transform the equation from a good investment to landslide victory for the firm. Strategic technology can build a firm’s reputation, strengthen bonds with clients and lessen price and competitive pressures. It can also create a clear and obvious differentiator when no other clear comparative advantage exists. More generally, strategic technology allows a firm to prepare for the future, so that as the world evolves, the firm evolves with it. The prevailing current paradigm in legal industry technology spending is to spend on the technology necessary to support the practice, and to minimize the costs of doing so. Clients expect firms to provide operational technology, and they expect the costs of this technology to be embedded into the existing rate structure on which clients are placing greater and greater cost pressure. To compete in the long run, however, firms need to lead with a strategic technology capacity to win business and minimize cost pressures. There will be no chance to respond to obvious client demand for operational technology, because demand will be met more quickly and incrementally by firms that can adapt with strategic technology in real time. Firms that recognize and position themselves to provide strategic technology to their clients will create a dramatic advantage in winning and retaining business. John Fish is the president and chief executive officer of Hubbard One, a software and technology solutions provider for legal departments and law firms.

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