Rolling with IT

All firms will face the need for a system upgrade at some point in the near future. But how do you make financing new IT more viable to the business? Firms know the headaches that await them with a new system rollout, so careful financial planning is crucial. And it’s the alternatives to large one-off expenditures that may make a new system not only more financially appealing to the firm’s leadership, but also more profitable to the business.

Investing large amounts of capital in an unpredictable new IT project budget can be an unattractive prospect to a firm’s leadership, and its partners. A big spend can choke up cashflow and significantly reduce flexibility. And if, after that, the new rollout is delayed, a firm can be caught paying double – both for the legacy IT and its replacement before it’s even ready. The move from old to new systems can be twice as harsh on the firm’s wallet. Firms are in a quandary, facing expensive overlapping costs before the new system gets the green light. They see the business value over the next 10-12 years, but it can be a big financial burden today.

There are, however, solutions to the IT conundrum. Alternative routes to financing new IT may free up a firm’s leadership, make the business more agile, and build competitiveness in a gritty market.

Double Trouble

Typically the cost of software maintenance is around 20% of the licence fee per year. Firms will be paying for support on the existing system, while also having to pay for the deployment of another system, that isn’t yet live or generating any business benefit.

Big-ticket system changeovers, such as a new PMS, can be troublesome to finance efficiently. Some systems take up to two years to be installed. During that time the software vendor, integrators and consultants are all invoicing the firm. A typical PMS project is about 50% software and 50% services. And occasionally even a 60/40 bias towards services, depending on the level of integration and data conversion needed. On top of this could be additional hardware investment to make the new system operational.

Then factor in the cost of some external consultancy to wire the system into the business’s processes, as well as training.

The “critical path” running precariously through a new system’s rollout can mean any element of it might cause delays too. Sometimes this will stretch to even three times the planned duration. Firms don’t want to be cash-negative for a £500,000 or £1m investment while not getting any benefit.

But one route around the chaos is warehousing the new system’s costs with a trusted finance partner. Sitting between the firm and its suppliers, a well-crafted finance solution means the finance partner takes the onus of supplier invoicing on behalf of the firm, freeing it substantially.

Partner Payment

Creating a financial warehousing facility, paying incoming invoices on the firm’s behalf, removes the financial admin from the project. Then, after an agreed period has elapsed, the finance partner can crystallise the project’s costs into a lease. This has the effect of vastly improving the firm’s cashflow and pleases the partners, who have delayed paying for a product until it is live.

The post-tax benefits of leasing can also mean savings of anywhere between 3% and 10% over the equivalent cash purchase. Leasing is cheaper than cash because for partners paying 45% tax, the rentals are 100% tax-deductible.

From the partnership perspective, why should a partner have to pay out their share of £1m in a single year, for something that’s planned across five to 10 years of business value. If the partner’s going to leave, he or she won’t get the benefit of that cash investment. Firms need to match the cost of technology investment with the business benefit. Leasing can offer a fairer distribution of the acquisition costs across the partnership.

Alternative financing is making businesses think innovatively about new technology – and for partners, because it means taking less cash out of the business in one go, change becomes more financially viable. Many partners resent investing in IT, as they don’t always appreciate the value it brings. Why take that financial hit all at once? Firms can spread that cost of that big investment over five years meaning the business preserves its cashflow. That reduces the resistance to these projects.

Residual value of technology assets at the end of a lease is another cashflow plus. The firm ends up only paying back 90% or even 80% in the case of new tablets. There are no benefits to ownership of an IT asset. There are only responsibilities. Assets should be financially managed outside of the firm, meaning the IT team and its leadership can focus on the core business.

Asset Inventory

As well as making savings, firms can keep their IT estate up to date with a better handle on what tech is actually in the business. With a powerful asset management system, firms can get a snapshot of how many laptops, desktops or tablets they have, which is a particularly powerful tool if they’re international or have multiple offices nationally.

One reason for firms to take a wider view on technology may be to solve the problems of post-M&A legacy systems. There can be a patchwork quilt of disparate IT systems within the same firm. It makes complete sense to drive efficiencies and improve financial hygiene to have one application across the whole business.

A new PMS that operates across the firm solves inefficiencies, such as conflicting data coming from multiple sources. If you want to control your processes better, then getting everything upgraded into a single system makes sense.

Some software and hardware platforms are also beginning to show their age, which is driving change. The big data requirements of today’s business world means that some technology just isn’t up to it. New competitors and agile firms are entering the next era of legal technology, enabling more flexibility and remote working through cloud-based services. For firms resisting that shift to higher-tech systems, the competition may get too hot.

The laptop and tablet markets are growing, while desktop is seeing a drop. That’s a sign of firms increasingly willing to modernise – and getting the right solution, customised to their firm. The finer details of asset finance will become vital to maximising their value.

Investment is more appealing to firms when it’s easier to digest. Firms can move forward faster when partners are more willing to invest at the level required, rather than holding off to avoid the financial hit.  And alternative routes to a brighter, more digitised future may be the solution to get them there.



Econocom is Europe's largest independent provider of technology finance and associated services. Active in 20 countries across Europe, Morocco and North America, Econocom has been working closely with the legal sector for more than 20 years. Econocom has many years' expertise in the financing of large hardware and software projects such as CMS and PMS systems. By working with Econocom, our clients benefit from stable IT budgets and comprehensive management of their technology portfolio. This means they can concentrate on their core business free of the administrative and budgetary hassle of buying technology. Click here for more information.

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