Leasing Technology and the Business of Law

Law firms are businesses. Law firms have, of course, always been businesses, but now more than ever, they must be conducted operationally and financially as such. Each year since the economic meltdown in 2008, the level of scrutiny and analysis of the firms' bottom lines has increased not just exponentially, but shifted paradigmatically as firms look to increase flexibility, efficiency and productivity. The 2012 Altman Weil Law Firms in Transition Survey confirms this dramatic shift in attitudes in which an overwhelming 96% of law firm leaders expect this pace of change in the profession to remain the same or accelerate, and the most successful firms will capitalize on clients' demands for greater transparency, greater value and greater levels of service.

Many law firm decision makers are turning to leasing equipment and technology as a competitively advantageous way of performing in the new business model landscape. From a financial perspective, leasing allows firms to: establish a monthly expense where the partner costs are spread out over the life of the hardware or software project; conserve their cash reserves; keep bank lines of credit open for short-term use; expense lease payments rather than depreciate equipment; avoid potential losses on the sale of equipment; and have IT proceed with projects that may exceed the firms' budgets. Combined, these benefits can translate into optimal financial and operational flexibility when the lessor involved is a trusted and strategic partner in a firm's decision-making.

As it happens, it's budget season for law firms now. As we speak, CFOs are scrutinizing their firms' available forms of funding for optimal distribution ' cash, existing bank lines, leasing or some combination of the three ' and determining precisely these key expense factors, especially spatialization, outsourcing (e.g., Foley & Lardner LLP), equipment, and technology needs to keep their firms performing at their competitive best financially and operationally in order to deliver on the mandate for increased transparency, value and service.

On the technology side, the accelerated rate of technology implementation at law firms dictates new rules and greater dangers of obsolescence ' leading-edge, high-performing technology is crucial to a firm's ability to perform efficiently and effectively. Leasing offers a strategic avenue for providing firms with top-of-the-line and current technology at a fraction of the purchase price. Whether a firm doesn't have sufficient cash in hand to do a full purchase or desires to make the most of its IT budget by leasing rather than buying technology equipment, a firm can choose a lease arrangement for equipment that would otherwise require a large capital investment in a single year. Leasing also frees staff from the burden of disposing of outdated equipment, ensures access to the most current IT tools and eliminates higher maintenance costs for older equipment.

Leasing technology may or may not be the right decision for your firm; however, in the spirit of the season ' budget season, that is ' this article highlights the seven best practices when leasing technology as well as the seven deadly sins to avoid.

Seven Best Practices

1) Determine the Fit

It is important to consider the service capabilities, industry and technology knowledge capital, client references, and reporting and invoicing capabilities of any lessor your firm may choose to consider.

Consult your peers in ALA; ILTA; LegalTech; user groups such as Aderant, Elite, Data Fusion, and Redwood, and have both finance and IT coordinate to evaluate and manage leases. Make sure the company or bank you select will have representatives who will be there for you during the entire term of the lease, which could last up to five years. Know who will manage your account and who at the leasing company has decision-making abilities.

2) Determine the Leasing and Financing Providers

There are three kinds of leasing and financing providers: the manufacturer or captive lessor, the independent lessor, and banks. With captive lessors, it is important to recognize that once the captive has the platform under lease, it may look more financially attractive to you to stay with them. They have more control to offer incentives that the other vendors cannot provide. The majority of these leases, however, are for manufacturer-specific products and may impinge upon your firm's desire for customized and flexible, firm-wide technology solutions, and many times discounting between parent and captive is hidden.

Banks have the advantage of having no allegiance to a specific vendor; however, your bank may or may not have IT or the necessary industry and technology knowledge capital that are the hallmarks of a strategic partner; that will ultimately relegate it to solely a source of financing.

Independent lessors, on the other hand, have no allegiance to a specific vendor and are in a unique position to take a consultative approach when working with your firm. An independent lessor, therefore, can be a strategic partner for your firm's unique set of concerns and may be able to provide more flexible and customizable solutions.

3) Perform Due Diligence

Send out Requests for Proposals (“RFP”) to at least three different leasing companies with law firm clients that are equivalent to the size of your firm. It's up to the leasing company to be competitive and fully disclose the terms and costs of leasing without you having to dictate all aspects of the lease to the lessor. RFPs with too many requirements can actually be detrimental to your firm, as you are inviting a leasing company to transform itself to fit a preconceived mold and allowing other factors to easily be hidden.

4) Patience

Do not provide a lease deposit upfront or until there has been:

• An agreement on the terms or conditions,
• Credit approval, and
• You have made sure that any deposit is refundable if you do not commence the lease and that it is either returned at the end of the lease or applied as the last month's payment.

Most banks and leasing companies will allow you to redline any contract; your firm can edit the master lease and all lease schedules to make sure the terms are reasonable, or better yet, favorable to the firm. Redline changes can take time to get approved; be sure to factor this process into the time frame of your projects.

5) Communicate

Provide the leasing companies with the following information to begin your evaluation:

• The term desired for the lease (frequently 36- to 60-month terms);
• Costs and Equipment Descriptions: 1) Hardware ' Provide the specific types and models of the equipment. 2) Software ' It helps to provide a description of what the software will be used for; this way, the leasing company can adequately explain its importance to the firm's operation when sent to a Credit Analyst. 3) Services ' List all services that may be needed for installation, maintenance, training, etc.;
• Installation time frames;
• Require that the Swap Rates be set for the date of the RFP to ensure that each leasing company is basing its rates off the same benchmark. Most leasing companies use like term Swap Rates that can be downloaded from the Federal Reserve's website: ( www.federalreserve.gov/DataDownload/Download.aspx?rel=H15&series=7fbf8fc65ad44431bf467b3b7eef6bf2&lastObs=&from=&to=&filetype=csv&label=include&layout=seriescolumn&type=package);
• Define your desire for the lease to include the following options at the end of the lease term (if applicable to your needs): 1) Ownership of the equipment at the end of the lease ($ Buyout or % Buyout). 2) Ability to return the equipment (Fair Market Value (“FMV”)). 3) The option to extend the lease at the FMV: a) Extensions ' 6 to 12 months at the FMV, b) Monthly extensions at the same rate. 4) The right to buyout the equipment at its FMV. 5) An automatic percentage buyout at the end of your lease where you retain ownership of the equipment without having to give notice. (% Buyout).

6) Evaluate

Evaluate all lease documents to determine whether they match the agreed-upon terms and to make sure no new language or terms have been added. Hold your leasing company accountable for what it has written in its proposal.

When tracking your lease schedules, create your own system based on the information downloaded off an asset tracking system. You have no control over a lessor's online asset tracking system, and it's in your best interest to operate an independent system to protect yourself and maintain data integrity.

7) The Fine Print

Technology leasing can be difficult to navigate in many ways because of deceptive and onerous leasing practices. Here are some tips and terms you should be looking for on your leasing documents:

• Fair Market Value on Software;
• Fair Market Value language is a number mutually agreed to by the Lessor and Lessee, and it has Appraisal Language if you can't come to an agreement on what the FMV is of the equipment;
• Quarterly Interim Rent/Quarterly Commencements;
• Fair Market Value determined by Lessor;
• Seven-day window to return equipment or the lease extends for 12 months;
• No right to use of the Software at the end of the lease;
• Pro Rata 1/30th Language;
• Long-term auto extensions if your notice of intent is missed;
• Notice windows that only allow you to give notice of intent between 90 and 120 days, or some variation thereof, before the end of the lease;
• Requirement to return original boxing material and manuals;
• Where you may be required to return equipment at the end of the lease; Does the leasing company have alternative return facilities if location is an issue?;
• Question if 0% financing can be beat. Depending on the equipment, a FMV lease can run at a negative percentage rate.

Below, I've highlighted seven mini case studies describing what can go wrong when the worst industry practices of these contract terms are overlooked.

Seven Deadly Sins

Case #1: Fair Market Value with Automatic Extensions

After entering into a five-year FMV lease, this firm came to the realization that it was going on year seven of its lease payments. The sin: The Lessor's Asset Tracking system listed the termination date of the lease, but it rolled over to add an additional 12 months of payments if the firm missed its notice to either extend the lease, return the equipment or do an FMV buyout. To add insult to injury, the Lessor was asking for an FMV buyout of around 50% of the cost of equipment that was well past its useful life.

Case #2: Quoted Payment, Not Actual

This firm was quoted a monthly payment on its proposal by a local leasing company. The sin: Following a review long after the lease had commenced, the firm learned that its monthly payment was based off the total equipment cost on the proposal. In actuality, the firm had only booked half that amount, but the lessor kept the monthly payment the same as the proposal's quote.

Case #3: Pro Rata

Upfront, everything looked fine with the lease's structure and rates for this particular firm. The sin: To the firm's dismay, the leasing company was charging the firm 1/30 a day rent until the lease commenced. Often, the leases were kept open and didn't commence until the calendar quarter. The end result was that the firm paid excessive installation costs that added more than $100,000 to the cost of its leases when it added up all the Pro Rata listed on the firm's invoices.

Case #4: Software Ownership

Software was included in this firm's lease. The firm wrongly assumed that it would retain ownership of the software when the lease ended. The sin: In the fine print of the firm's contracts, it was stated that the firm did not retain the right to continue use of the software at the end of its lease. The lessor's contract required that the firm stop using and destroy any copies of the software at the end of the lease. Some firms have been required to pay the FMV of the software with such lease language. The problem is that a buyout could often be determined as the latest version of the software, and the FMV buyout could be as high as the original cost of the software.

Case #5: Monthly Payment Only

While reviewing the cost of a copier project at this particular firm, the firm learned that the lease payments equated to rates as high as 13% to 19% if financed through the captive lessor. The sin: This firm was only able to determine the rates once it realized it wasn't sure what the true cost of the equipment was because it had only been offered the option for a monthly payment.

Case #6: Return of Equipment

This firm gave notice to return its equipment and shipped the leased items to a return facility. The sin: Some of the equipment arrived on time, but not all of the equipment made it to the return facility within the 10-day time frame the leasing company required in its master lease. This resulted in the firm's notice that it was returning the equipment being deemed void, and the leasing company extended the firm's lease payments for 12 months at the same rate.

Case #7: Buyouts with Automatic Extensions

A low buyout of 2% of the equipment's cost was presented to this law firm for the end of terms. The sin: The firm failed to realize that it was required to give notice for the buyout, and the lease was automatically extended for 12 months at the same rate.

Final Analysis

In the end, there are many benefits and reasons to consider leasing technology. Leasing technology guards against obsolescence, preserves credit lines, conserves working capital and partner capital, keeps bank lines of credit open for short-term use, and allows your firm to refresh its technology and equipment. Combined, these elements can provide financial and operational flexibility ' key strategic factors in the new model for law firms. While it's important to avoid the pitfalls when confronted with some of the worst practices in leasing, working with a vetted and trusted partner can not only assist your firm to navigate through the fine print but also help to strategize as your firm looks to position itself leaner, more productive and flexible in the increasingly competitive marketplace.

Law firms are businesses. Law firms have, of course, always been businesses, but now more than ever, they must be conducted operationally and financially as such. Each year since the economic meltdown in 2008, the level of scrutiny and analysis of the firms' bottom lines has increased not just exponentially, but shifted paradigmatically as firms look to increase flexibility, efficiency and productivity. The 2012 Altman Weil Law Firms in Transition Survey confirms this dramatic shift in attitudes in which an overwhelming 96% of law firm leaders expect this pace of change in the profession to remain the same or accelerate, and the most successful firms will capitalize on clients' demands for greater transparency, greater value and greater levels of service.

Many law firm decision makers are turning to leasing equipment and technology as a competitively advantageous way of performing in the new business model landscape. From a financial perspective, leasing allows firms to: establish a monthly expense where the partner costs are spread out over the life of the hardware or software project; conserve their cash reserves; keep bank lines of credit open for short-term use; expense lease payments rather than depreciate equipment; avoid potential losses on the sale of equipment; and have IT proceed with projects that may exceed the firms' budgets. Combined, these benefits can translate into optimal financial and operational flexibility when the lessor involved is a trusted and strategic partner in a firm's decision-making.

As it happens, it's budget season for law firms now. As we speak, CFOs are scrutinizing their firms' available forms of funding for optimal distribution ' cash, existing bank lines, leasing or some combination of the three ' and determining precisely these key expense factors, especially spatialization, outsourcing (e.g., Foley & Lardner LLP), equipment, and technology needs to keep their firms performing at their competitive best financially and operationally in order to deliver on the mandate for increased transparency, value and service.

On the technology side, the accelerated rate of technology implementation at law firms dictates new rules and greater dangers of obsolescence ' leading-edge, high-performing technology is crucial to a firm's ability to perform efficiently and effectively. Leasing offers a strategic avenue for providing firms with top-of-the-line and current technology at a fraction of the purchase price. Whether a firm doesn't have sufficient cash in hand to do a full purchase or desires to make the most of its IT budget by leasing rather than buying technology equipment, a firm can choose a lease arrangement for equipment that would otherwise require a large capital investment in a single year. Leasing also frees staff from the burden of disposing of outdated equipment, ensures access to the most current IT tools and eliminates higher maintenance costs for older equipment.

Leasing technology may or may not be the right decision for your firm; however, in the spirit of the season ' budget season, that is ' this article highlights the seven best practices when leasing technology as well as the seven deadly sins to avoid.

Seven Best Practices

1) Determine the Fit

It is important to consider the service capabilities, industry and technology knowledge capital, client references, and reporting and invoicing capabilities of any lessor your firm may choose to consider.

Consult your peers in ALA; ILTA; LegalTech; user groups such as Aderant, Elite, Data Fusion, and Redwood, and have both finance and IT coordinate to evaluate and manage leases. Make sure the company or bank you select will have representatives who will be there for you during the entire term of the lease, which could last up to five years. Know who will manage your account and who at the leasing company has decision-making abilities.

2) Determine the Leasing and Financing Providers

There are three kinds of leasing and financing providers: the manufacturer or captive lessor, the independent lessor, and banks. With captive lessors, it is important to recognize that once the captive has the platform under lease, it may look more financially attractive to you to stay with them. They have more control to offer incentives that the other vendors cannot provide. The majority of these leases, however, are for manufacturer-specific products and may impinge upon your firm's desire for customized and flexible, firm-wide technology solutions, and many times discounting between parent and captive is hidden.

Banks have the advantage of having no allegiance to a specific vendor; however, your bank may or may not have IT or the necessary industry and technology knowledge capital that are the hallmarks of a strategic partner; that will ultimately relegate it to solely a source of financing.

Independent lessors, on the other hand, have no allegiance to a specific vendor and are in a unique position to take a consultative approach when working with your firm. An independent lessor, therefore, can be a strategic partner for your firm's unique set of concerns and may be able to provide more flexible and customizable solutions.

3) Perform Due Diligence

Send out Requests for Proposals (“RFP”) to at least three different leasing companies with law firm clients that are equivalent to the size of your firm. It's up to the leasing company to be competitive and fully disclose the terms and costs of leasing without you having to dictate all aspects of the lease to the lessor. RFPs with too many requirements can actually be detrimental to your firm, as you are inviting a leasing company to transform itself to fit a preconceived mold and allowing other factors to easily be hidden.

4) Patience

Do not provide a lease deposit upfront or until there has been:

• An agreement on the terms or conditions,
• Credit approval, and
• You have made sure that any deposit is refundable if you do not commence the lease and that it is either returned at the end of the lease or applied as the last month's payment.

Most banks and leasing companies will allow you to redline any contract; your firm can edit the master lease and all lease schedules to make sure the terms are reasonable, or better yet, favorable to the firm. Redline changes can take time to get approved; be sure to factor this process into the time frame of your projects.

5) Communicate

Provide the leasing companies with the following information to begin your evaluation:

• The term desired for the lease (frequently 36- to 60-month terms);
• Costs and Equipment Descriptions: 1) Hardware ' Provide the specific types and models of the equipment. 2) Software ' It helps to provide a description of what the software will be used for; this way, the leasing company can adequately explain its importance to the firm's operation when sent to a Credit Analyst. 3) Services ' List all services that may be needed for installation, maintenance, training, etc.;
• Installation time frames;
• Require that the Swap Rates be set for the date of the RFP to ensure that each leasing company is basing its rates off the same benchmark. Most leasing companies use like term Swap Rates that can be downloaded from the Federal Reserve's website: ( www.federalreserve.gov/DataDownload/Download.aspx?rel=H15&series=7fbf8fc65ad44431bf467b3b7eef6bf2&lastObs=&from=&to=&filetype=csv&label=include&layout=seriescolumn&type=package);
• Define your desire for the lease to include the following options at the end of the lease term (if applicable to your needs): 1) Ownership of the equipment at the end of the lease ($ Buyout or % Buyout). 2) Ability to return the equipment (Fair Market Value (“FMV”)). 3) The option to extend the lease at the FMV: a) Extensions ' 6 to 12 months at the FMV, b) Monthly extensions at the same rate. 4) The right to buyout the equipment at its FMV. 5) An automatic percentage buyout at the end of your lease where you retain ownership of the equipment without having to give notice. (% Buyout).

6) Evaluate

Evaluate all lease documents to determine whether they match the agreed-upon terms and to make sure no new language or terms have been added. Hold your leasing company accountable for what it has written in its proposal.

When tracking your lease schedules, create your own system based on the information downloaded off an asset tracking system. You have no control over a lessor's online asset tracking system, and it's in your best interest to operate an independent system to protect yourself and maintain data integrity.

7) The Fine Print

Technology leasing can be difficult to navigate in many ways because of deceptive and onerous leasing practices. Here are some tips and terms you should be looking for on your leasing documents:

• Fair Market Value on Software;
• Fair Market Value language is a number mutually agreed to by the Lessor and Lessee, and it has Appraisal Language if you can't come to an agreement on what the FMV is of the equipment;
• Quarterly Interim Rent/Quarterly Commencements;
• Fair Market Value determined by Lessor;
• Seven-day window to return equipment or the lease extends for 12 months;
• No right to use of the Software at the end of the lease;
• Pro Rata 1/30th Language;
• Long-term auto extensions if your notice of intent is missed;
• Notice windows that only allow you to give notice of intent between 90 and 120 days, or some variation thereof, before the end of the lease;
• Requirement to return original boxing material and manuals;
• Where you may be required to return equipment at the end of the lease; Does the leasing company have alternative return facilities if location is an issue?;
• Question if 0% financing can be beat. Depending on the equipment, a FMV lease can run at a negative percentage rate.

Below, I've highlighted seven mini case studies describing what can go wrong when the worst industry practices of these contract terms are overlooked.

Seven Deadly Sins

Case #1: Fair Market Value with Automatic Extensions

After entering into a five-year FMV lease, this firm came to the realization that it was going on year seven of its lease payments. The sin: The Lessor's Asset Tracking system listed the termination date of the lease, but it rolled over to add an additional 12 months of payments if the firm missed its notice to either extend the lease, return the equipment or do an FMV buyout. To add insult to injury, the Lessor was asking for an FMV buyout of around 50% of the cost of equipment that was well past its useful life.

Case #2: Quoted Payment, Not Actual

This firm was quoted a monthly payment on its proposal by a local leasing company. The sin: Following a review long after the lease had commenced, the firm learned that its monthly payment was based off the total equipment cost on the proposal. In actuality, the firm had only booked half that amount, but the lessor kept the monthly payment the same as the proposal's quote.

Case #3: Pro Rata

Upfront, everything looked fine with the lease's structure and rates for this particular firm. The sin: To the firm's dismay, the leasing company was charging the firm 1/30 a day rent until the lease commenced. Often, the leases were kept open and didn't commence until the calendar quarter. The end result was that the firm paid excessive installation costs that added more than $100,000 to the cost of its leases when it added up all the Pro Rata listed on the firm's invoices.

Case #4: Software Ownership

Software was included in this firm's lease. The firm wrongly assumed that it would retain ownership of the software when the lease ended. The sin: In the fine print of the firm's contracts, it was stated that the firm did not retain the right to continue use of the software at the end of its lease. The lessor's contract required that the firm stop using and destroy any copies of the software at the end of the lease. Some firms have been required to pay the FMV of the software with such lease language. The problem is that a buyout could often be determined as the latest version of the software, and the FMV buyout could be as high as the original cost of the software.

Case #5: Monthly Payment Only

While reviewing the cost of a copier project at this particular firm, the firm learned that the lease payments equated to rates as high as 13% to 19% if financed through the captive lessor. The sin: This firm was only able to determine the rates once it realized it wasn't sure what the true cost of the equipment was because it had only been offered the option for a monthly payment.

Case #6: Return of Equipment

This firm gave notice to return its equipment and shipped the leased items to a return facility. The sin: Some of the equipment arrived on time, but not all of the equipment made it to the return facility within the 10-day time frame the leasing company required in its master lease. This resulted in the firm's notice that it was returning the equipment being deemed void, and the leasing company extended the firm's lease payments for 12 months at the same rate.

Case #7: Buyouts with Automatic Extensions

A low buyout of 2% of the equipment's cost was presented to this law firm for the end of terms. The sin: The firm failed to realize that it was required to give notice for the buyout, and the lease was automatically extended for 12 months at the same rate.

Final Analysis

In the end, there are many benefits and reasons to consider leasing technology. Leasing technology guards against obsolescence, preserves credit lines, conserves working capital and partner capital, keeps bank lines of credit open for short-term use, and allows your firm to refresh its technology and equipment. Combined, these elements can provide financial and operational flexibility ' key strategic factors in the new model for law firms. While it's important to avoid the pitfalls when confronted with some of the worst practices in leasing, working with a vetted and trusted partner can not only assist your firm to navigate through the fine print but also help to strategize as your firm looks to position itself leaner, more productive and flexible in the increasingly competitive marketplace.