Pressure Points: How to Move Forward Successfully with Technology Leasing

The 2013 IT Budget Benchmark Report conducted by Corporate Executive Board (CEB) Global reveals CIOs across the globe expect a modest growth in total IT expenditure while capital expenditure growth will stay flat. See, www.executiveboard.com/it-blog/2013-it-budget. Despite CIOs' efforts to reduce maintenance and mandatory spending, this continues to represent nearly 70% of total IT expenditure. This trend is amplified in the 2012 ILTA/InsideLegal Technology Purchasing Survey (http://bit.ly/12nQwgj) where overall law firm technology spend ' as a percentage of total revenue and per attorney ' is still down from the pre-2009 economic downturn and firms across the board were spending less on technology as allocated per attorney.

However, according to a Gartner report just released on 10 critical tech trends for CIOs over the next five years, there is significant growth in IT complexity. Faster change cycles are being predicted with shorter development timelines and end-users increasing demands on IT.

With these increases in complexity and demands in the technology realm, institutions will need to find ways to stay on the cutting edge of technology. With the possibility of limited capital expenditures, financing technological advances will certainly be a way to stay within budget constraints and allow firms to continue investing in the latest and greatest technological trends. Leasing is one financing option that a firm can use to cut the out of pocket costs for technology upgrades and still be able to implement new projects by providing a monthly expense versus a total cost purchase.

The Goal: Lessor and Lessee

A technology leasing company's goal should be to look at a firm's projects as a whole and find the best structure and solution to service the needs of the firm. For example, an accounting software system can comprise approximately 80%-90% of software and services (soft costs). Due to possible restrictions and ratios banks have on soft costs, it's important for a lessor to ask if there are any additional hardware upgrades (projects related or unrelated) that the firm will be installing. Often, a firm can look at a lease as another line of credit where they draw down on the line throughout the year instead of doing one-off leases on a project-by-project or vendor-by-vendor basis. Not only will a lease line of credit simplify financing technology throughout the year, but it could also increase the firm's chances of getting approvals for the lines of credit and more favorable rates.

At the same time, a law firm that leases technology should:

• Be Prepared. Once a technology budget is established, a firm should start looking at its financing options for the entire year, especially if there is a short timeframe for the projects to begin.
• Be Thorough. Read all Master Lease documentation including schedules, riders and casualty tables. Have an attorney review the lease documents and consult a trusted leasing expert about any economic language in the lease. Plan on extra time to begin your project if you do not have a Master Lease in place with the lessor and don't hesitate to make red-line changes.
• Be Calculated. Communicate with your lessor on the timelines and timeframes of installations. Also, let them know if any deposits are required upfront and for how much. This will allow the lessor to plan accordingly.
• Be Open. In this day and age, the banks may be conservative with the terms they are willing to finance, depending on the type of equipment and the firm's financials. If a firm would like a 60 month term, it might only be approved for 48 or 36 months; thus, looking at an option B for your projects could save the time and energy of having to reevaluate rates and terms right before a project is scheduled to begin.
• Be Organized. Make sure the firm has a team in place to not only establish a lease, but to track the firm's lease schedules throughout the life of the lease and to continually examine lease documents and invoices.

IT Staff/Executive Team/Attorney Communication

Typically, the leading stakeholders in a leasing situation are the law firm CIO, Director of Technology, CFO, Executive Director, Managing Partner, COO, Controller, Director of Administration, the Management Committee, as well as at least one of the firm's attorneys. The IT staff and their team decide what equipment they need and one or more members of the executive team decides to pay cash, bank finance or lease. Like anything else, the decision could be made on current cash flow, an ongoing lease refresh program, or a firm-wide belief that having no debt and paying cash is the only way to go. If leasing is the preferred option for the firm, then the lease documents provided are usually sent to an attorney to review. In a lot of cases, the attorney is focused on the legalese in the lease documents and the overall exposure. Finance runs the numbers to see what makes sense but the numbers may not reflect the hidden costs in the master lease, schedule, loss table, riders or other documents. The executive team may rely on the attorney to find this type of language.

A couple problems can arise when the stakeholders are not working in concert.

• Attorney Issues. Some of the financial terms and language embedded in the lease may not stand out as an issue to the attorney or, occasionally, all the documents were not provided for the attorney's review. It's not uncommon for leasing companies to send over copies of the Master Lease with blank lease schedules and riders, in which case, the attorney is obviously not going to be able to evaluate the language.
• IT Staff Issues. The IT staff may not have been involved during the decision and negotiation process. In these instances, IT will have to deal with the terms and conditions negotiated by the executive team and attorney. In so doing, the IT staff will want to make sure that they have the necessary flexibility ' especially as the leases terminate ' such as specific configurations for the return of computers, specified terms of advance notice, wiping of data before the return of equipment, where the equipment needs to be shipped, and whether there are multiple return locations. Most importantly, IT will want to be fully apprised of the end-of-term options and whether the firm can return the leased equipment without any further obligation.
• Executive Team Issues. The executive team needs to be in communication with the IT staff to protect the firm from the financial consequences of the above outlined issues. For example, finance and accounting will want to make sure IT is tracking the equipment by location to make sure taxes are being applied properly, monitoring that the correct lease rates are being used, and that gathering the equipment for an on time return isn't a colossal task.

We always recommend that the IT staff, executive team, and attorney coordinate on all aspects of the lease to collectively establish expectations. For example, if the attorney catches 1/30 pro-rata language, finance and accounting should know that it shouldn't be billed on the invoice. If there is pro-rata language, the IT staff had better know when the equipment is being installed and know how long it will take since it will cause an unexpected cost to the lease. We don't recommend using pro-rata, but the IT staff should certainly be aware of the fact that there could be extra costs involved for longer installations.

Regardless of how a firm decides to manage its leases, it's better off managing the leases as a group with an organized system rather than managing the individual parts separately.

Never Too Late To Negotiate: Communication is Key

The lessor is invested in long-term relationships with its clients and therefore wants to take a proactive role in facilitating clear communication with a law firm's leading stakeholders in a leasing situation. Of course, it's a clich' to say that communication is important ' which is why it is surprising how often this key step is overlooked. Only with clear communication between the lessor and the firm's stakeholders can expectations not only be managed, but also met and even exceeded for the firm's needs. That's a win-win, and the foundation for building trust and long term relationships.

On the other hand, if your firm has a technology lease in place, is it too late to get organized? No, it's never too late to organize the firm's leases. The great aspect of a free market society is that you can always renegotiate terms. Reevaluate your lease documents and invoices and be on the lookout for items such as:

• Fair Market Value on software;
• Fair Market Value language that is determined solely by Lessor;
• Quarterly Interim Rent/Quarterly Commencements;
• 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 1/30 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; and
• Requirement to return original boxing material and manuals.

Conclusion

If you find onerous terms in your master lease and supporting documents, start asking questions of your lessor now and ask for the terms to be removed. From there, we recommend you solicit a competitive bid from a leasing company with law firm clients roughly the same size as your firm and that fully discloses all costs and terms associated with their lease solution. There's no doubt that budget constraints and the increasing pace of technology needs are creating pressure points on both ends of the equation, but with the right communication tools, technology leasing can provide the nimbleness and agility law firms need in the increasingly complex IT landscape.

Scott McFetters is president of CoreTech Leasing, Inc., and Marc Cram is the company's regional manager. CoreTech is an independent leasing company working in strategic partnership with over 100 law firms. For more information, please visit www.coretechleasing.com, follow on Twitter
@CoreTechLeasing, and like on Facebook at www.facebook.com/technologyleasing.

The 2013 IT Budget Benchmark Report conducted by Corporate Executive Board (CEB) Global reveals CIOs across the globe expect a modest growth in total IT expenditure while capital expenditure growth will stay flat. See, www.executiveboard.com/it-blog/2013-it-budget. Despite CIOs' efforts to reduce maintenance and mandatory spending, this continues to represent nearly 70% of total IT expenditure. This trend is amplified in the 2012 ILTA/InsideLegal Technology Purchasing Survey (http://bit.ly/12nQwgj) where overall law firm technology spend ' as a percentage of total revenue and per attorney ' is still down from the pre-2009 economic downturn and firms across the board were spending less on technology as allocated per attorney.

However, according to a Gartner report just released on 10 critical tech trends for CIOs over the next five years, there is significant growth in IT complexity. Faster change cycles are being predicted with shorter development timelines and end-users increasing demands on IT.

With these increases in complexity and demands in the technology realm, institutions will need to find ways to stay on the cutting edge of technology. With the possibility of limited capital expenditures, financing technological advances will certainly be a way to stay within budget constraints and allow firms to continue investing in the latest and greatest technological trends. Leasing is one financing option that a firm can use to cut the out of pocket costs for technology upgrades and still be able to implement new projects by providing a monthly expense versus a total cost purchase.

The Goal: Lessor and Lessee

A technology leasing company's goal should be to look at a firm's projects as a whole and find the best structure and solution to service the needs of the firm. For example, an accounting software system can comprise approximately 80%-90% of software and services (soft costs). Due to possible restrictions and ratios banks have on soft costs, it's important for a lessor to ask if there are any additional hardware upgrades (projects related or unrelated) that the firm will be installing. Often, a firm can look at a lease as another line of credit where they draw down on the line throughout the year instead of doing one-off leases on a project-by-project or vendor-by-vendor basis. Not only will a lease line of credit simplify financing technology throughout the year, but it could also increase the firm's chances of getting approvals for the lines of credit and more favorable rates.

At the same time, a law firm that leases technology should:

• Be Prepared. Once a technology budget is established, a firm should start looking at its financing options for the entire year, especially if there is a short timeframe for the projects to begin.
• Be Thorough. Read all Master Lease documentation including schedules, riders and casualty tables. Have an attorney review the lease documents and consult a trusted leasing expert about any economic language in the lease. Plan on extra time to begin your project if you do not have a Master Lease in place with the lessor and don't hesitate to make red-line changes.
• Be Calculated. Communicate with your lessor on the timelines and timeframes of installations. Also, let them know if any deposits are required upfront and for how much. This will allow the lessor to plan accordingly.
• Be Open. In this day and age, the banks may be conservative with the terms they are willing to finance, depending on the type of equipment and the firm's financials. If a firm would like a 60 month term, it might only be approved for 48 or 36 months; thus, looking at an option B for your projects could save the time and energy of having to reevaluate rates and terms right before a project is scheduled to begin.
• Be Organized. Make sure the firm has a team in place to not only establish a lease, but to track the firm's lease schedules throughout the life of the lease and to continually examine lease documents and invoices.

IT Staff/Executive Team/Attorney Communication

Typically, the leading stakeholders in a leasing situation are the law firm CIO, Director of Technology, CFO, Executive Director, Managing Partner, COO, Controller, Director of Administration, the Management Committee, as well as at least one of the firm's attorneys. The IT staff and their team decide what equipment they need and one or more members of the executive team decides to pay cash, bank finance or lease. Like anything else, the decision could be made on current cash flow, an ongoing lease refresh program, or a firm-wide belief that having no debt and paying cash is the only way to go. If leasing is the preferred option for the firm, then the lease documents provided are usually sent to an attorney to review. In a lot of cases, the attorney is focused on the legalese in the lease documents and the overall exposure. Finance runs the numbers to see what makes sense but the numbers may not reflect the hidden costs in the master lease, schedule, loss table, riders or other documents. The executive team may rely on the attorney to find this type of language.

A couple problems can arise when the stakeholders are not working in concert.

• Attorney Issues. Some of the financial terms and language embedded in the lease may not stand out as an issue to the attorney or, occasionally, all the documents were not provided for the attorney's review. It's not uncommon for leasing companies to send over copies of the Master Lease with blank lease schedules and riders, in which case, the attorney is obviously not going to be able to evaluate the language.
• IT Staff Issues. The IT staff may not have been involved during the decision and negotiation process. In these instances, IT will have to deal with the terms and conditions negotiated by the executive team and attorney. In so doing, the IT staff will want to make sure that they have the necessary flexibility ' especially as the leases terminate ' such as specific configurations for the return of computers, specified terms of advance notice, wiping of data before the return of equipment, where the equipment needs to be shipped, and whether there are multiple return locations. Most importantly, IT will want to be fully apprised of the end-of-term options and whether the firm can return the leased equipment without any further obligation.
• Executive Team Issues. The executive team needs to be in communication with the IT staff to protect the firm from the financial consequences of the above outlined issues. For example, finance and accounting will want to make sure IT is tracking the equipment by location to make sure taxes are being applied properly, monitoring that the correct lease rates are being used, and that gathering the equipment for an on time return isn't a colossal task.

We always recommend that the IT staff, executive team, and attorney coordinate on all aspects of the lease to collectively establish expectations. For example, if the attorney catches 1/30 pro-rata language, finance and accounting should know that it shouldn't be billed on the invoice. If there is pro-rata language, the IT staff had better know when the equipment is being installed and know how long it will take since it will cause an unexpected cost to the lease. We don't recommend using pro-rata, but the IT staff should certainly be aware of the fact that there could be extra costs involved for longer installations.

Regardless of how a firm decides to manage its leases, it's better off managing the leases as a group with an organized system rather than managing the individual parts separately.

Never Too Late To Negotiate: Communication is Key

The lessor is invested in long-term relationships with its clients and therefore wants to take a proactive role in facilitating clear communication with a law firm's leading stakeholders in a leasing situation. Of course, it's a clich' to say that communication is important ' which is why it is surprising how often this key step is overlooked. Only with clear communication between the lessor and the firm's stakeholders can expectations not only be managed, but also met and even exceeded for the firm's needs. That's a win-win, and the foundation for building trust and long term relationships.

On the other hand, if your firm has a technology lease in place, is it too late to get organized? No, it's never too late to organize the firm's leases. The great aspect of a free market society is that you can always renegotiate terms. Reevaluate your lease documents and invoices and be on the lookout for items such as:

• Fair Market Value on software;
• Fair Market Value language that is determined solely by Lessor;
• Quarterly Interim Rent/Quarterly Commencements;
• 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 1/30 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; and
• Requirement to return original boxing material and manuals.

Conclusion

If you find onerous terms in your master lease and supporting documents, start asking questions of your lessor now and ask for the terms to be removed. From there, we recommend you solicit a competitive bid from a leasing company with law firm clients roughly the same size as your firm and that fully discloses all costs and terms associated with their lease solution. There's no doubt that budget constraints and the increasing pace of technology needs are creating pressure points on both ends of the equation, but with the right communication tools, technology leasing can provide the nimbleness and agility law firms need in the increasingly complex IT landscape.

Scott McFetters is president of CoreTech Leasing, Inc., and Marc Cram is the company's regional manager. CoreTech is an independent leasing company working in strategic partnership with over 100 law firms. For more information, please visit www.coretechleasing.com, follow on Twitter
@CoreTechLeasing, and like on Facebook at www.facebook.com/technologyleasing.