Predictability, Technology Change Cycles and Increasing Client Demands

From Purchase to Lease, and Improving Predictability

HPTY is a litigation firm comprised of over 130 attorneys in eight office locations throughout the U.S. Gerber has been with HPTY for 22 years, has been managing the firm's computer services since 1991, and is now in charge of all of the technology procurement for all of the firm's locations. In 1999 and in conjunction with the firm's administrator, Robert Elliott, HPTY made the decision to move from purchasing its technology and equipment needs to leasing ' and has been selecting leasing as the preferred form of finance since that time. “One of the most persuasive aspects of the initial switch to leasing,” says Gerber, “was the predictability of the monthly expense for the firm's partnership.

Another persuasive element for the firm's partnership had to do with liability; leasing, for instance, provides liability with the partnership as the lease agreement is with the LLP. “In many bank loan situations,” he adds “a particular partner has to put his or her name on the agreements. Leasing spreads the liability more appropriately.”

How the Firm Leverages Leasing

“I've seen a lot of changes in my 22 years,” Gerber continues. “I'm on my fifth generation WAN, have managed attorney technology from mini-computers to iPads and everything in between.” On a smaller scale, one recent change has been from firm-issued smartphone devices to an embracing of the BYOD culture. Previously, the firm issued its attorneys Blackberrys, but with the growth of productivity apps, etc., especially in the legal space, the firm now provides its attorneys with a smartphone stipend so attorneys can purchase the smartphone and data plan of their choice.

On a larger scale, changes have been experienced through the firm's growth as evidenced by the opening of several new offices over the last 10 years, not the least of which was the opening of the New York location in January of this year. Leasing has been an advantage for the firm's expansions as well.

“Every time we open an office, there's a tremendous cash outlay. All new equipment, including laptops, software, phone systems, implementation, training and support for the incoming staff, for instance, needs to be procured. In each situation, we have leased the technology portion of the expansion to assist with managing that expense, to do so expeditiously, and to consistently predict what our expenses were going to be.”

This need to shorten decision cycles is echoed by Harvard Business Review author, Rita Gunther McGrath, who suggests that in the new economic climate, decision makers should focus on positioning companies to remain flexible and agile, pushing to shorten decision cycles. See, “Transient Advantage,” Harvard Business Review, June 2013.

At the same time, it has become evidently clear that the technology cycles are moving ever more quickly, year after year. This is substantiated in all of the recently published IT procurement surveys, including Gartner Research Group's report, “10 Critical Tech Trends for CIOs,” which says this trend will only increase over the next five years, with faster change cycles being predicted, shorter development timelines and end-users increasing their demands on IT departments. See, http://gtnr.it/UXRTiL.

For HPTY, leasing simultaneously satisfies all of these market conditions to the firm's advantage. Gerber says: “I try to remind my staff that we are here to help people who happen to be clients. The goal is to have the kind of technology in place that provides for that, fosters client relationship and facilitates the effectiveness and efficiency of the attorneys. There is much greater demand for collaboration and transparency on the client side, and the attorneys need to deliver on that. My goal is to make sure my network and computer operations work every day, and that we keep people as current and workable as possible.”

Gerber says “the challenge is that technology is moving so quickly over the years. Leasing, however, provides the inherent option of refreshing all of the technology and equipment at the end of the term, and forces the firm to review those technology advances in the market cyclically and consider new options that may have emerged.

“When you own the equipment outright, firms may be more reluctant to refresh or replace. With leasing, the monitoring of the technology is built into the lease schedule situation ' which is, I believe, a hidden benefit. Moreover, you have to work on the assumption that things are going to change even more quickly as the younger associates move through the ranks and become partners. These are highly adept, tech-savvy people who will be dealing with increasingly tech-savvy clients. You need to position your firm for that future.”

Beyond the Lowest Lease Rate Factor

To begin with, Gerber makes it a consistent practice to always read the Master Lease Agreements (MLAs) from various lending sources. “In each leasing situation, I go to the marketplace. I want to know that I have done my due diligence for the firm, and select the lessor that best suits our firm's needs.”

This means, over the years, Gerber has seen many different kinds of leases. “Firms should be aware that not all MLAs are created equal. Some are excellent, clear and straight forward. With other MLAs, there are 'land mines,' conditions that are onerous to the firm. Through experience, I can determine where many of the land mines are. For instance, software should be considered a soft cost and lessors should provide a different lease factor since soft costs, such as software and services, should not be returned with equipment at the lease's end.

“However, with some leasing companies, if you're on an FMV schedule, the terms require you to return the software at the end of the lease or you have to buy out the software. That's what I consider a land mine. I have also seen lessors that include terms requiring the firm to return the equipment in the original packaging materials for laptops when you ship equipment, for instance, laptops back to the vendor. But what firm is going take up that real estate to keep 500 empty, original boxes in storage for three years?”

HPTY leases about 80% or 90% of the firm's technology, including all of the work stations, laptops, servers, storage devices, network switches and phone system. The firm also leases software for big projects. For instance, when HPTY upgraded to Office 2010 on 300 laptops, the firm decided to lease that project, including the services component (implementation, training and floor support) of the upgrade. Similarly, the firm leases software in their office expansion projects.

When it comes to reviewing MLAs, Gerber recommends considering the following:

• Carefully review the MLA and any addenda;
• Do not fixate on lowest lease rate factor;
• Do fixate on Total Cost of Ownership of the MLA and any addenda;
• Start with the lease end terms in mind and ask these questions:
• |
  • What are my costs curing the installation process?
  • What are the financial ramifications of pro-rata and quarterly interim rent? Is there anything I can do about these prior to signing?
  • What is my notification process at end of term?
  • What are the consequences if I miss deadlines detailed in the notification? Is there an auto-extension? If so, how long is that extension, 30 days? 180 days?
  • What does my firm have to do to satisfy the terms at the end of the lease?
  • How is the equipment to be returned?
  • Is it feasible that my firm can satisfy the terms at the end of the lease?
• Consider the qualifications of your lessor:
• |
  • Is it a knowledgeable recsource for your firm?
  • Will it communicate consistently and transparently?
  • Is it responsive and able to accommodate changing needs over time?

Gerber explains further: “A lot of people just look at the lowest lease factor, but it is really about the end of lease, and most do not begin with the end in mind. That's where people get into trouble. If, for instance, you have millions of dollars of equipment ' it isn't actually possible to get it decommissioned, boxed up and returned in the timeframe set in some Master Leases and there are substantial financial penalties.”

The Takeaways

At the end of the day, Gerber says, “leasing has provided our firm with multiple advantages, from an IT and financial perspective, and has facilitated our firm's growth over the past decade as well as how we are preparing for the future. The firm partnership values the predictability of the monthly expense, IT values the refresh cycle inherent in technology leasing and the ability to procure top of the line technology.”

Scott McFetters, a member of this newsletter's Board of Editors, is president and Mike Henderson is regional manager for CoreTech Leasing, Inc. Founded in 2008, CoreTech is an independent leasing company working in partnership with more than 100 of the nation's law firms. Gerber has used CoreTech for HPTY's leasing needs for 15 years. For more information visit www.coretechleasing.com.

It's the 2014 budget season and law firm decision makers are scrutinizing bottom line variables to answer many questions, including this one: Is it more advantageous for my firm in the current and future market to own an asset or lease it over its useful life? Things to take into consideration when determining the answer for each firm include: current market trends; advances in technology; the end of the life of the technology equipment; and financial perspectives, including cash outlay, predictability, flexibility and total cost of ownership.

These variables and circumstances will be unique to each firm, of course. Firm culture, tradition, decision making processes, size, market forces, etc., all will play into the best suited results.

To concretely illustrate one firm's approach, we talked to Ted Gerber, Director of Data Systems at Hawkins Parnell Thackston & Young LLP (HPTY), a firm which has embraced forward thinking on the technology front, including the bring-your-own-device (BYOD) culture, as well as having been in the advantageous position of experiencing significant expansion over the past decade. HPTY has selected leasing as the most strategic decision for their firm. Ted's recommendation? “Begin with the end in mind.” Here's what he means.

From Purchase to Lease, and Improving Predictability

HPTY is a litigation firm comprised of over 130 attorneys in eight office locations throughout the U.S. Gerber has been with HPTY for 22 years, has been managing the firm's computer services since 1991, and is now in charge of all of the technology procurement for all of the firm's locations. In 1999 and in conjunction with the firm's administrator, Robert Elliott, HPTY made the decision to move from purchasing its technology and equipment needs to leasing ' and has been selecting leasing as the preferred form of finance since that time. “One of the most persuasive aspects of the initial switch to leasing,” says Gerber, “was the predictability of the monthly expense for the firm's partnership.

Another persuasive element for the firm's partnership had to do with liability; leasing, for instance, provides liability with the partnership as the lease agreement is with the LLP. “In many bank loan situations,” he adds “a particular partner has to put his or her name on the agreements. Leasing spreads the liability more appropriately.”

How the Firm Leverages Leasing

“I've seen a lot of changes in my 22 years,” Gerber continues. “I'm on my fifth generation WAN, have managed attorney technology from mini-computers to iPads and everything in between.” On a smaller scale, one recent change has been from firm-issued smartphone devices to an embracing of the BYOD culture. Previously, the firm issued its attorneys Blackberrys, but with the growth of productivity apps, etc., especially in the legal space, the firm now provides its attorneys with a smartphone stipend so attorneys can purchase the smartphone and data plan of their choice.

On a larger scale, changes have been experienced through the firm's growth as evidenced by the opening of several new offices over the last 10 years, not the least of which was the opening of the New York location in January of this year. Leasing has been an advantage for the firm's expansions as well.

“Every time we open an office, there's a tremendous cash outlay. All new equipment, including laptops, software, phone systems, implementation, training and support for the incoming staff, for instance, needs to be procured. In each situation, we have leased the technology portion of the expansion to assist with managing that expense, to do so expeditiously, and to consistently predict what our expenses were going to be.”

This need to shorten decision cycles is echoed by Harvard Business Review author, Rita Gunther McGrath, who suggests that in the new economic climate, decision makers should focus on positioning companies to remain flexible and agile, pushing to shorten decision cycles. See, “Transient Advantage,” Harvard Business Review, June 2013.

At the same time, it has become evidently clear that the technology cycles are moving ever more quickly, year after year. This is substantiated in all of the recently published IT procurement surveys, including Gartner Research Group's report, “10 Critical Tech Trends for CIOs,” which says this trend will only increase over the next five years, with faster change cycles being predicted, shorter development timelines and end-users increasing their demands on IT departments. See, http://gtnr.it/UXRTiL.

For HPTY, leasing simultaneously satisfies all of these market conditions to the firm's advantage. Gerber says: “I try to remind my staff that we are here to help people who happen to be clients. The goal is to have the kind of technology in place that provides for that, fosters client relationship and facilitates the effectiveness and efficiency of the attorneys. There is much greater demand for collaboration and transparency on the client side, and the attorneys need to deliver on that. My goal is to make sure my network and computer operations work every day, and that we keep people as current and workable as possible.”

Gerber says “the challenge is that technology is moving so quickly over the years. Leasing, however, provides the inherent option of refreshing all of the technology and equipment at the end of the term, and forces the firm to review those technology advances in the market cyclically and consider new options that may have emerged.

“When you own the equipment outright, firms may be more reluctant to refresh or replace. With leasing, the monitoring of the technology is built into the lease schedule situation ' which is, I believe, a hidden benefit. Moreover, you have to work on the assumption that things are going to change even more quickly as the younger associates move through the ranks and become partners. These are highly adept, tech-savvy people who will be dealing with increasingly tech-savvy clients. You need to position your firm for that future.”

Beyond the Lowest Lease Rate Factor

To begin with, Gerber makes it a consistent practice to always read the Master Lease Agreements (MLAs) from various lending sources. “In each leasing situation, I go to the marketplace. I want to know that I have done my due diligence for the firm, and select the lessor that best suits our firm's needs.”

This means, over the years, Gerber has seen many different kinds of leases. “Firms should be aware that not all MLAs are created equal. Some are excellent, clear and straight forward. With other MLAs, there are 'land mines,' conditions that are onerous to the firm. Through experience, I can determine where many of the land mines are. For instance, software should be considered a soft cost and lessors should provide a different lease factor since soft costs, such as software and services, should not be returned with equipment at the lease's end.

“However, with some leasing companies, if you're on an FMV schedule, the terms require you to return the software at the end of the lease or you have to buy out the software. That's what I consider a land mine. I have also seen lessors that include terms requiring the firm to return the equipment in the original packaging materials for laptops when you ship equipment, for instance, laptops back to the vendor. But what firm is going take up that real estate to keep 500 empty, original boxes in storage for three years?”

HPTY leases about 80% or 90% of the firm's technology, including all of the work stations, laptops, servers, storage devices, network switches and phone system. The firm also leases software for big projects. For instance, when HPTY upgraded to Office 2010 on 300 laptops, the firm decided to lease that project, including the services component (implementation, training and floor support) of the upgrade. Similarly, the firm leases software in their office expansion projects.

When it comes to reviewing MLAs, Gerber recommends considering the following:

• Carefully review the MLA and any addenda;
• Do not fixate on lowest lease rate factor;
• Do fixate on Total Cost of Ownership of the MLA and any addenda;
• Start with the lease end terms in mind and ask these questions:
• |
  • What are my costs curing the installation process?
  • What are the financial ramifications of pro-rata and quarterly interim rent? Is there anything I can do about these prior to signing?
  • What is my notification process at end of term?
  • What are the consequences if I miss deadlines detailed in the notification? Is there an auto-extension? If so, how long is that extension, 30 days? 180 days?
  • What does my firm have to do to satisfy the terms at the end of the lease?
  • How is the equipment to be returned?
  • Is it feasible that my firm can satisfy the terms at the end of the lease?
• Consider the qualifications of your lessor:
• |
  • Is it a knowledgeable recsource for your firm?
  • Will it communicate consistently and transparently?
  • Is it responsive and able to accommodate changing needs over time?

Gerber explains further: “A lot of people just look at the lowest lease factor, but it is really about the end of lease, and most do not begin with the end in mind. That's where people get into trouble. If, for instance, you have millions of dollars of equipment ' it isn't actually possible to get it decommissioned, boxed up and returned in the timeframe set in some Master Leases and there are substantial financial penalties.”

The Takeaways

At the end of the day, Gerber says, “leasing has provided our firm with multiple advantages, from an IT and financial perspective, and has facilitated our firm's growth over the past decade as well as how we are preparing for the future. The firm partnership values the predictability of the monthly expense, IT values the refresh cycle inherent in technology leasing and the ability to procure top of the line technology.”

Scott McFetters, a member of this newsletter's Board of Editors, is president and Mike Henderson is regional manager for CoreTech Leasing, Inc. Founded in 2008, CoreTech is an independent leasing company working in partnership with more than 100 of the nation's law firms. Gerber has used CoreTech for HPTY's leasing needs for 15 years. For more information visit www.coretechleasing.com.