The real cost of IT for a new firm: a comparative analysis

Last week I received a call from Matt, an old friend and seasoned lawyer currently working in one of the Big Three.

Matt’s been developing plans to start his own practice with four associates, and intends to hire a junior lawyer and one support person. He was looking for guidance on the IT side of his business plan, so we met to talk through the IT infrastructure and associated outlay he’ll need to make to get his team up and running smoothly and with minimal upfront cost and downtime.

Matt’s enquiry is not at all unusual. I get approached with questions like this with remarkable frequency, from lawyers looking to go out on their own, and wanting the most efficient and future-proof IT pathway. There’s a myriad of information on the web about cloud versus in-house IT, and you can easily spend hours trawling through all the pros and cons.

But one thing that isn’t readily available is a cost comparison in a New Zealand context for firms looking to keep their client data in the country, as is the case for the 30-plus law firms I deal with on a daily basis.

Taking Matt’s team of seven, let’s look at the upfront and ongoing costs for the cloud model versus the in-house infrastructure model for his IT requirements.

Upfront infrastructure and costs

There are a few essentials he needs to hit the ground running. As a minimum, he’ll need seven computers, somewhere secure to store his client data (preferably within New Zealand), up-to-date practice management and billing software, operating software like Microsoft Office, emailing capabilities, a high speed internet connection with a firewall, and some basic network equipment to connect all this together.

In-house model

PCs or laptops (per unit)	$1.4k – $2k (x7 units), 3-4 year life cycle
Physical Server	$25k, 3-4 year life cycle
Practice Management Software	$30k – $50k
Microsoft licencing (per user)	$1.1k (x7 licenses), Repurchase for each new version
Firewall\Router and switches	$2.5K – $3.5K
Support hours (build/setup)	$10k
Total	$85k – $97k

Based on the hardware’s average lifecycle, the firm is faced with replacing the computers and the server in 3-4 years.

Cloud Model

Thin terminals* (per unit)	$700 – $1k (x7 units), 4-6 year life cycle
Practice Management Software	$30k – $50k, Includes cost of implementation
Firewall\Router and switches	$2.5K – 3.5K
Support hours (initial build/setup)	$5k
Total	$38.7k – $65k

The biggest difference is in the cost of a server, which you don’t need to purchase in the cloud model. Per-station hardware also costs less, and there are no upfront costs for Windows software, which is included in the monthly fee outlined below. Thin terminals (*slim, simple desktop terminals that translate the ‘computing’ of the offsite server to your monitor) will need to be replaced every 4-6 years. To further reduce the upfront capital spend you could ask your provider about spreading the cost of the initial support hours across the first year.

Ongoing/maintenance costs

Looking at the numbers above makes it seem like a pretty straight-forward decision. However, a look at the ongoing costs reveals some additional issues.

In-house model

Internet	$200/month
IT support, infrastructure, maintenance, back-ups etc	$300 – 700/month, Increases as hardware gets older
Printer	$320 – 500/month
Total	$820 – $1,400/month

Cloud model

Internet	$200/month
Cloud hosting platform (based on Resolve’s SmartLegal solution incl. IT support, back-ups, Windows licensing etc)	$250/person/month (x7 employees = $1750/month)
Printer	$320 – $500/month
Total	$2,270 – $2,450/month

All things considered

Put simply, the financial difference between the two is like buying a car versus leasing it. In-house IT is a large upfront cost, and once you own it, your only significant outgoing is maintenance, and further down the track, replacement. But maintenance and replacements costs are not easily able to be budgeted, and there’s the added cost of down time (through the loss of revenue) if the system goes down. With the cloud model, on the other hand – on a reliable platform – you have a minimal upfront capital outlay and fixed ongoing costs, allowing accurate budgeting. And you can be nimble: scaling up or down quickly, simply adding (or reducing) per person monthly fees, without requiring more upfront investment or divestment.

There are other factors besides cost and flexibility that Matt should consider in deciding what IT model to use in his start-up. The security and location of the provider’s infrastructure, and therefore their clients’ data, is critical for any law firm. The provider’s experience, reputation, location and stability should also all be considered.

As a general rule, for any start-up, there are three key things to do:

1. understand your business’ IT requirements – you may need expert advice on this;
2. map your requirements against different IT solutions, including a range of cloud and in-house models (it’s not a case of one-size-fits-all, and you need to consider your plans for growth); and
3. select a good IT service provider that specialises in the solution you’ve determined is right for you.

So which way should a law start-up go?

A cloud platform is by far the cheaper option for Matt to get his firm up and running. In the first year he’ll spend around $65,000 for the cloud model (mainly due to the software requirements of a law firm) versus a minimum of $95,000 for an in-house model. Over the first three years these costs will start to balance out with the on-going per person cloud hosting/service fee. This ongoing fee will eventually equal the upfront investment in a server, computers and licensing. However within the first 3-4 years this hardware and software will need to be either replaced or upgraded.

So over the long run the direct costs for cloud and in-house IT are similar. But when you weigh up the certainties against the uncertainties around maintenance, and consider the flexibility, reliability and security the cloud option offers, the decision starts to become clear.

Judging by the thinking of the more than 30 law firms Resolve has now transitioned from an in-house model to the cloud, the cloud has become the option of choice.