Imagine that an important healthcare group approaches your firm with an RFP for a large engagement related to helping its members comply with HIPAA legislation.  You have been asked to demonstrate how you would use technology to improve the firm’s delivery on this engagement.  How would you respond?

Some firms would cite their modern networks and computers.  Others would note their lawyers’ remote access capabilities, BlackBerries or the software they use.  A handful of firms might even point to extranet capabilities (regardless of its quality) or to internal knowledge management initiatives (no matter how rudimentary).

But chances are, none of these technologies would be enough to win this business. 

In an actual example, a leading healthcare group awarded a very large engagement to a firm because it has a significant practice in healthcare law, and importantly, because the firm was able to demonstrate a strategic use of technology. 

Reed Smith developed an innovative, online delivery system that could be used directly by employees of the hospitals, healthcare networks and other providers that comprise the healthcare group’s member organizations.  Employees of subscriber organizations can now access plain-English interpretations of federal and state healthcare regulations drafted and compiled by the firm’s healthcare attorneys, on a secure, subscription-based, specialized website.   

Strategic Technology Wins Business for the Firm
For the client, the technology deployment revolutionized the engagement, making it possible to provide a service to their members that they couldn’t have otherwise.  Rather than paying a fee for hourly legal services, the healthcare group is able to charge a subscription to its members for access to this online resource, which more than offsets the legal and technology work and dramatically boosts its value to the membership.  Reed Smith has been able to weld itself to its client by providing both the highest-quality legal work and an innovative delivery system that integrates itself completely with its client.  The deployment has also opened the door to new possibilities for the delivery of legal services, which can be easily reapplied to any number of specific legal issues.  This is an obvious example of a technology deployment yielding concrete returns.  And yet most firms are not prepared to seize these kinds of opportunities. 

Operational vs. Strategic Technology—A Simple Distinction 
Part of the problem is that this kind of technology—an online subscription system for a single client—simply does not live anywhere in a traditional IT budget.  This is why we recommend to our clients to divide their IT spending into two categories: operational and strategic.  The strategic budget contains expenditures for technology that truly helps the firm win, expand or keep business with clients.  The operational budget contains everything else.  It cannot contain any “minimum ante” services (e.g., telephone, network, computers, document management, billing), no matter how important.  And it should not contain any technology that your client will not clearly recognize and appreciate, including operational systems like CRM, DMS, e-mail or billing systems (despite their obvious benefits).  Operational technology delivers exclusively on managing the services and requirements of lawyers, and the only objectives are cost reduction or no-cost service improvement. 

For operational technology, the ROI equation is most often an analysis of cost savings.  “If we upgrade to the next version of XYZ, how much time and money will be saved over how we are operating today?”  Operational technology investments will often “save” your firm costs—in headcount, in efficiency gained or simply in reduced technology costs; but it cannot alter old service models and change client relationships.  The ROI equation for strategic technology is very different, where the return creates an absolute increase in value.  “If we implement this kind of system, how much new business can we win, or how will this expand our revenue with current clients?”  Strategic technology is about adding new value to the firm. 

There are two litmus tests for whether technology is truly strategic:  first, did your clients select the firm in part because of your technology; and second, are your clients willing to directly pay for some or all of the technology costs (if you choose to charge for them)? 

Let’s look at our examples of important operational technologies.  In the last two years, has a client identified your CRM, DMS or e-mail or billing systems as the reasons why your firm was selected for the work over others?  Has a client offered to pick up all or part of your investment for any of these technologies?  Probably not.  At best, they value these technologies but expect them to be built into the firm’s cost structure; at worst, the value they assign to these technologies is much lower than the actual cost to the firm.

Strategic technology has a very different role in client relationships.  Clients of law firms with strategic deployments are often eager to identify the strategic technology as a big part of their selection process.  In more cases than you might expect, they either offer payment or insist on making all or some of it in the technology, because they value it that much and want to secure these benefits for themselves. 

Managing a Portfolio of Strategic Technology Budgeting for strategic technology is a true challenge, particularly since the return on these systems in dollar amounts can be difficult to establish, even when their value is obvious to all involved.  Furthermore, individual strategic investments tend to be more risky than those in operational technology, but with a much greater potential return. 

We recommend redefining an IT budget in terms of a strategic IT portfolio, similar to an investment portfolio where each strategic project is a holding.  Similar to a venture capital portfolio, the overall goal might be a 25 percent or 50 percent ROI, but the individual returns are going to vary widely. 

Individual operational investments tend to be much less risky, with corresponding lower rates of return for each investment.  You would not invest $2 million in a DMS upgrade, hoping for a 20-50 percent chance of success; you expect a 99 percent chance of success, but you also have realistic expectations for what kind of return this investment will provide over a multi-year period. 

This is not to say that you want to “place bets” with the firm’s resources.  You have to manage a strategic IT portfolio with the same discipline you apply to your operational IT budget.  Your objective is to “win big” for the firm with several strategic investments that will carry the return for the portfolio.  The overall risk of investment in strategic technology is no riskier than investing in operational technology.

Portfolio Return Is Only One Measure
The financial return of the strategic portfolio is only one measure of the overall return.  In addition, the positive externalities from a strategic portfolio often transform the equation from a good investment to landslide victory for the firm.  Strategic investments have many indirect benefits.  They build your firm’s reputation, strengthen bonds with clients and lessen price and competitive pressures.  They can also create a clear and obvious differentiator when no other clear comparative advantage exists.  More generally, strategic technology allows a firm to prepare for the future, so that as the world evolves, the firm evolves with it. 

Identifying High-Value Strategic Investments
All software vendors and technology consultants will argue that their technology is strategic, which devalues the meaning of the term and makes it difficult to identify strategic investments.  Technology investments can be beneficial, even essential, without being strategic.

The Law Value Chain applies supply-chain theory to the business of providing legal services.  The overarching approach is simple enough:  by mapping out high-value relationships, you can identify areas where strategic technology can be applied to dramatically facilitate the exchange.  Applying a planning template can provide a robust and sophisticated framework for targeting strategic technology.  But in the end, your instinct as an IT leader at the firm will guide you to the right answer.  Technology is truly strategic if it helps win the firm business; and, unlike operational investments which must often be implemented and cost justified firm wide, strategic investments can be made with laser-like precision and focus.

Leveraging Successful Strategic Investments
Just as in a venture capital portfolio, a strategic IT portfolio will produce one or more clear winners, and these investments are prime targets for future investment and expansion and broader rollout across the firm. 

The timeline for strategic technology moves at blinding speed.  Like any new technology, the opportunity for maximum benefit is at the earliest point, because within two to five years any successful strategic technology will be adopted by half of the major firms—in other words, shift to the operational end of the portfolio.  Investing early in this technology generates returns; investing later on becomes a matter of survival, as clients will expect the technology as a minimum requirement.  All major technologies follow this course.  Ten years ago, having e-mail might have won you business from a competitor; today it represents a huge investment for firms but has no competitive value. 

Another key to reducing the timeline is speed of execution.  To reap maximum return on strategic IT investments, any steps that can reduce the time-to-market of new technologies—including increased staffing or access to outside providers—results in captured benefits and, just as importantly, strategic advantage over other firms.

Leading with Strategic Technology
The current paradigm in legal industry technology is to spend on the technology necessary to ensure the continuous and optimal practice of law.  Clients expect firms to provide operational technology, and they expect them to embed the costs of this technology into the existing rate structure on which clients are placing greater and greater cost pressure. 

It’s very clear that to compete in the near future, firms will need to lead with a strategic technology capacity.  Client demand will be met more quickly and incrementally by firms that can adapt in real time with strategic technology.  Firms that recognize and position themselves to take advantage of strategic technology will undoubtedly create a dramatic advantage in winning and retaining business. 

About our author . . .

John Fish is President and CEO of Hubbard One, the leader in technology solutions for the legal industry.  He co-founded Hubbard One in 1997, and for two years in a row the company has been recognized by Deloitte & Touche as one of the fastest-growing companies in North America.  John was awarded the KPMG Illinois High-Tech Award in 2002.  He can be reached at jfish@hubbardone.com or 312.939.5000.