How to create a legal tech budget

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Diane Camacho of DLC Consulting Services says she usually advises law firms to allot 3% of their budgets for technology. (Image from Shutterstock)

As the legal landscape becomes more technological, law firms are struggling to devise a potentially robust legal tech budget. But this cost-value equation is a complicated one.

Just 12% of legal industry respondents use legal-specific generative artificial intelligence, but 43% more say they plan on adding this to help with their workflow in the next three years, according to a February 2024 Thomson Reuters study. And another recent study finds that while 72% of in-house legal departments say that using technology is a high priority, just 32% have actually increased their legal tech budget, citing cost control as a high priority.

Worried about having enough funds to devote to legal tech? It’s time to set a budget.

Results may vary

There’s no defined amount that law firms should be spending on the legal tech budget—but legal consultants do have suggestions.

Law firms should allocate 4% to 7% of their total budget to technology, suggests Debbie Foster, the CEO of Affinity Consulting Group. But the specific percentage depends on where the firm is starting. If your firm hasn’t invested in technology, then you can expect to face higher initial costs to modernize, Foster says.

Others roughly agree. Typically, 5% to 7% is allocated to tech, which covers the upfront costs, along with subscriptions, upgrades, training and support, says Jan Sander, a consultant with PerformLaw in New Orleans. Payroll and facilities costs are typically the top two for law firms, but technology sometimes costs more than space, he adds.

Diane Camacho, the founder and CEO of DLC Consulting Services in San Francisco, says she usually advises firms to allot 3% of their budgets for technology. This equates to about $300 per month, per person for software, plus an additional $1,500 for a twice-annual training refresh.

Tech budgets are no longer focused on just hardware and software. Included in the tech budget should be training, change management, process and other critical components to ensure the team is well-trained and the technology is effectively leveraged.

One-third of firms have increased their legal tech budgets significantly in recent years—and they can expect to spend even more as hardware costs rise and new technology emerges, according to a 2023 Thomson Reuters study.

According to the 2022 ABA TechReport, a quarter of firms with 2 to 9 lawyers spent an average of $1,000-$2,999 per year on hardware, and 20% say they spent $3,000 to $4,900. But midsize firms of 10 to 49 lawyers decreased their budgets over the last few years, with 65% reporting having a tech budget in 2022, compared to 69% the prior year. The average amount firms spend on hardware was $11,514 in 2022, an increase from $10,433 in 2021.

The reason there’s so much disparity in budgets is because many firms are struggling to understand the true value they should be getting from technology.

“While there is a strong desire to leverage tech for better efficiency, job satisfaction and client service, firms often struggle with the actual transformation process,” Foster says. “That leads to many firms experiencing low user adoption rates and internal skepticism about the decisions made around selecting and implementing new tools.”

Before changing your legal tech budget, Foster suggests that firms conduct a needs assessment to identify inefficiencies and set clear goals for technology investments. It’s crucial to focus not just on the initial purchase but also on proper implementation, training and user adoptions.

Size matters

A strong legal tech budget is essential for firms large and small—but different-sized firms will need distinct investments at different times.

Smaller firms should be using technology to level the playing field, increase efficiency and reduce overhead costs, Foster says. Automating processes at a small firm frees up the limited number of employees to focus on litigating and prevents associates from becoming overwhelmed with having to wear too many hats.

By adopting one to two user licenses with an all-in-one solution, small firms can reduce their costs in other areas, such as third-party software (payment processors, for example), third-party accounting firms and user licenses for general productivity tools such as Microsoft 365 and Google accounts, says Kristopher Kaufman, a legal tech customer success manager who has managed high-volume corporate accounts.

On the other hand, legal tech at a large firm serves the most immediate benefits of reducing errors and improving cross-functional communication, says Amy Fogle, CEO of Milestone, a post-settlement solutions company in Buffalo, New York.

Larger firms need technology to manage complex operations, ensure compliance and enhance client services at scale.

“While the impact is substantial for both, smaller firms might experience a more immediate and transformative effect simply because they can be more nimble when it comes to decision-making and change management,” Foster says.

Creating the budget

To increase your technology budget, you’ll probably need to cut from other areas. Foster suggests looking to cut costs in paper-based processes, redundant software subscriptions and manual tasks that can be automated.

“Reallocating resources toward technology is an investment in long-term efficiency and competitiveness,” Foster says.

Sander says she’s been seeing marketing expenses come down as a percentage of revenue because digital approaches and more targeted approaches help generate brand equity and new client development. Additionally, some law firms are reducing facilities costs to eliminate 20% to 30% of wasted, redundant space cost. This is especially helpful right now, as Sander recommends that law firms allocate at least 10% of their revenue to tech investments and defensive measures initially.

Overwhelmed? Fogle suggests getting started by identifying which processes and systems could or should be made more efficient and looking at what budget is needed to accomplish those processes and systems.

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