Time to reopen the CAPEX v OPEX debate

While any discussions about legal technology inevitably have a strong focus on what sort of technology law firms and legal service providers should be buying and how best to then handle the rollout to get lawyers actually using it, the issue of how to pay for it tends to be ignored.

All too often firms automatically pay for technology the way they have always have done, namely the one-off up-front cost of buying a perpetual licence followed by an annual maintenance charge. How they then raise the capital to buy the perpetual licence varies from firm to firm (cash reserves, capital injection by partners, bank loans, finance/leasing etc) but it all comes down to what is known as the CAPEX (capital expenditure) model.

There is however an alternative – sometimes called SaaS (software as a service) or subscription licensing or even pay-as-you-go – in which the firm pays a set fee per user, per month for however long the software is needed. This is known as the OPEX (operating expenditure) model, as the cost comes out of firms’ regular running costs, rather than involving major capital investments.

But what are the respective merits of CAPEX versus OPEX. I’ve lost track of the times I’ve been told that law firm partners hate OPEX, that law firm IT directors hate OPEX, that legal technology vendors hate OPEX and that legal technology sales staff really hate OPEX.

You can have sympathy with the last group because most sales staff are on relatively low basic salaries and depend upon sales commission to make their money. And with CAPEX sales there is a potential to make huge amounts of money on really big sales – three years ago one legal IT salesman in the UK earned £1.5 million in commission from a single deal. This, incidentally, also explains why smaller firms frequently receive a more cavalier response from vendor sales staff – because they would rather focus their efforts on the bigger firms where they can earn bigger commissions.

So why law firms hate OPEX? The argument here is basically that OPEX introduces an element of uncertainty that can trash law firm budgeting and financial planning. With CAPEX, you buy 100 licences and you not only know what your upfront capital expenditure is today but you also know what your maintenance fees will be tomorrow and the next day, for the next five years. (Perpetual licences usually lock in maintenance terms and have annual inflationary caps.)

This is contrast with OPEX, where you take out a subscription to 100 licences today but then tomorrow you need 150 licences and suddenly your IT budget has been exceeded by 50%. Interestingly, IT vendors hate OPEX for exactly the opposite reason: if you sign up a firm for 100 licences today, you are in serious problems if tomorrow they decide they only need 50 licences because then 50% of your revenues are wiped out.

Well, at least that is the theory but even with CAPEX, if you as a law firm need an extra 50 licences, you are still going to have to pay for them somehow. However what happens if you have to cut back? With OPEX no problem (subject to any notice periods, minimum terms etc) but with CAPEX you are stuffed. You cannot return the licences to the vendor and get a refund and usually there is no second-hand market available. More importantly, as law firms found during the 2008 economic downturn, with CAPEX you are still required to pay maintenance on all those licences you bought, even if many of the people you bought them for have been made redundant.

Indeed the recession saw some unpleasant squabbles between vendors and law firms over this very maintenance-for-empty-seats issue although the smarter vendors realized that “sharing the pain” with a firm was better for longer-term customer relations than trying to squeeze out every last drop of blood from a contract.

Final thoughts: if as a law firm you do move your IT expenditure onto an OPEX basis, then your capital remains in tact and the partners can either use it to pay themselves lots of money or, rather more longer-term, strategic thinking-wise, that capital is available to fund other projects, such as business expansion. As is often the case in the legal industry, just because you’ve always done something this way doesn’t mean that is the only way to do it.

Charles Christian is a legal IT commentator and speaker with over 30 years knowledge of the industry. He is publisher and editor of the Legal IT Insider global legal tech industry newsletter. Twitter @ChristianUncut.

2 thoughts on “Time to reopen the CAPEX v OPEX debate

  1. There is of course another consideration here in relation to finance. There can be significant tax advantages in being able to enter into a leasing agreement that bundles CapEx to incorporate some of the implementation costs too. Some interesting options there to muddy the water too.

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