The last nine months have seen huge changes in our industry. Massive upheaval in the financial services sector has resulted in a funding restriction affecting almost every business. The new market is more competitive, with most clients under increased budgetary pressure and more likely to consider using other firms or exert pressure on their existing firms to lower rates. This pressure on revenue is in turn affecting the profitability of most firms, and the understandable reaction is to cut costs.

The highest costs for a law firm are generally salaries and office space. As it is difficult to significantly reduce the cost of office space in the short term, the cost-cutting spotlight has tended to fall on salaries. Most firms have reduced their business service teams, some for the first time in their history. Other areas of relatively high cost, such as IT, are also obvious targets. As a result, most law firm IT departments are now operating with fewer staff and lower budgets. 

In such circumstances, it is entirely understandable that reductions in IT budgets will be made in the discretionary areas of expenditure, including 'strategic' (but non-essential) projects, or areas of research for 'high potential' new projects. This will help to meet partners' need for increased profitability in the short term, but risks losing ground to the competition in the longer term.

'Cost leadership' is one of the generic competitive strategies available to a firm. Others are 'differentiation', where a firm will attempt to differentiate itself from its competitors through the quality of the service that it offers, or moving to a 'niche' market position. It is unlikely that a 'full-service' firm will follow a 'niche' strategy unless forced to do so, and therefore in reality the only other option for pursuing a pure cost-leadership position, with obvious implications for long-term profitability, is to seek some form of differentiation.

Within our IT departments, we face the same dilemma. The paradox is that in these increasingly competitive times, in order to help (or enable) our firms to compete, we should also be investing in value-adding IT services that differentiate our firms in the eyes of our clients. 

The constraints placed upon IT departments with these cost-cutting measures are likely to result in a lack of strategic planning. If we only have sufficient budgets for operational issues, then why should we plan beyond our means? It could be argued that it is even more important to think strategically now because: i) strategic initiatives are likely have a greater impact within the market, and ii) we need to be prepared to seize opportunities as soon as they arise.

Assuming that a firm can afford to undertake some level of discretionary expenditure, a strategic project should still be justifiable with a well-prepared and sufficiently strong business case. Such proposals must be based on sound financial analysis, with firms looking for a high and ideally quick return on their investment. Obtaining approval will require strong commercial and influencing skills on the part of the CIO or IT director.
If increasing the size of the teams is not an option, then reducing inefficiency is a given, but improving morale and inspiring the team is crucial. This will require direct engagement with the whole team to explain the challenges, and inspirational leadership to encourage them to deliver the required solutions.

There is no doubt the current environment is creating significant challenges for law firms. This, in turn, creates challenges within their IT departments, many of which are more significant now than anything we have seen before. What will make the difference and determine the winners and losers in the new marketplace is how we respond to those challenges – and that is not a technical issue, but one of leadership. CIOs and IT directors must therefore be strategic, commercial and inspirational leaders if they are going to position their departments to fully support the firms as we negotiate these difficult times and prepare to take advantage of the upturn, whenever it comes.

Paul Heywood is the IT director at Field Fisher Waterhouse.