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The Silver Lining of Cloud Software?

A question that we regularly get asked by law firms is “should we move to the cloud?”

First, you probably have no choice. This is the direction of travel of the IT industry and where all the investment is going. Worldwide end-user spending on public cloud services is forecast to grow 23.1% in 2021 to total $332.3 billion, up from $270 billion in 2020, according to the latest forecast from Gartner, Inc. On the software side most software vendors (including Microsoft) are now putting the bulk of their R&D into SaaS products (MS365 already has an estimated 300m users). Those who are on-prem or are hosted are focused on their SaaS journey. Secondly, though you obviously need to drill down into what people mean. Private cloud, public cloud, hybrid, infrastructure or platform as a service. There is a range of combinations, and the list goes on. Again though the direction of travel of the IT industry is hard to resist.

For the purposes of this article though I am going to focus on cloud-based software i.e. SaaS. I am going to be looking at it with more of a business than technical lens.

The first thing to say is that I am a big fan of SaaS tools. The benefits are huge:

1. Agility

These tools make an organisation of whatever size more agile. Services can be swiftly turned on and off. Organisations can grow and shrink subject only to the flexibility of the contracts they have in place.

2. Capability Building

It is really easy to build capability, a smaller firm can gain the same capabilities as a much larger firm overnight. They don’t need huge infrastructure back ends or large IT teams to implement. The capabilities within MS365 alone are huge.

3. Business Continuity

Business continuity and office moves become much easier. Without SaaS software, the lockdown and shift to home working would have been much harder. Many organisations now need to dual run (if for no other reason than we could see future waves and pandemics). SaaS is part of the solution.

4. Our People

Most people will have used the lockdown to decide what they want out of life. What do they miss and what they do not want to return to again. Within this, for many, there will be greater flexibility. One lawyer I know wants to spend half their life in Norway and half in the UK. Every organisation is going to see different demands from their people, it is their decision how they want to react but at least SaaS gives them options but with fewer operational headaches.

5. Cost Management

Cost management is easier in some ways, as it is more OpEx than CapEx. There is less depreciation to worry about and if you grow to dislike a piece of software it can be turned off and swapped out. A dog is for life, but SaaS software does not need to be. You are not “buying” licences in the same sense as in the past.

6. Less Hardware Spend

Your hardware has to do less processing and so lasts longer and potentially does not need to be as powerful.

7. Less Infrastructure

No longer do you focus on and run the same level of infrastructure where there is little or no competitive advantage. IT teams can be focussed more on added value. The business of the delivery of law has got more complex in recent years and arguably this takes one more thing off your worry list.

8. Security

It is well known that larger organisations have the ability to invest more in security than smaller firms. For software suppliers, this is easier too if they are running one product. They really can invest in effective security at a level no individual firm could.

9. Ecosystems and Integrations

Integrations have always been a headache for technologists. Not only do many of these products have strong APIs but they also have other products in their ecosystem meaning that complementary products can simply be downloaded almost as if they were iPhone apps like WhatsApp which “fit” seamlessly.

10. Innovation on Tap

Every firm wants to transform and drive innovation and there are some great products. Again, as many of these tools are SaaS it makes things very accessible and immediate. Recently in a week we built out the entire capability of a fee earning group within a firm and put them in a great position for a key client tender. 10 years ago this would have been impossible.

Overall, there is much to be positive about. Hyperscale Group itself has hugely benefitted from SaaS. We have great technology capabilities at a cost per user that many would be envious of. The truth is though that if I had set up Hyperscale Group 10 or 15 years ago our cost per user (and operational hurdles/headaches) would have been a multiple of what they are now. In short, you could say we are living the dream and can pretty much operate our business from an iPad from wherever we are in the world – even if we are offline we simply resync when we gain internet access.

And so, what’s the catch? If it sounds too good to be true it probably is. SaaS has a lot of benefits but there are also some big gotchas to be wary of:

1. Cost

In the “old days” you used to buy a piece of software and depreciate it over say 3 or 4 years and pay 18% software support and upgrade protection. You “owned” the software albeit that it did not really have a value as you could not trade it in or give it back. A £100 a seat piece of software might have been replaced by a SaaS product at £25 a seat per year. Over 6 years on a total cost of ownership basis it became more expensive. Some SaaS software then became £100 per user per year and so became much more expensive. I am not saying this is the case for every supplier, but this is the case for many. Monthly pricing can disguise the true cost.

2. Economic Model

If you enter into a lease of a property you perhaps do it for 20 years with clear rent reviews and break clauses at pre-determined times. You need this as you put a lot of effort into a property, you need certainty and invest in the fit-out. For a SaaS contract, these are often annual contracts, and the reality is that you have no price certainty. The price in year 3 can be very different to that in the first year. Trust is important but equally, there is a lot of M&A activity, and a SaaS company could be sold and so who could you be dealing with. Prices in year 6 could be higher or lower than you start out with according to the market, but you have no control. You would not enter into a property or hardware lease like this, but the SaaS market is different. In fairness to vendors, they won’t know hosting or development costs and how the product will evolve either, but the opportunity for margin enhancements is there. I am a former private equity lawyer and PE houses love SaaS as the potential for profit growth, low-cost sales and recurring revenue is there. With SaaS vendor management may need to become a bigger focus and if you have too many vendors cost management may be painful, perhaps leading you more to a diminution of the tech stack and platform type enterprise SaaS providers?

3. Transition

As discussed above there is an inevitability that at some point you will probably need to move to a SaaS model. Many who have operated on-prem versions of software have had two surprises when doing this though. First, the cost model is very different. If a firm purchased a system 9 years ago the costs will have been depreciated with the only annual expenditure being software support and upgrade protection. A move to a SaaS version can be an expensive shock as the costs appear as “new” costs. In fairness to suppliers the R&D costs can be high and for a range of reasons the economic model is different. It nonetheless can be a shock and causes some to look to other possible solutions. Secondly, SaaS development work is very different to coding an on-prem system. Many expect the functionality to be similar. In some cases, it is not and some are surprised at how clunky and/or less feature-rich SaaS-based equivalents are. There are many great SaaS products out there and many suppliers have invested huge amounts in developing them, but this is not always the case.

4. Data

There are many layers to this point. Firms are under an obligation to keep full and accurate files but what data sits in what system when you move to a SaaS model? Integrations are key but what is being passed where and is there a record of that data on your actual electronic files? When file sharing SaaS systems close down how easy is it to get your data back onto your file (many will have had to deal with getting WhatsApp messages back into files in the past). If there is a security breach, do you know what data is where? Also, you may be told where the data is hosted from a GDPR perspective but how can you be sure? Also, there is the key point that you are giving these systems your data. The longer you use them the more data they have and the harder and more expensive it is to get it back. Most people are wised up to having better post-termination provisions, but will you have that negotiating power to get the provisions you want into a contract with a dominant vendor? In reality, you are probably entrusting your data not to just one vendor but to many. I am not implying any illicit intention from any vendor just fact.

5. Change Management

Lawyers lead busy lives, their focus is clients, delivering law and earning money. More change has happened in the last 5 years than the 20 before and often you see the change fatigue as a barrier to adopting new tech. In the past we would have done system upgrades, you may not have had control over this but at least you could time it and we would have different versions where changes were grouped. The world of the cloud is very different. Changes you don’t want, or need can appear by the day. Things can change colour and move, and you have no control over them. I love my wife very dearly but when we first started to live together she had a habit of seeing my wallet or phone and putting it somewhere else in the house to tidy up. When leaving for an early train this was sometimes “unhelpful” as it involved an extensive search of the house. We got past this, but SaaS software works exactly like this – changes happen without your knowledge and we are on a constant voyage of discovery in just using a product. I had exactly this happen today where controls had been moved to make a simple time-critical task move. I also have a great app for my car with some good features such as being able to download business mileage via a spreadsheet. Yesterday it was different, some of the features have gone but I now have a pretend flashing red alarm light on the picture of its dashboard. Progress, absolutely not, but I have no choice as this is delivered on a SaaS type model. Many users won’t like this and will also blame IT who also have little or no control.

6. Cyber

Yes, as per the above security should be better. Large SaaS providers will be in a much better position to invest and Microsoft for example is reported to be the biggest IT security company in the world by spend. But there is a but. Not all SaaS vendors have this scale and some are much smaller with lower spends, many are start-ups. Back in 2017, we saw the devastating NotPetya virus affect many businesses. Its origin in some cases was reported to be from an alleged attack on large but not huge SaaS providers in particular jurisdictions. Yes, many learnt lessons from that attack on how to rethink security, but we have to accept every new system brings with it additional complexity and risk. This needs to be factored into your plans.

7. Risk

On risk more generally liability for software products will be capped at the monies paid for the software. This is normal and you may say the same applies to on-prem software. For SaaS, though you have less control, and the data is in someone else’s system and so the risk profile is different. Unless you know a SaaS vendor well and do extensive due diligence the reality is that this involves a huge leap of faith

8. Team

Whilst you may need fewer people in areas like infrastructure what SaaS may do is shift that demand elsewhere. You still need to know a lot about the products, how they integrated and also your security and vendor due diligence arrangements will be different. For some products like MS365, you may need a range of new skills even to keep up with the changes. These enhanced capabilities will drive new demand. SaaS is unlikely to result in a headcount reduction.

And so what should we do? Like I say above we need to remember in big picture terms SaaS is good and brings with it many advantages – there are lots of great vendors and the capabilities SaaS brings is phenomenal. Setting up Hyperscale Group 5 or so years ago would have been much harder if SaaS software had not been available. Lockdown has been tough for many and hit the economy hard. Had it not been for SaaS-based products (especially the video platforms which have helped us communicate) things would have been a lot worse. As well as keeping the world moving SaaS allowed many individuals to keep in touch with their friends and family. SaaS is here to stay and so we need to accept this.

What I am saying though is that there are issues and points to be aware of (many of which are not the fault of suppliers). These need to be navigated carefully. It is an art, not a science. In some areas, you will be able to mitigate concerns and in others, you may have little or no power. It is perhaps a time for better modelling and a different sort of due diligence and a refreshed approach to vendor and cost management. Choosing your SaaS “partners” for this journey is key too and perhaps an opportunity to take supplier/law firm relationships to another level.

Hyperscale Group is a technology, digital and innovation advisory and implementation business. For more information please e-mail dereksouthall@hyperscalegroup.com

Derek Southall

Derek Southall

Hyperscale Group
Derek Southall, founder and CEO is a high profile and very well connected figure in the legal technology, innovation, knowledge management and digital marketplaces. Derek has spent nearly 25 years in a range of leading strategic roles for a top 50 global law firm, for most of this time as a Partner and Head of Strategic Development and subsequently as Head of Digital and Innovation. During this period Derek oversaw and helped drive growth from £27 mil TO to in excess of £425 mil TO as well as driving and supporting numerous mergers and international expansion to 18 offices in 10 countries. Derek was ranked by the FT as one of the top three most innovative lawyers in the UK in its first study into the legal market. Derek also led the firm’s technology team to become ranked as the most innovative in Europe and subsequently the firm to ranked as the second most innovative firm in Europe as well as picking up a range of other awards. Derek has been the relationship partner for a long list of major household name clients in a range of sectors including Automotive, FMCG, Financial Services, Food and Drink, Fashion and Construction and has a strong track record in sales and product delivery. Derek has been ranked three times in the last three years as an Acritas Star for outstanding client delivery (based on independent feedback). Derek chairs and was one of the founders of the Legal IT Innovators Group (www.litig.org) which has 80 or so of the top 100 firms as members and which plays a key role in driving ahead technological thinking and change for the good of the legal profession. In this role he has worked alongside the United Nations and a range of other large organisations. www.hyperscalegroup.com recently joined forces with two other leading advisory businesses in the fields of technology, operations and financial management to create the www.intuityalliance.com which has been referred to as the “Holy Trilogy” of Legal IT. Its purpose is to pool experience and intellectual knowhow to ensure we have a more holistic approach to how they give advice. Derek also serves on the advisory boards of several start-ups and has recently been appointed to the advisory board of the Global Institute of Innovation, which brings together around 400 academics to solve some of the world’s biggest problems.