And, more to the point – why R&D programs for law firms? First off, everyone is familiar with the notion of R&D. Heck, most of your clients have them. “R&D” is a benign and accepted moniker for experimentation, exploration and inquiry. An R&D program provides a safe haven, where “failure” is simply part of the process, thus, taking much of the sting out of trying new things and providing much-needed salve to lawyers’ skittish psyches. Moreover, there is a lower expectation for an ROI in the near-term. Truly dialing down the consequences.
What kind of investment are we looking at?
Before we go into what law firms might actually explore as part of an R&D program, let’s deal with what it might cost a firm. The short answer is: not much.
First, some stage-setting. R&D investments are ubiquitous at American corporations. Sure, there are industries where you expect to see significant commitments to R&D, and you’d be right. Here’s a sampling of R&D spending as a % of revenue by industry (sourced from Strategy&Co. 2014):
- Computers/electronics: 8%
- Healthcare: 11.5%
- Software/internet: 12.5%
- Telecom: 13%
But get this – the average investment in R&D for all North-American headquartered businesses (across all industries) is 5%. Think about this for a minute. This includes relatively low-tech industries such as shipping or warehousing or trucking – as well as, or course the very high-tech of aerospace developers. R&D is simply a pervasive fact of business.
To get a sense of what an R&D investment might look like for law firms, we did some rough calculations and somewhat arbitrarily looked at 0.25% of annual revenue as a starting point (yep, that’s ¼ of a percent, or 20 times less than that of the average for American businesses). For an AmLaw firm with, say $100 million in annual revenues, this would come to an R&D budget of $250,000. Not insignificant, surely. That said, to put this into context this equates to about 20 hours of work out of one year. Put another way, this is less than the annual cost (salary and benefits) of a 1st year associate. You can do the math for your firm.
Investments in R&D may qualify for Federal and State tax credits which partnerships can pass through to partners; with the potential of mitigating some of the tax “bite” from non-distributed earnings. (Assuming tax credits are renewed for 2015, as they have been 16 times since 1981.) Worth looking into.
Now that we’ve established the advisability of an R&D program – and the modest investment called for – the next question is what “R&D” could look like for a law firm? Again, the short answer is almost anything you’d want. (But short answers never seem to suffice in Law Land!)
For guidance, let’s take another brief detour into Corporate Land.
