By and large, most of my clients have opted for the cost recovery approach to eDiscovery for their cases. Usually they have an internal solution that they use on “smaller cases” and use service providers for larger and specialized cases. I used quotation marks because smaller cases mean something different to every law firm. For one of my clients, it means under 5GB, for another, under 200GB. When talking to people at Relativity Fest, I noticed a trend of firms asking me questions about how others manage cost recovery on more of their cases.
Here is a recap of questions I was asked, and that they had for themselves after going to sessions on this topic:
How Do You Price Cost Recovery to Manage the Inherent Volatility of Litigation?The irony of hosting economics is that the unit economics are least favorable when business is most tight, and most favorable when business is strongest. Most firms opt for a similar model to service providers with per GB, per user and per hour fees. Trying to set those numbers in advance, at cost recovery rates, is an exercise in moving the goalposts. Most of my clients have a couple cases that account for 50% – 80% of their eDiscovery usage. If either of those cases come offline, then the firm will be significantly underwater on their eDiscovery investment – rather than at cost-recovery.
What is More Important: Defensibility or Simplicity?Take a very simple example. Your software company charges you based on the number of named users. A single user has access to anywhere between 1 – 5 matters, but the average user has access to 2. In a cost recovery model, would you prefer to charge full freight on the user fees to one matter, and not charge anything on the remaining four matters? Would you prorate each user individually across all their matters? Would you set up a rule that each matter is charged 50% of a user, and expect that in the long run the economics average out? Each law firm, and typically each partner, has a different view on the best approach. But, they each have different implications on economics, ethics and management complexity.
How Do You Factor in the Soft Costs?Very frequently, firms discover that the cost of an in-sourced solution contains more soft costs than they anticipated. The IT department, which is already extremely busy, is suddenly burdened with extra work, so the firm may need to add headcount there. Lit support may need to train staff on the software. Most firms I know that have gone completely to an in-sourced cost recovery model have needed to hire at least two new employees in lit support. Further, managing the infrastructure requires on-going investment and input from key partners, typically posing a distraction to their core focus. Making sure the methods to capture this information and account for it correctly are important to ensuring all costs are fully reflected in cost recovery.
Concluding ThoughtsIt’s not in my nature to say a blanket statement that one-way handling eDiscovery costs is better than another, because each law firm is different. I’ve worked with some firms that have very successful profit centers, and another that has tried and failed at it. There was a great panel about cost recovery with several very successful firms represented on it at Relativity Fest. Most firms don’t want to take on added risks and costs associated with eDiscovery operations but do want to zealously represent their client’s interests – both economically and in terms of service quality. The main challenge is understanding the full scope of those added risks and costs at the outset.
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