E-Discovery Profits: Drawing Blood From a Stone?

, The Legal Intelligencer

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Editor's note: This is the third installment of a four-part series examining the ways in which firms are managing e-discovery work and whether there is profit to be had in such endeavors.

E-discovery is a booming growth industry with falling margins.

As clients look to shave as many dollars off of the expense line of e-discovery as possible, law firms that want to make money on e-discovery — outside of the high rates a few partners can charge for legal expertise in the area — have to be willing to forgo substantial rates in favor of volume.

The good news for firms is that the majority of money to be made in the e-discovery realm is on what only lawyers can do — document review. Interestingly enough, however, even some of the firms that have insourced the entire e-discovery delivery service model still use outside contract lawyers despite the fact that some clients are starting to refuse to pay a markup on review work outsourced to a vendor or contract firm.

The Rand Institute for Civil Justice released a study in September titled "Where the Money Goes: Understanding Litigant Expenditures for Producing Electronic Discovery." In it, Rand found collection of data accounted for 8 percent of e-discovery costs, processing accounted for 19 percent and document review accounted for 73 percent of all e-discovery costs. According to the survey, vendors played the dominant role in collection and processing while outside counsel handled the bulk of document review.

The Rand study participants, which consisted of large corporations across several industries, noted they were looking only to outsource "commoditized" work. They were looking to bring the collection process in-house and limit the document review they send out.

Several e-discovery lawyers agreed, and the Rand study found, that the hourly rate of a document review attorney has "already hit bottom," as Morgan, Lewis & Bockius' eData group leader, Stephanie A. "Tess" Blair, said.

The two other pieces to attack from a cost perspective in that equation then are the number of documents to be reviewed and the speed with which they are reviewed, said WilmerHale Discovery Solutions Managing Director Steven Berrent.

"That's where the race is now," Blair said.

Firms and vendors are in a race to provide lower-cost services with the knowledge that the bubble very well may eventually burst.

"There is money to be made in e-discovery," said Jason Lichter, director of discovery services and litigation support at Pepper Hamilton. "But if you were to plot on a chart the per [gigabyte] processing charges vendors have charged over the last 10 years, it would be a precipitous fall."

Vendors used to charge upwards of $2,500 per gigabyte of information, but now charge almost nothing for processing, Lichter said. He said they look to recoup money through hourly charges at time of production.

That is where Michael Boland of Drinker Discovery Solutions, a recently formed subsidiary of Drinker Biddle & Reath that brought the e-discovery delivery model in-house, thinks a firm can do better. He said he hasn't seen a vendor that is cheaper than what his company is offering. And Drinker Discovery Solutions offers flat fees or retainers to give clients predictability in costs, Boland said.

But Boland is aware of the timeframe for making a profit on e-discovery work. First there is the technology side. He said the investment in a firm's technology needs to see a return on investment that outpaces the timeframe for when that technology will become obsolete. In the e-discovery space, that timeframe is three to five years, he said.

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