Law firms undertaking eDiscovery activities invariably incur costs. Someone inevitably bears those costs. Today’s post looks at those costs and outlines three models law firms use to address the question: Who should bear the costs of eDiscovery? In part 2, I will examine the pros and cons of each approach, discuss how to decide which model to adopt, and offer pointers for success.
What eDiscovery Costs Do Law Firms Incur?
The costs law firms incur when they engage in eDiscovery are like those incurred for many of the litigation and investigative activities they undertake. In large part, these costs fall into two groups: the costs associated with having people do things, and the costs associated with the tools people use to do those things.
People Costs
Costs from the first group – the things people do – track the stages of the EDRM diagram. These are the hours put in by attorneys, paralegals, eDiscovery and litigation support professionals, and others to:
Law firms incur these people costs in at least three ways, two direct and one indirect:
Technology Costs
Costs from the second group – eDiscovery technology costs – also track the EDRM diagram. They are for technology used for everything from the initial identification of data through presentation of data and eventual disposition or other treatment of data in accordance with client information governance policies and practices.
There are several ways to look at these technologies and their costs to law firms:
Who Should Bear eDiscovery Costs?
For as long as there has been eDiscovery, there has been a debate about who should bear the costs of eDiscovery. Should those costs be borne by law firms or by their clients?
There are three general models law firms use to address eDiscovery costs: they absorb the costs, recover them, or mark them up. As a practical matter, firms typically use a combination of the three approaches.
Absorb
Firms taking the “absorb” approach treat eDiscovery expenses as a cost of doing business. They effectively treat these expenses as overhead just as they might treat the costs of office space, administrative staff, and software they use for billing, email, or word processing.
Recover
With the “recover” approach, firms try to avoid spending money for eDiscovery that they are not able to recover.
There are several ways law firms try to accomplish this. One approach is to avoid the situation entirely by having the organization providing eDiscovery software or services send its bills directly to the end client. The firm never receives a bill, never makes a payment, and has nothing it needs to recover.
A common “recover” method used by firms is to have the eDiscovery software or service provider send matter-specific bills to the firm. The firm pays the provider and bills its client for the same amount.
A third “recover” mechanism is used where firms receive a single bill that covers multiple matters. In that situation, a firm receives a bill, pays the provider, divvies up the bill, and bills its clients for the amounts they own. With this approach, firms usually assign different amounts to different matters based on some form of pro rata calculation.
Firms using the second or third “recover” approaches sometimes mark up the bills they send or add a fee to cover administrative costs.
Profit
Some firms treat eDiscovery as a profit-generating activity. Some of those firms treat eDiscovery as one more billable activity. Others create wholly owned eDiscovery subsidiaries and engage those subsidiaries much as they would any other eDiscovery service provider.
In Part 2
In this post, I covered what eDiscovery costs law firms incur and outlined three approaches law firms use to handle those costs.
In the next post on this topic, I will examine the pros and cons of each approach, discuss how to decide which model to adopt, and offer pointers for success.