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September 2012

Home – When Law Firm Revenue Morphs into an Expense It's Not Pretty

When Law Firm Revenue Morphs into an Expense It's Not Pretty

It's a wonder of nature. After spending week after week eating every green leafy vegetable in sight, a caterpillar forms itself into a chrysalis. Through the miracle of metamorphosis it emerges as a butterfly, just as delicate as it is beautiful. And, if lucky enough to stay away from your windshield, our newly winged friend spends the rest of her days laying eggs. Metamorphosis, in this case, is nothing short of amazing.   


But when a revenue-generating activity morphs into an expense, well, it's less of a beautiful thing and more of a nauseating thing. This is what some firms are facing in the practice of e-discovery. As the volume of data has exploded, so has the cost of reviewing potential evidence. What used to be an activity a firm charged for has become one a firm pays for. It's not a small problem. The Cowen Group estimates that revenue generated by litigation support will go from $275 million in 2011 to $535 million in 2012. According to a 2012 LexisNexis survey on trends in e-discovery billing, 75 percent of firms consider e-discovery activity an important revenue stream.   


But wait, you might say, if this is an expense relating to litigation, can't I charge the client for it? After all, firms have charged for photocopying for years. 


Not a Mystery 


Kristin Branson, editor at large for TechnoLawyer, says this does not need to be an "impenetrable mystery" to lawyers. "It's simply the modern equivalent of billable work" that firms used to perform when documents existed only on paper, she says. 


In fact, she says, more firms are handling the process between document collection and internal review. "These firms not only eliminate the cost of outsourcing the job, but also recapture a lost revenue stream by using their own litigation support teams to prepare the ESI [Electronically Stored Information] for attorney review," Branson wrote in her July 2012 paper for LexisNexis, titled How to Recapture the Discovery Fees Your Law Firm Used to Earn. 


Before going all in on a massive investment, consider gearing up for smaller cases and outsourcing larger ones. Opinions vary on the definition of small and large cases.  


The 340-attorney firm of LeClairRyan might handle a case that involves up to 25GB, an attorney there said, but if there is a long deadline they will go up to as much as 100GB.  


Tom O'Connor, co-author of the ABA's Electronic Discovery for Small Cases, says most firms can process up to 10GB of data; but with experience comes the capability to handle higher-volume matters, Branson adds. 


Hours and Gigabytes 


How do firms recoup their investment?  The majority of respondents to the LexisNexis survey, 78 percent, simply bill by the hour.  Others charge by the gigabyte.  Clients may not love this, especially if you are charging the same rates as outside vendors.  Of the firms that go this route, they make it a savings for the client by charging 30 percent less than a vendor, Branson writes.  She adds that one way to make the pill easier to swallow for the client is a flat fee that you calculate based on a combination of the time and volume involved.   


Of course, Branson says, you can always count your e-discovery services among the value-adds for clients-giving your existing clients a reason to stay with you and assign more work to the firm, and giving you a way to differentiate your firm when potential clients are picking from a field.   


The same issue presents itself as firms are moving to cloud computing.  In that context, Michael Arkfeld, founder of Arkfeld & Associates, says that from an ethical standpoint firms need to be very careful to distinguish between overhead and disbursable expenses.  "What the ethics rules say is that you want to get consent and agreement if you want to charge your clients for something other than just their reimbursable costs - so the way you do that is through agreement." 




The best ways to keep from finding yourself splattered on a windshield involve carefully ramping up your e-discovery capability; taking on smaller cases at first; coming up with the fairest way to charge for these services, keeping in mind the long-term value you will bring to clients; and making sure e-discovery costs are clearly articulated and understood in an agreement with your client.


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