Are large-scale legal reviews part of an outdated law-firm business model?

Posted on February 9, 2010

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During the past few months, while meeting with customers and attending trade shows in the United States and throughout Europe, I was told frequently by partners from many high-profile law firms: “large e-Discoveries and the resulting massive legal reviews are part of an outdated business model used by law firms. We may have made good money providing this service in the past, but it no longer works or is feasible”. Of course this triggered my interest because it would seem that law firms should be able to make large profit margins on large e-Discovery requests –  the more documents to review, the more hours one must bill. This may have been the case in the past, but this is changing. Very much like the compelling cases described in Freakonomics and the more recent Super Freakonomics from Steven Levitt and Stephen Dubner (http://freakonomics.blogs.nytimes.com/) sometimes there are other drivers that lead to success or changes than the ones we think should make a difference.

As it appears, young and ambitious law students no longer want to be part of a linear legal review of millions and millions of documents. The decisions that need to be made are often very straightforward and involve little to no legal knowledge. This work can also be done by contract attorneys or by off-shore law firms and more and more by modern computer technology. As a result many top-tier law firms are having  trouble motivating their new recruits to do this type of work. It’s just not in their DNA.

However, the most important driver is that customers no longer accept these huge e-Discovery bills from their law firms. As data collections have continued to double every 18 months (Moore’s law), so have the size of the document collections in an e-Discovery, and unfortunately, so does the external counsel bill for many corporations. The really bad news for the law firms is that most of this work is outsourced (except from a small mark up if that is permitted by the local bar or some work billed by an internal eDiscovery specialist or an internal group of eDiscovery experts), thus the law firms makes only a fraction of the total cost of doing this work.  

So, the customer is already completely upset, well over budget, sometimes bills need to be credited, there are disputes all over the place and the law firms has not yet made any decent money? That does not made sense in a sustainable business model!

As a result, the high-end law firms who live off billing hours in high-profile, niche and complex litigation, are desperately looking for ways to cut e-Discovery costs. There are many ways to do this such as the earlier mentioned off-shoring (to a low wage country), near-shoring (for instance to an area in the U.S. where legal fees are lower than in New York or Los Angeles) or by using text-mining and text-analytics to make the review process more efficient (have computers do the first pass and then apply human sampling and quality control). But all of these approaches do not address the source of the problem: the continuing growing amounts of electronic information.

Therefore, some of the best law firms have taken a different approach: they help their customers to become litigation ready by applying proper information management principles and to help them to create filing plans or data maps which identify the most litigation risky archives and help them to manage these information repositories better, apply legal retention policies and organize privileged, confidential, non-confidential and potentially responsive documents when these documents are created and not when they need to be archived.

We have seen the same evolution with the large document review due diligences in the past: young lawyers refusing to live in a data room with a dictaphone surrounded by tons of paper for (more than) a month. Additional productivity benefits such as the ability to access data from different offices, bill more hours (no travel time), work faster and share the information among accountants, (tax-) lawyers, bankers and other consultants are among the main reasons why electronic data rooms have become a well accepted standard.

In the legal industry, there are never revolutions, but only (slow) evolutions. The fact that I have now heard the same story several times from different (independent) law firms in both Europe and the U.S. and because more than 90% of the educational tracks and other marketing messages at the recent LegalTech 2010 in New York were about Bringing e-Discovery in-house makes me believe that we are indeed at a crucial turning point in the evolution of e-Discovery: the old business model, where the only good e-Discovery, was to have massive data sets in the legal review, no longer makes sense. Law firms need to adopt or they will lose their core business of billing valuable legal advice to other law firms that do accept this new reality!

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