Editor's Note: This is the first of a two-part question and answer series wherein industry leaders answer webinar attendees’ questions on implementing a successful cost recovery model.
Law firms have traditionally absorbed all costs related to litigation, including e-discovery—chalking them up to the price of doing business. However, as clients demand their law firms do more with less, this billing model will not be sustainable for many firms moving forward.
To stay competitive, many modern law firms are deploying a new way to approach litigation expenses: cost recovery. In a cost recovery model, firms position e-discovery services as part of their practice and factor these expenses into their fees. Some firms are even turning e-discovery into a potential revenue generator.
We recently hosted a webinar where industry leaders discussed their law firms’ journeys to a cost recovery model, including different factors to consider before going “all in” on this approach. The panel—Kevin Clark, litigation support manager at Thompson & Knight; Kimberly Fisher, practice support manager at Dickinson Wright; and John Koss, e-discovery Counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo—answered attendees’ questions on all things cost recovery.
Interested in watching the full programming? Check it out here.
Question: For the cost equation, does this process get automated or is it generally a manual process to roll-up all the different costs that are considered in scope for the model?
John Koss: I would advise finding a way to make it automated. Otherwise, it is going to kill you in the long term. You need to assess the pro rata share of all of this. You should get assistance from IT and finance on evaluating the true cost of a gigabyte of hosting or the true cost of licensing fees or processing, et cetera. Once you get that metric and can monetize it, you can figure out a way that the process can be automated. On a monthly basis, you can coordinate with your finance and billing folks to get that information to them in an automated way. It is challenging to set everything up from an automated perspective in the initial instance. [However,] it can be done and once it is, it is like everything else. It goes into the billing software like every other cost for the firm and is distributed as part of the invoice. I would highly recommend you do it this way, especially if you want to roll this out globally. A manual approach will always be extremely difficult; it is a daunting task and probably subject to a lot more subjective judgment than you want there to be in case there is any pushback or questions.
Q: Should firms recognize the difference between hard costs versus soft costs? Regarding hard costs, how are firms treating managed services if that is applicable?
Kevin Clark: It depends on how your costs are set up. In a cost recovery model, you may have more flexibility. You may not need to list every single line item, such as internet usage. It depends on how precise you want to be when setting up your model. In my mind, managed services should be included in there, but it also depends on who runs the managed services team. Does it fall under an attorney, an associate, or lit support? It depends on how it is broken up and what makes the most sense for your firm.
Q: In terms of metrics, how are firms appropriating software costs?
Kimberly Fisher: Some firms absorb the cost of the software but charge hourly rates or per gigabyte rates for services provided. The firm will try to recover this cost in other ways. If the firm really wants to recover the cost of the software, it would require the group to meet with accounting and the IT department to determine to true cost of the application and all the components that are involved with managing the application.
Q: Any thoughts on cost recovery (hard costs, soft costs, et cetera) versus recovery in the form of an increased attorney/staff rate?
KC: Some firms are taking this approach, although it is always hard to increase rates. I would bucket this as a hybrid cost absorption-cost recovery model. It is difficult to do if the litigation support department is in charge of its own profit and loss statement, as it is hard to directly link the two to show recovery. It falls partway into the cost absorption model, because the lit support department will absorb the cost, but the firm will try and make it up in other areas with higher attorney or staff rates. This hybrid approach also makes it difficult to use the value that the litigation support department brings to the table to justify the rate increase, as you lose the nexus between the costs of the department and the overall attorney staff bill rate.
Q: How do you handle hard costs versus employee time entries for those that are performing e-discovery work internally?
KC: Firms have different approaches to this question so there is no one-size-fits-all solution. Firms have various billing methods to recoup costs and will mix and match as best fits. Some firms may only bill using the legal professionals’ timekeeping, and the hard costs are built into their billable rate. Others bill based on unit, such as number of users active in a database, the number of gigabytes stored per month, or number of gigabytes processed in a database. Others have hybrids that mix the two. Attorneys seem to favor the billable hour as it is easier to understand, while line items for unit costs are sometimes interpreted as administerial, and easier to write down or off.
One side note here is the importance of good narratives. The legal professionals will often need to work with the partners and customize their work descriptions to try and avoid unnecessary billing issues. For example, if the narrative is too technical, oftentimes the client will incorrectly think that the task is an IT task and push back on paying. The trick is to properly describe what the legal professional performed, while showing the value and the expertise of the individual performing the task.
Q: How do insurer guidelines factor into your recovery and communication strategies? Do you engage directly with the insurers?
JK: We treat insurer guidelines the same for e-discovery services offered internally as we do with services obtained via external vendor partners. Depending on the client, coverage arrangement, and so forth, we may engage with insurers directly, particularly to demonstrate the value and efficiency of our internal offerings and to justify our pricing approach or workflow strategies. Again, this is the same whether working with a vendor partner or doing some or all of the work internally.