e-discovery 2.0

Cheesy Successories posters aside (for an alternative take, go here), the need to work together is much more than just a cliché in today’s environment.

In its recent brief on the five major trends that will shape business technology in 2009, leading management consultancy McKinsey and Company noted one trend in particular which highlights the urgent need for an organization’s IT and legal groups to forge better, faster, and more efficient ways of collaborating on electronic discovery issues:

Regulators demand more from IT

Government scrutiny of business will intensify in many developed countries. Already, in the United States, the Office of the Comptroller of the Currency weighs in on the resiliency of banking systems, the Food and Drug Administration (FDA) requires that many pharmaceutical systems be “validated,” and Sarbanes-Oxley drives decisions about accounting systems in every industry. In the future, policy makers and regulators will probably demand that IT systems capture more and better data in order to gain greater insight into and control over how banks manage risk, pharma companies manage drugs, and industrial companies affect the environment. Government officials also will monitor many legal and business rules more closely to ensure compliance with mandates. Successful CIOs should enhance their relationships with internal legal and corporate-affairs teams and be prepared to engage productively with regulators. They will need to seek solutions that meet government mandates at manageable cost and with minimal disruption.

- McKinsey Quarterly, February 2009

The current economic environment is creating a “Double Whammy” within almost every enterprise that has ongoing or pending electronic discovery issues (and are there many organizations left out there that don’t?):

• As the McKinsey article notes, regulators will increasingly be demanding more from IT as government scrutiny of business intensifies. Just look at the just-launched recovery.gov site to see the level of transparency and accountability that the government is aiming for with regard to the stimulus package. The bailout will not directly affect every business, but there is a new sheriff in town who will likely set the tone across the entire business landscape.
• At the same time, there is relentless pressure on controlling costs. When times are tough, dollars that can be saved on the expense side are much more valuable that top-line revenue, since 100% of every dollar of cost savings goes directly to the bottom line.

The net-net: Enterprises will be forced to do more, with less.

How? With regard to electronic discovery, there is a lot of low-hanging fruit to be picked in the area of IT and legal cooperation:

• In-house legal teams should meet with IT (if they aren’t already) to help them better understand the nature of electronic discovery, particularly as it applies to the more “upstream” parts of the process (specifically, identification, preservation, and collection) which IT tends to be more responsible for. Through a better understanding of the nature of electronic discovery, IT can improve its ability find the right documents, avoiding over-collection and reducing downstream processing costs. In addition, new electronic discovery technologies are making it increasingly easy for legal to own more of the process, reducing the electronic discovery burden on IT.
• Conversely, IT should coordinate with in-house legal teams to provide advice and mentoring as legal seeks to bring e-discovery platforms in-house to assist with early case assessment, search, culling, and analysis. To many legal teams, bringing e-discovery in-house may seem like a daunting proposition, but enterprise software has been around for a long time, and learning from IT’s experiences can make the process far less intimidating.

Yes, regulators are going to be far more demanding in the future than they have been in the past. But some simple collaboration and coordination between IT and legal will go a long way toward lightening the regulatory burden, especially as it pertains to electronic discovery.

In today’s economy, controlling electronic discovery costs has taken on a new urgency.  Because the financials of many companies have deteriorated so quickly, there is great interest in finding methods to reduce any costs in the short-term.  As  a result, anyone in a company’s IT or legal department that comes up with a plan to substantially reduce their company’s electronic discovery costs in the short-term is likely to become a hero in their company.  So, what’s the best way to reduce electronic discovery costs quickly?

A natural first step is to decide where to focus.  Which electronic discovery activities are the most costly today?  Which have the greatest room for cost reductions?  The EDRM model serves as a good guide for answering such questions by breaking electronic discovery activities into Information Management, Identification, Collection, Preservation, Processing, Analysis, Review, Production and Presentation.  One thing I have noticed when interacting with enterprises is that the IT and legal departments tend to focus on different stages within electronic discovery based on their perspective.  IT managers naturally concentrate on the information management, identification, collection and preservation activities because these are the activities in which they are most involved.  Similarly, legal managers naturally look to preservation, processing, production and review.

Given these different perspectives, it’s important to take an objective approach to calculating electronic discovery costs.  Doing so is not that easy.  Costs can vary significantly depending on each company, the nature of the case, nature of the data, which vendors/technologies that are used and a variety of other factors.  Costs also come in many different forms: direct hard dollar costs, such as spending on legal and electronic discovery fees delivered by third parties; indirect hard dollar costs, such as time spent by company employees; and soft dollar costs, such as increased risk that could lead to adverse judgments and sanctions.  Finally, electronic discovery costs are often buried across both legal operating budgets and IT budgets making it hard to separate these costs from the costs of other activities.

Undertaking an internal analysis to understand your company’s electronic discovery costs is a valuable activity if you want to better control these costs.  However, while costs do vary between companies, most companies will find that the same activities contribute the most direct hard dollar costs and that these are the costs that are easiest to control in the short-term.  To demonstrate this, let’s walk through a generic cost analysis of a typical case.  Fortunately, we don’t have to start from scratch in doing this.  Leonard Deutchman, an author of several excellent electronic discovery articles, has already done most of the work in a May 2007 article, “Get Ready for the Rules Changes, Part VIII“.  In this article, Mr. Deutchman walks the reader through a hypothetical litigation between an Investor and a Venture Capital firm.  He describes the typical electronic discovery activities and calculates the direct hard dollar costs for these activities including:

• Collection: Mr. Deutchman calculates that it costs $10k to collect 400GB from 8 hard drives and the data of 8 custodians on file and email servers using an outside vendor (doing it in-house can be less expensive).  Note that this excludes any collection from back-up tapes, which can be more costly.
• Culling & Processing: it costs $4k to reduce the 400GB to 90GB by removing non-relevant file types prior to processing.  Processing 90GB costs $90k at $1000/GB.  De-duplication and the application of search terms reduce the data to 25GB.
• Production: it costs $4k to produce the 4GB of data that is deemed responsive and not privileged to produce to the other side.

Mr. Deutchman doesn’t identify direct hard dollar costs for Information Management, Identification or Preservation.  These activities are typically not associated with direct hard dollar costs on a per matter basis.  Rather, they involve indirect hard dollar costs such as employee time and software licenses.  Mr. Deutchman also does not provide an estimate for the costs of review.  However, since review does contribute significant direct hard dollar costs for every matter, this gap needs to be filled in order to get a complete sense of the direct hard dollar costs.  The two big buckets of cost in review are: attorney review costs and review software costs.  In Mr. Deutchman’s hypothetical litigation one might imagine the following scenario for these costs:

• 25GB translates into 195,000 documents using the low end of the documents per GB email (9,000/GB) and documents per GB files (7,000/GB). Industry survey data that is available from EDRM.  This example assumes that 40% of the 25 GBs is email.
• The attorneys reviewing the data charge $75/hour and make 100 document decisions per hour.  This translates to approximately $146,000.
• The hosted review service costs $50/GB/month and, in this case, let’s assume we host it for 6 paid months.  This costs $7,500.

If we tabulate these costs and calculate the direct hard dollar cost shares for each stage, the clear take-away is that Processing and Review costs comprise the vast majority of direct hard dollar costs.  Collection and Production direct hard dollar costs are significantly smaller in comparison.

Now, it’s possible to come up with many arguments for why Mr. Deutchman or my estimates could be high including different assumptions for attorney hourly review costs, higher document decision rates, cheaper vendor pricing, etc.  Similarly, it’s possible to come up with many arguments for why the estimates could be low including the need to perform multiple review passes, slower document decision rates, more expensive vendor charges, etc.  In addition, each company will have their own unique circumstances that will change this picture.  However, this generic analysis strongly suggests that more customized analyses would come to the same conclusion: if you want to reduce electronic discovery costs quickly, then you need to focus on processing and review costs.  One can also imagine that even if you were to use some form of activity-based costing to allocate indirect hard dollar costs on a per matter basis, it would likely not change the importance of Processing and Review costs.

What does this mean for IT and legal managers in Corporations?  These kinds of analyses make it pretty clear that, even though they are more involved in the Information Management, Identification, and Collection phase of electronic discovery, IT managers need to focus more on helping the legal team optimize Processing and Review activities.  You are not going to get the biggest bang for your buck in the short-term by trying to reduce costs in Information Management, Identification, Preservation, and Collection.  Similarly, legal managers need to work more closely with IT in order to focus on how to reduce processing and review costs.

So, the obvious question coming out of such an analysis is what’s the best way to reduce Processing and Review costs?  We’ll discuss this issue in a future post.

In the meantime, tell me what you think by participating in our first e-discovery 2.0 poll.  See the sidebar here: Which Phase of Electronic Discovery Do You Think is the Most Costly?