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INSIGHT: Cost Modeling Can Boost Law Firm Profitability

June 26, 2020, 8:00 AM

Already under tremendous pressure from clients to cut costs, provide more value, and increase accountability, law firms face new challenges unleashed by Covid-19.

At many firms, staff have been furloughed or laid off, and yet the volume of litigation is likely to rise in the months to come. How can firms maintain or increase profitability with the technology and staff that they already have?

Revisit In-House v. Outsource Decisions by Project Type

Are you struggling with decisions about whether to outsource certain legal services? Every activity and every application your firm uses produces valuable data that can be layered or cross-referenced with other bodies of data to produce meaningful insight and actionable business intelligence.

To understand the cost drivers, set your assumptions aside and look closely at the data. Calculate the time and cost of using internal staff and in-house technology versus alternative legal services providers (ALSPs), technology vendor services, and data hosting. Perform this analysis across multiple matters over time, then break it down by matter size and matter type.

There will likely be surprises. Rather than handling all eDiscovery projects in the same way, you may discover it makes more sense to adopt a “mix and match” approach, outsourcing in some cases but not others.

In relatively small and straightforward matters, the use of basic on-premise software managed by internal staff often proves to be more cost-effective than turning to a vendor, who may charge for storage capacity or advanced technologies like technology assisted review (TAR) even when the matter doesn’t require it.

On the other hand, in high-volume matters with diverse data types you may need technology that is more flexible and scalable, and you may benefit from using TAR to reduce data volumes and minimize the cost of human review.

A close look at cost data from past projects should help you understand where the thresholds are, and which kinds of litigation are most likely to benefit from the use of a reputable vendor or ALSP.

Consider Alternative Cost Models for Recovering Investments in eDiscovery

Absorbing eDiscovery costs as overhead is a traditional practice, but does it still make sense for your firm?

The time-worn arguments for cost absorption— “We’ve always done it,” “It’s too difficult to project and itemize costs for every matter”—hold less water now, especially in the current business environment. eDiscovery processes are more mature than they were even five years ago, the technology is much more powerful, and the tools for analyzing and projecting costs are more accurate and easier to use.

One popular cost recovery model is the pass-through model, in which the firm passes on all eDiscovery costs directly to clients without markup while typically charging extra for project management support and coordination of any third-party services.

In the bundled cost model, a firm engages an outside vendor to provide eDiscovery services and bills clients by marking up per-gigabyte hosting charges to cover attorney and legal support labor through per-gigabyte charges.

In the adjusted cost model, firms purchase eDiscovery services and data hosting capacity from vendors at a “wholesale” price for a set period of time and sell those services to clients at a “retail” rate. This entails some risk, but if your firm has the ability (and technology) to project requirements with precision, the adjusted cost model may allow you to offer clients a favorable, consistent, predictable rate and reduce their overall costs while improving your own bottom line.

Clients may be more open to alternative models than you realize, but you must be prepared to demonstrate your proposal is aligned with their business objectives, paying particular attention to speed of delivery, accuracy, cost-efficiency, and legal outcomes.

Extend Financial, Operational Analysis Across the Litigation Workflow

The scrutiny of data for financial and operational insight needn’t be limited to eDiscovery. Firms should cultivate a “dashboard mentality” that extends to the entire litigation workflow.

That means both continuous monitoring of the costs and progress of individual projects, and the analysis of KPIs across multiple matters to identify chronic workflow inefficiencies and expose client litigation trends.

Analysis based on actual past matters enables accurate projections of litigation costs and time frames, helping you make crucial decisions about whether to settle or not, as well as providing a more informed basis for litigation strategy. It can help you understand which practice areas are most profitable and should be the focus of intensified business development efforts and recruitment. It can also help you evaluate the performance of teams and associates in specific contexts so you can allocate resources more cost-effectively.

Much of this analysis can be shared with clients to inform their own decision-making, anchor your counsel and recommendations in facts, and demonstrate your firm has adopted a business mindset to complement the expert legal counsel you provide.

While a severe crisis like the current pandemic may seem to call for caution, it is also an opportunity for leaders to demonstrate resilience. Now is the time to take a hard look at how your costs, business processes, and technological infrastructure intersect as you search for new efficiencies and smarter workflows. Doing so will allow you to protect profit margins in the short term and scale much more quickly and efficiently when economy gets back on firmer ground.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

David Carns is chief revenue officer of Casepoint. A former adjunct professor of legal technology at Georgetown University, Carns received his J.D. from the John Marshall Law School.

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