Effective electronic discovery for legal purposes has become a necessary -- and expensive -- process for modern organizations. By closely examining data management strategies, however, companies can reduce these e-discovery expenses and even improve processes, according to information governance expert Jeffrey Ritter.
In this four-part SearchCompliance webcast, Ritter provides strategies companies can implement to alleviate these high e-discovery costs. Here in part one, he discusses how companies can identify their hidden e-discovery expenditures so they can begin to refine and streamline their information management processes.
Jeffrey Ritter: A 2012 study by the RAND Corp. demonstrated that e-discovery remains an expensive proposition. The company's study, which was an amazing economic analysis of the case portfolios of eight large companies, recognized that e-discovery spending is roughly allocated, with companies spending about 10% on the collection of electronically stored information (ESI) and 20% on the processing of that information. But more than 70% of the spending is on ESI review to determine if it is responsive, relevant, or perhaps privileged and eligible for exclusion.
The most important finding by the RAND study was that companies are not tracking all of their e-discovery costs. The study emphasized that companies do not track the cost of preserving ESI for possible processing and production. They're not tracking the legal fees that are being spent on negotiating information security or access to international ESI, nor are they tracking the soft cost-type of things that are being spent inside the company on dealing with various and growing spending buckets. Today's program provides some insight into what those issues are.
Our agenda consists of three topics, and our goal is to present five strategies for you to lower your e-discovery costs, not only in the current year, but beyond. Before presenting those strategies, we first have to ask and answer two questions: What are the unrecognized spending buckets, or where's money getting spent? Second, where is that money increasing, and therefore, creating increased problems? Then, we will find out what two truths transform how money is being spent. There is a paradigm shift that has occurred, and unless we call it out and explicitly recognize its influence on what spending in e-discovery is evolving, we won't be able to change the new paradigm. Then we will discuss the five strategies for lowering the cost.
Let's get started by focusing on those unrecognized spending buckets and asking the two questions. Where is our money going today? And, where is our spending going up? When we have the answers, we can reduce those expenses.
There are five areas where I believe companies are not doing a good job of tracking their expenses and as a result are sending a lot of money out the door on e-discovery. The first deals with hidden internal costs. In most companies, reliance is placed on normal employees in the ordinary course of their job to help find the electronically stored information that is responsive or potentially relevant. For most employees, finding, preserving and identifying ESI, then reporting to the legal function, is another assigned duty. Often, hold notices instructing employees to participate in e-discovery go out to ten, hundreds, perhaps thousands of employees, all of them being asked to cooperate in increasingly complex legal processes without being compensated.
E-discovery infrastructure of law firms, service vendors, corporations and third-party storage houses have become prime targets for corporate espionage and hacking.
What are those hidden internal costs? First, there is time's money value. Activity-based cost accounting highlights that every hour an employee spends doing an activity costs the corporation money in salaries, labor expenses and overhead. Those costs, when an employee is being diverted to support the discovery and preservation of ESI, are not being tracked. Similarly, there's the lost opportunity cost because employees are not doing their jobs to create income for the business.
Because e-discovery is a part-time duty assigned to many employees, it's an area that the courts have confirmed increasingly requires guidance, supervision and audits. Companies therefore need to spend a lot of time holding the hands of their employees and other custodians -- both internally and externally -- in navigating the complexity of e-discovery and making sure everybody knows what they need to know. This can include general council or CEOs, as well as associates or new employees at law firms. One other cost we see in terms of hidden internal expenses is the failure of the company to compose and manage written documentation of the preservation process. As a result, when outside lawyers or opposing council question or audit the process, if the documentation is not in place then everybody has to have a fire drill to find or create the records.
All of those are internal costs for the company. They're part of what e-discovery requires, but the RAND study did not identify them and most companies lack the internal activity-based reporting that allows them to track those costs. It adds up. Just imagine 5,000 employees receiving a blanket hold notice that tells them to find all of their electronic mail relating to all possible sales to an international marketplace during a four-year period. That's expensive.
The second area is security. Securing ESI has become a hot topic, basically because we've discovered that the e-discovery infrastructure of law firms, service vendors, corporations and third-party storage houses have become prime targets for corporate espionage and hacking. Think about it: Electronically stored information relevant to litigation is some of the most volatile information a company may control. It is the evidence of their truth or their innocence or possibly liability.
Three phases of electronic discovery show where the security issue has been popping up. First is in the security of the collection process -- whether it's law firms, e-discovery vendors or primary custodians who are being asked to collect information off their mobile devices. Security analysts show the information does not have the controls and security blankets that should be in place, thus exposing not only the content but even the electronic mail communications or the internal search criteria. This is obviously going to be potentially valuable to hostile actors.
Second is the security of the collected ESI. Once it's been collected, it's in the custody of law firms. Until recently, one law firm would routinely send an electronic file, or a disk, or magnetic tape of hundreds, thousands, even gigabytes and petabytes of data to opposing council without any question about the security of the opposing council's law firm, service provider or operating environment. This exposed the corporation's data to being possibly compromised while it's in the hands of those law firms.
A third aspect of e-discovery is becoming increasingly problematic: Privacy and personal information that is the target of privacy regulation is increasingly influencing how e-discovery is conducted. International ESI that is subject to privacy laws on transfer, use and disclosure; medical-based class action; financial services-based litigation -- these are areas in which managing privacy to protect personal information has become extremely difficult. A lot of law firms, consultants and corporations are spending a lot of hours to find the path forward that allows the e-discovery to proceed while still maintaining security.
The third area of spending is in the support services that are embedded within outside law firms. Conventional billable hour billing: $300, $400, $500, $600 per hour for an attorney was the way law firms historically allocated and embedded their overhead expenses. Whether it was for research analysts, e-discovery support personnel or IT personnel, all of them cost the law firm money and the billable hour was their means of recovering the income to offset the operational costs.
The reality is that as we're shifting to alternative billing, but we still haven't solved and provided the law firms a mechanism for separately billing and disclosing those expenses so they can be properly analyzed. Frankly, the companies can better determine whether the law firms, service vendors or the company itself should be incurring the expense. Law firms have, at least until the last few years, had a history of poor overhead and cost management practices. After all, the law firm knew that the client would need to pay the expenses. This has been a troubling area where law departments, law firms and their financial components need to improve. It's costing money.
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The fourth area is the cost of extensive negotiations around the vocabulary and semantic architecture for search. Lawyers believe that part of being a zealous advocate is to protect the disclosure of damaging information that could compromise their client's position. As a result, actually getting productive, effective discovery of electronic-stored information is proving immensely difficult. Companies need to think differently about this expense.
Inefficiency is extremely costly for companies. The lawyers will fight over small issues of search terms. They will not conduct adequate due diligence before entering into negotiations. Therefore, they have to backtrack and spend a great deal of time trying to figure out an effective search strategy. Consistent with late 20th century mandates from clients to control cost, law firms are often using stock or form replies in e-discovery, which actually may be a way of short-terming the control of expenses. Had those responses been tailored to the actual facts, the reality is that e-discovery could be much more efficient.
We're finding that because of the lack of educational sophistication and the existence of technological comfort zones, all of the work around negotiating and finding the ESI that is relevant and responsive is expensive. As a consequence, companies are finding themselves caught as the spending buckets for law firms that are battling for transparency on one side and nondisclosure on the other. They are trying to design a good faith strategy that may potentially still allow responsive information to be outside of the production process.
Finally, it's about the licensing and support of e-discovery software. Yes, there are tools that work. Often, companies and their law firms acquire solutions in crisis. The avoidance of e-discovery has finally caught up with the general council, which has been in denial about needing to deal with the issues. Technology solutions are being acquired and licensed without necessarily having designed the metrics the company or law firm can employ to ensure the success of the acquisition. There are inadequate reforms for how privileged material will be reviewed using technology. Law firms still largely insist on linear reviews to identify attorney/client communications that may be excluded from production. Software tools that are being acquired aren't necessarily doing all they can, and the results of that are expensive.
Those are the five areas where I think undocumented, unrecorded, unrecognized spending is occurring. Is that where the spending is going up? We find out that it's not necessarily the case.
Please visit SearchCompliance.com to view the next segment in this webcast, where Jeffrey Ritter will continue his discussion on strategies to lower e-discovery costs.