Cost recovery is the process of law firms apportioning technology and other costs back to their clients.  As the creator and leader of eDiscovery managed services, Epiq has gained deep insights into how law firms approach eDiscovery cost recovery.  We’ve seen cost recovery grow as a practice for well over a decade, with some firms trying to break even and others turning it into a profit center. Earlier this year we provided insights on cost recovery based on processes we support within large law firms.  In this update, we focus on eDiscovery cost recovery adoption we support within small and mid-sized firms.

Cost Recovery Adoption Drivers for Small and Mid-Sized Law Firms

In our work with small and mid-sized law firms, we have observed the following drivers that impact whether a firm executes a cost-recovery model for eDiscovery technology:

• Geographic markets
• Litigation specialties
• Client types
• Regulations, rules, and law

Geography can play a role in cost recovery practice, but mostly due to its impact on law firm size.

For larger firms in U.S. East Coast markets and in large cities such as Los Angeles, Toronto, and Chicago, cost recovery is the expected norm and firms usually pass technology costs on to their clients. For smaller firms in these same markets, we see some instances of cost recovery, but it is not the norm. In other geographies such as the U.S. Midwest and South and Western Canada, we rarely talk to small and mid-sized firms who are engaging in cost recovery prior to working with Epiq. These small and mid-sized firms are either bearing the associated costs or looking for vendors to pass costs directly to the clients.

Litigation types can impact cost recovery practice, largely due to the associated client types.

What may be surprising is that specialties and practice groups do not seem to have a direct impact on cost recovery practices, with the size of the law firm still making the biggest difference in approach.  However, we see trends when it comes to client pushback on fees billed. Compliance, internal investigations, pro bono and other low-budget matters see the most client requests for reduced fees or low fixed fees that are potentially loss leaders.  Mergers and acquisitions, antitrust, commercial litigation, and large matters have the most robust eDiscovery budgets and least client pushback on pricing.

Client type has the largest impact on cost recovery practice.

Law firms work with a wide variety of clients in terms of size, location, and industry.  Law firm clients who represent larger corporations routinely have their own eDiscovery solutions in-house but fill the gaps with law firms and alternative legal service providers (ALSP). These corporations understand eDiscovery incurs vendor costs and pay accordingly. Law firm clients who are smaller organizations or individuals are typically less familiar with eDiscovery fees and value add. They often have smaller legal budgets overall, making them more likely to scrutinize costs.

One reason many small and mid-sized firms are less likely to participate in cost recovery is their clients also tend to be smaller in size and therefore more likely to fit the profile of client type less willing to pay for eDiscovery.

Regulations, rules, and laws are shifting to support cost recovery.

Although there is diversification in jurisdictional approach, the ABA’s reasonableness standard tends to be the predominant force and guidance. This requires asking the following questions: Are law firm cost recovery fees reasonable in relation to their expense? Were they well explained to the client?

There has been recent movement in what constitutes reasonableness. Increasingly, the courts view the use of technology and AI as a requirement to help reduce costs and minimize factors, like the amount of data requiring manual review. Fees for AI are seen as reasonable because they reduce overall costs. In fact, avoiding the use of AI can be viewed as unreasonable behavior.

Reasonableness is a factor small firms must consider. Law firms of any size that are slow to adopt best-in-breed eDiscovery technology and utilize tools like AI may fall into a scenario where their processes and fees are not viewed as reasonable because they are not as defensible and efficient as is possible. This in turn may force them to avoid cost-recovery because they cannot perform it reasonably, or alternatively to innovate to meet the reasonableness standard needed to ethically cost recover.

Successful Cost Recovery Adoption for Small and Mid-Sized Law Firms

We have seen bright spots when it comes to successful cost recovery employed by small and mid-sized law firms. These firms tend to have the following characteristics:

• They partner with an experienced Alternative Legal Services Provider who has experience helping law firms of all sizes implement cost recovery models.
• They provide clients with education and real numbers to help them understand the value of utilizing best-in-class technologies, and especially how it will lower their overall costs.
• They understand and overcome an internal culture that views eDiscovery costs as a bargaining chip and something commonly or easily written off.  For cost recovery to be successful, partners and decision-makers must buy into the value of eDiscovery and be willing to articulate and stand behind this point of view with clients.
• They use the funds generated by cost recovery to increase their capabilities, which in turn enables them to win more valuable work and projects and assists with meeting the reasonableness standard.  It is a cycle that feeds itself.

The benefits these firms see are significant.

• Cost recovery enables them to invest in world-class technology and ultimately provide their clients with overall lower costs due to increased efficiencies and reduced risks.
• Improved technology means they are better positioned to compete against their peers, and even against larger firms.
• Utilizing cost recovering instead of having vendors bill clients directly means these firms gain increased buying power and cost savings when working with external vendors.
• Cost recovery can drive more standardization across matters, resulting in a consistent and cohesive approach that increases efficiency and defensibility.

Moving Forward with Cost Recovery

Working with the largest law firms and corporations in the world provides Epiq with insights into their billing practices and approach.  For many clients of all sizes, we have applied this experience to help them set up cost recovery or cost allocation billing and cost models for their eDiscovery spend.  Over the past decade this practice has grown in adoption, and more and more firms are moving to a profit center model.  While many small and mid-sized firms have not yet followed suit, we have helped with highly successful implementations.  We believe that with education—including client education—smaller firms, regional firms, and firms off the coasts can implement cost recovery successfully. This implementation can help them provide best-in-class eDiscovery while meeting their own financial and profitability targets.  Firms who do not embrace cost recovery should expect to operate at a loss for that service, as the need to offer best-in-class tech and eDiscovery services will mean they still need to spend money on the best tools and vendors even if they do not choose to pass those costs along to their clients.  Cost recovery is here to stay for the foreseeable future, with adoption by small and mid-sized firms expected to increase. Firms of all sizes can successfully work with Alternative Legal Services Providers to accelerate their implementation journey.

Brandon Hollinder is a licensed attorney, CEDS, and holds the position of Director of eDiscovery solutions at Epiq. He has more than 15 years of experience in the eDiscovery managed services, document review, and cyber fields.