Integreon

by Debra Rozier

George Rudoy provides an insightful look at the issue of insourcing vs. outsourcing for electronic discovery in his recent blog post, To Insource or To Outsource, at the Georgetown Law E-Discovery Law Blog. 

Rudoy writes that he has always believed in outsourcing of electronic data collection, processing, culling etc. Recently, however, “the ever-increasing pressures on the legal budgets of corporations and resulting pricing flexibility of law firms services once again raised a question of insourcing vs. outsourcing of the discovery services in general and data processing in particular.”

Rudoy cautions law firms thinking about insourcing e-discovery, noting multiple challenges such as managing processing capacity and demonstrating an ROI. We generally agree with his assessment and add two more cautionary notes of our own, one around technology, the other around pricing.

Technology Challenges

While “processing” remains a core e-discovery component, the steps to the ‘left and right’ on the EDRM model are growing in importance.  For example, Early Case Assessment (ECA) technology to perform data analytics (culling and finding the “right” documents for review) is rapidly growing ‘on the left’.

A combination of economics and the advantages of proximity to data storage devices likely will drive processing and ECA technology towards convergence in the form of tools that many companies will likely adopt in-house. For example, a blog post by the CEO of Clearwell, Not Yet A Gartner E-Discovery Magic Quadrant, But Still A Gartner E-Discovery MarketScope on 29 Dec 2009, discusses a recently released Gartner report. Gartner suggests that companies will increasingly bring e-discovery in-house.

But law firms that invest in bringing e-discovery in-house today could find that they do not achieve sufficient volume over the next couple of years to earn a return because their clients will increasingly rely on corporate resources. If not today, that risk will certainly exist by when the time arrives for the law firm to make further investments to keep its technology up-to-date.

Likewise ‘on the right’ of the EDRM, the tools to review documents after culling are also becoming more sophisticated. Vendors regularly upgrade the products they use and sell.

The history of technology in law firms suggests that firms usually lag behind in making upgrades. This is because firms often have their hands full and budgets maxed-out, which means they typically find themselves managing infrastructure as is. Investing in in-house e-discovery tools may commit these firms to technology platforms that quickly become obsolete. 

If in spite of these challenges law firms do want to bring technology in-house, then they should strive to invest in technologies that offer both internal deployment opportunities and a service based model. This integrated approach will enable the firms to manage smaller cases internally as they want to, and then as cases grow, they can then choose to leverage the same solution into a more highly scalable service-based (hosted) model. The firms will benefit from greater flexibility by utilizing the same application provider for both the internal and hosted solutions. The provider can also offer such firms a greater level of support infrastructure than the firms might be willing to invest in on a purely internal basis alone. 

Pricing Challenges

Our anecdotal sense is that some firms are also investing in in-house e-discovery platforms as a way of providing clients with “hidden discounts”. By absorbing a cost that would otherwise be a third-party disbursement or explicit line-item charge, firms can lower client costs without seeming to discount their rates. We’ve heard our friends in firms talk about offering their clients that “something extra”. But is this a good and a sustainable strategy? 

Is the “something extra” really just a price mechanism? Or does it commit a firm to a new set of deliverables that then brings up a set of risks independent of the legal advice clients seek? Bringing technology in-house can enhance service; but it can also create a new service level to meet, one that is prone to many known risks and one that the firms may not be fully equipped to handle. For example, consider the possible impact to project deadlines. Service providers usually have more products in their arsenal and can also scale their staff and infrastructure quickly as project needs increase. Will the law firms maintain this same level of efficiency? What starts as a pricing strategy can spiral into a big operational challenge.

Even aside from potential operational issues, firms may not reap the anticipated ‘price benefit’. Clients may not realize they are receiving a hidden discount. Even if they do, they may none-the-less bargain hard for rate caps. Firms could be at risk for giving away a service and still having to discount or cap their rates.  

Perhaps a bigger pricing risk is the move to alternative fee arrangements (AFA). In the AFA world, many fees may be fixed. With fixed fees, discounts are moot and firms will want to go with the lowest cost option, which usually means outsourcing.

A move to AFA also will lead to more unbundling of services, which means pricing components of matters separately. Smart clients will unbundle some components of matters such as e-discovery. If companies bid out e-discovery and document review separately, then an “in-house hidden discount” strategy just will not work.

Conclusion

We agree with George Rudoy and believe that the concept of law firms completely insourcing e-discovery ultimately lacks a sustainable ROI. A combination of scarce investment capital, technology challenges, capacity and resource utilization management, and pricing risks will drive the majority of firms to instead rely on outsourced solutions as the optimal and most sustainable approach for addressing the full range of their clients’ e-discovery requirements.

UPDATE January 11, 2009: Chris Dale of the eDisclosure Information Project blog recently commented on this post, in his post Outsourcer Integreon adds to Insource v Outsource discussion.