James D. Shook, Esq., CIPP EMC eDiscovery Expert

In today’s economic environment, companies deploying new technology have to show not just that they will be better and faster, but also just how much faster and better so that they can justify the expense.  Part of the buying process frequently involves gathering data on how much it costs to handle a business process in the current environment, how much can be saved with improvements, and establishing that the savings will justify the cost of the improvement (and frequently, how long it will take to do so).  Most companies refer to this process with the shorthand acronym of “ROI” or “return on investment”.  (In financial circles, ROI is actually a more complex analysis, but it’s still a good acronym for our purposes).

For companies that are looking to bring more of their eDiscovery process in-house, the ROI process can be difficult.  While we intuitively know that we can save money and cut risk with a leading eDiscovery solution, it can be tough to show that quantitatively because financial information is usually not readily available.  Even within the legal department, the cost of eDiscovery is frequently not well-known.  Often, time and money spent on eDiscovery issues is buried with other tasks in time entries from outside counsel; internal costs are generally not tracked at all; and payments to third-party processes are passed through (or marked up) by outside counsel and difficult to locate.

The benefits can also be difficult to calculate.  For example, many companies have poor eDiscovery processes (what we term “Faux eDiscovery“), where they wrongly or negligently ignore data sources and/or sound eDiscovery processes.  Faux eDiscovery can actually be very inexpensive — the real “cost” is in the risk with being caught and sanctioned.  But risk is difficult to quantify.  The result is that some companies trying to improve their eDiscovery processes may actually find a negative ROI (i.e. we only spend $10,000 per litigation now but it will cost us $50,000 to do it right) because they fail to identify or quantify the real ROI — their reduction in risk by handling eDiscovery properly.

If you are putting together an ROI analysis for bringing eDiscovery in-house, here are a few things to consider:

The general statistics available about eDiscovery costs are startling.  It’s well-established that having legal professionals review data – one of the later steps in the eDiscovery process — is expensive, with $18,750 per gigabyte a well-accepted number.  (Gartner, Reducing the Cost and Risk of EDiscovery in 2009, 1/9/2009 at 6).  Over the last several years, the average cost of discovery per case ranged from $621,880 to $2,993,567 (Litigation Cost Survey at 3).  And as noted earlier, Gartner advised an IT eDiscovery budget of $500,000 for a modestly sized case.    (Gartner, Reducing the Cost and Risk of EDiscovery, at 5).

Cutting through the noise, Gartner notes that many companies report a full return on their investment in an eDiscovery solution within 3 to 6 months — or within a single large case.  (Gartner, Marketscope for E-Discovery Software Product Vendors, 12/21/2009 at 2).  While these high-level facts alone may not be enough to convince anyone who requires a detailed ROI, they can help to set the stage for acceptance and also tend to strike a nerve with many C-level executives.

Undertake basic investigation on costs.  Talk to the legal department about how many “cases” they handle in each month (or year), being sure to include internal investigations and employment claims, regulatory inquiries and other matters where data is being preserved, collected and/or processed — not just “lawsuits”.  Ask them if they have information about amounts paid to outside service providers (perhaps through their law firm) for eDiscovery services.  Also check with the people who handle backups and email within the IT department — since different groups within legal may be asking them for help, they may actually have the best view of this work, and could even have hired an outside vendor to handle some eDiscovery-related work.  IT wil generally know whether the company has had to purchase tape processing equipment, additional storage or other non-standard equipment to help the lawyers with eDiscovery.

Check on soft-costs, too.  Most IT departments are only too ready and able to tell someone (anyone!) how much time they have devoted to eDiscovery tasks.  Frequently groups of 2-3 staffers can be assigned full-time or better for weeks or months on a medium or large case.  Without a chargeback model, legal might not even be aware of the massive undertaking to help them.

You may only be able to gather information on a few cases.  In that scenario, try to figure out whether it’s legitimate to extend the information out across the full volume of cases:  were these cases representative of what’s happening?  Do our cases tend to be similar or repeatable?  Do I have a good sampel?  When detailed information is not available — and usually it’s not — your goal is to get an understanding of the magnitude of the spend, and not necessarily the exact dollar amount.

There are a variety of ways in which you can begin to assess the savings that an eDiscovery solution will bring to the company.  In many cases, after purchasing a solution the incremental costs fo reach case will be almost nothing.  The better systems will enable custodian notification, search, preservation, collection and processing within the platform, so that investigators can efficiently handle these tasks.  This is really the purpose of the ROI analysis — case-by-case handling costs should be very small, because the expense is up-front in the purchase and deployment of the solution.

One area where the savings can be significant, but still substantial, is with “eyes-on” legal review.  An efficiently deployed system will help to minimize the amount of data collected, processed and eventually reviewed; but the review volumes can still be large.  And the hourly costs of review will be the same (although you can get some savings from de-duplication, clustering, email threading, etc.).  Still, we routinely see 50%+ savings in review based on the reduction in volume for efficient collection and culling.

You may decide that risk is too difficult or political to calculate as part of the ROI.  Or you may decide that it’s a necessary component that you must include.  Both approaches can be effective.

If you decide not to calculate a specific value for risk, you should still consider some risk analysis as part of your process, even as merely a “plus” factor to your overall analysis.  In doing this, take note of recent cases where companies have paid sanctions, had their case compromised and/or faced a backlash in the press (and potentially from shareholders).  You may not have a value for that risk, but the message will resonate with management.

If you do calculate risk, consider a conservative approach and factor in the probability of a sanction.  For example, you might decide that a severe sanction would compromise your ability to effectively defend (or prosecute) a case, and a larger case can be worth $5,000,000.  If you estimate a 10% chance of being sanctioned, you could take the resulting product ($5,000,000 x 10% = $500,000) as a basis for your risk value.  Remember that this risk amount would apply to each such case; so while the risk amount for a sanction on a smaller case might seem low (let’s say $20,000), it would be applied over a far larger number of cases.  It adds up!

Also remember that sanctions costs can exceed the entire estimated value of a case.  There have been many cases where shoddy eDiscovery processes have resulted in expensive remediation efforts — legal fees in determining what went wrong and how to fix it (and fending off motions for sanctions), repeating earlier work or being forced to use extraordinary efforts such as tape restoration.  So even a $500,000 case with eDiscovery problems could easily require more than the case value to try to “fix”.  (And don’t let anyone argue that you could always just write a check to settle the case.  Opposing counsel may have valued the case at a higher value than you, and once they realize that you are in trouble, it could be tough to negotiate a fair settlement).

Sometimes a simple model is better.  We have used extremely complex ROI models that were spot-on, but difficult to explain, and ultimately were ignored. We have also seen very simple models — “an eDiscovery solution will save us 50% in review costs, and last year review costs were $5M” — that have carried the day.  Hopefully, as you work on your ROI project, you’ll uncover the method that will best establish your case.  Until then, consider using a scenario-based approach (small case, medium case, large case), develop your facts for each one, and extrapolate the costs across the volumes that you expect to see each year.

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