Five Ideas To Take Control Of Your eDiscovery Costs

How To Lock-Down Expenses So You Achieve Cost Certainty

One of the biggest challenges with owning and managing eDiscovery environments is unpredictable costs. On more than one occasion, people have come to us because they are staring at a price tag that they find incredulous. “Does it really cost that much?” “Do eDiscovery businesses actually make money?” These are questions we’ve heard numerous times, usually after an executive has reviewed a potential expenditure and then said—go find a better alternative. Truly, costs can spiral out of control quickly in eDiscovery.

I am not convinced it has to be this way. After working with hundreds of eDiscovery professionals, I’ve come to believe that there are several simple and logical steps you can take to lock-down costs and take control of your budgets. This approach will help you predict, with a high degree of accuracy, your annual operating costs for eDiscovery. The net effect to you and your organization will be much improved peace of mind and a feeling of being in control. This means you can relax and not worry about when the next shoe will drop. Here are five of my best ideas to help you achieve cost certainty.

Who Needs Cost Certainty?

These types of organizations have made a significant investment in eDiscovery, or rely on eDiscovery to achieve their business goals, and are at-risk of escalating costs:

• Law firms
• eDiscovery service providers
• Consultancies with a core competency or practice area in eDiscovery and investigations
• Corporations, government agencies and other stakeholders who prefer to manage eDiscovery in-house

If you come from an organization like these, I think you’ll really like what I’m about to present.

What Is Cost Certainty?

Before we look at the methods to achieve cost certainty, let me briefly define it. Cost certainty is a multi-faceted concept comprised of these outcomes:

• There is a high degree of correlation, 98% or higher, between what you predict you will spend and what you actually spend in your annual eDiscovery budget.
• There are no financial surprises over the course of the year, especially big ones that could cripple your eDiscovery ecosystem (shutting you down) or that could wipe out profits.
• The eDiscovery environment is well-maintained and high-performing. In other words, you don’t achieve cost certainty simply by slashing costs with deferred upgrades and maintenance.
• The upgrades you need to make to keep your eDiscovery environment high-performing are planned for and understood well in advance of the need to spend the budget. Advanced planning is crucial to cost certainty.
• Your eDiscovery environment is profitable. In other words, you don’t achieve cost certainty by losing money on eDiscovery.

That is a tall order but it’s very achievable. In my experience, these are the financial outcomes that most leaders of eDiscovery environments want to realize. If you’d like to see these types of results, here are five ideas that can really help:

1. Conduct a TCO analysis to document your current-state cost picture.
2. Treat each eDiscovery matter as a discrete financial event, with projected profit per-matter.
3. Begin to reconcile budgets with actual spend.
4. Identify those situations that consistently produce unexpected financial surprises.
5. Adopt fixed-cost agreements with your partners.

Conduct A Total Cost Of Ownership Analysis

Total Cost Of Ownership (TCO) analyses have been around for a very long time. But very few organizations who own and manage eDiscovery environments have ever conducted a full-blown TCO analysis, in my experience. I know this because I have asked numerous clients this question. Maybe 1 out of 100 have ever done this. I believe this is a huge mistake. So first, I’d like to describe why you should do it and then how to do it.

Why should your organization complete at TCO analysis?

• Without this analysis, you’ll never really know how much eDiscovery is actually costing you every year. You can guess, based on budgets, but you’ll almost certainly miss important details.
• Every client we’ve ever done this for has been surprised by what eDiscovery actually costs them. The difference between what they think it costs and what it actually costs can be up to 100%.
• eDiscovery is often full of hidden costs that get attributed to other departments or functions.
• A TCO analysis gives you a baseline framework by which you can begin to predict costs based on actual hard data, not just budgetary assumptions. This is the cornerstone for taking control of your costs in the future.

So how do you conduct a full-blown TCO analysis? Here are the areas where I recommend you document your expense. In general, this is about people, process and technology.  So the goal is to collect and categorize data for the trailing 36 months across these expense categories:

• Technology: what did you spend on software, servers, storage systems, disaster recovery, SQL databases (not human costs) and security systems? Please factor in the cost of warranties on all of these systems.
• Unplanned Projects: this is a big one. Go back through your actual expenditures and look for expense spikes. These are usually indicators of an unplanned project. Factor in the costs of consultants, overtime from your staff, new technologies and anything related to that event.
• Data Center Space: this should be pretty straight-forward because most organizations pay this monthly or quarterly. Be sure to note cost increases because you’ll want to bake that into future projections.
• Network Services: this might include the costs of internet access and LAN and WAN systems and services.
• Data Hosting: most eDiscovery functions are paying to host their data in one or more locations.
• Fixed Human Costs: I recommend that you divide your human costs into two categories: fixed and variable. Fixed human costs come from the people primarily or partially dedicated to your eDiscovery function. These people are often full-time employees on the application or litigation support team. In many clients we’ve served, there are just a handful of them. Then there are other employees, often from IT, who contribute on a frequent basis. You’ll need to come up with a fractional cost equation to calculate an accurate expense picture.
• Variable Human Costs: this is where many of the hidden costs in eDiscovery come from. Variable costs arise from people who perform work in eDiscovery on an ad hoc or project basis. This can often include consultants, project work from service providers, reviewers, project inaugurators and even attorneys to review matters. No two clients have ever had the same variable human costs because each company seems to have a different approach.

Once you have this analysis complete, you’ll probably be rather uncomfortable with what you see. So let me make some recommendations. First, I do not recommend that you embark on this analysis with a big announcement to your leadership team. You’ll likely need the support of someone from your finance department to access all of the expenditures. So pick someone you trust. Build your TCO picture and then make choices about what you do with that information. The most important thing is that YOU KNOW what eDiscovery is actually costing your organization. You can’t really take control without this.

Second, build your future-facing financial forecasts with this far-more-accurate information at hand. You may or may not want to include the variable human costs or other categories in your forecasts. That’s entirely up to you. The goal of this exercise is to get accurate, data-driven insights into every area that impacts your costs.

Treat Each eDiscovery Matter As A Discrete Financial Event

If you want to take control of your eDiscovery costs, treat each matter as a discrete financial event. Why should you do this? I see three reasons. First, eDiscovery is an inherently project-driven business model. One of our clients who is a litigation support leader describes his job with a fishing metaphor: “watching a bobber on a lake.” When the bobber goes under, he gets to work. Second, as much as 50% of eDiscovery expenses are variable, being incurred over the course of the matter.

Third, the revenues that give rise to profits only come, in the vast majority of instances, from matters. One of my points above is that you don’t achieve cost certainty by losing money on eDiscovery. Once you gain a clear picture of costs from your TCO analysis, the question then becomes how much revenue did we generate? Usually your actual annual profits will be determined by subtracting your aggregate eDiscovery expenses from your revenue.

But right along with cost certainty, you can also achieve profit certainty on a per-matter basis. This can help you avoid taking on matters where you might potentially lose money. This is a huge benefit from treating each matter as a discrete financial event. It helps you protect your profits.

How do you achieve this? Take a look back at the trailing 36 months of matters you’ve completed and ask yourself these questions:

• How many total matters did we complete pear year?
• How much, in total were our fixed costs each year over the last 3 years? This should give you a clear annual fixed cost number. Divide that number by the number of matters you’ve completed and this gives you a fixed-cost-per-matter figure that should be very accurate. For example, let’s assume your annual fixed costs are $500,000 per year and you completed 20 matters. Your fixed-cost per matter is $25,000 per matter.
• What were our variable costs per year for the last 3 years? Divide this by the number of matters you completed and this gives you a variable-cost-per-matter figure that should be very accurate. Let’s assume again that your variable costs were $500,000 and you had 20 matters. Your variable cost-per-matter is $25,000.
• Add your fixed and variable costs-per-matter together and you have a baseline for understanding your all-in costs per matter. In the above example, that would be $50,000 per matter. Your numbers could be very different from this example, but the formula still works.
• You now know that almost any matter that cannot generate revenues that exceed your fixed and variable costs-per-matter will likely lose money. This arms you with information that makes you a very good partner to people who are pricing your services.

Begin To Reconcile Budget To Actual Spend

Most organizations build annual eDiscovery budgets, but very few reconcile their budgets with their actual annual spending. This is one of the simplest and quickest ways to take control of your costs. Why should you do this? 

1. This allows you to see how accurate your budgets actually were—which helps increase cost certainty for the years to come.
2. This allows you to see where your costs have spiraled, unexpectedly. This is typically the greatest source of heartburn for eDiscovery leaders and it’s often avoidable.

We have been brought into situations where expenditures spiraled out of control by as much as 300-500% more than what was budgeted. Why does this happen? I typically see three reasons. The first and most frequent reason is deferred maintenance. Poorly maintained systems will fail before end-of-life, causing an unplanned budget spike.

The second reason is poor capacity planning. Systems will age out and need to be upgraded and this is usually quite predictable. This is where looking at actual spending can really help you. If you look back at your spend and see that 5 years ago you had a spike when you bought a bunch of new equipment, it is very likely you are due for a new spike because that equipment is old. The more time you can give your finance team to prepare for these events, the happier they’ll be with you.

The third reason is unexpected events that give rise to large and usually unplanned expenditures and projects. These can be much harder to identify and plan for, but the tell-tale signs that they are coming can often be detected in your historical spending. And that leads me to my next point.

Identify Situations That Produce Unexpected Financial Surprises

Nearly every client we’ve served has had unhappy financial surprises. This is one of the biggest reasons we get called in. Usually, we are given a mission that sounds like this: “this can never happen again.” To help you avoid these very unpleasant moments, let me reflect on the situations that have given rise to unexpected financial surprises.

• Running out of storage. This is one of the most common scenarios we see and it’s easily solved for, if you have proper storage management and monitoring tools in place.
• OS and application upgrades that are forced on you. eDiscovery operates as an ecosystem of interconnected devices that must communicate with each other. An upgrade in the OS of your servers can have a domino effect on other components of the ecosystem, setting off a series of expensive and unplanned upgrades.
• Security breaches. These events can often have serious financial consequences. Please see Jordan McQuown’s article for ideas to address these.
• One-off special needs or projects. These can include data migrations, matters with unique data types that you don’t have the skills in-house to address and a range of other situations.
• Key employee departures. This can leave you in a lurch and it always seems to happen in the middle of a big project. Expensive consultants often get brought in to fix things quickly.

Of the scenarios I’ve listed above, the top two are usually avoidable if you conduct thorough due diligence. The bottom three are probably not easily predicted, but I have a suggestion to address that. If you have experienced any of them, conduct the financial analysis that allows you to understand what it actually cost you. Then pad your budget forecast by some portion of that number.

For example, let’s assume a special project cost you $100,000 that you hadn’t anticipated. You might consider adding $50,000 (half the actual costs) as a line item on your budget called special projects. If you don’t have a special projects, you’ll look great because you’ll have come in under budget. But if a special project does arise and it does cost $100,000, you’ll likely only be marginally over budget.

Adopt Fixed-Cost Agreements With Your Partners

This is one of the single best solutions for controlling costs and achieving financial predictability. Partners and projects that consistently go over budget make it nearly impossible for you to achieve cost certainty. This usually happens for two reasons, in my experience.

The first reason has to do with due diligence. A hallmark of a trusted fixed-cost partner is their willingness to engage in deep-dive due diligence so they know exactly what they are signing on for. A partner who says “yes” too quickly may be a partner who will have regrets or come back to you later and ask for fee adjustments.

The second reason is scope creep. This often happens when service-level agreements are not clear enough about who is responsible for what. To avoid this situation, take your time reading through the SLAs of your partner agreements and simply ask yourself – what’s missing? Then ask the partner who is responsible for those items.

I believe that in the very near future, the eDiscovery Managed Service Provider market will be nearly exclusively fixed-fee. Why do I say this? Cost certainty is more important today than ever as downward pressure on eDiscovery services have become the norm. Organizations want to know what their costs are and want the proposals they’ve signed on for to look exactly like the invoices they are sent.

Where To Go From Here

Cost certainty delivers real peace of mind to eDiscovery leaders and the businesses they work in. The five ideas I’ve put forward here can help you lock down costs, prevent unhappy surprises and even make you the darling of the finance team.

1. Conduct a TCO analysis to document your current-state cost picture.
2. Treat each eDiscovery matter as a discrete financial event, with projected profit per-matter.
3. Begin to reconcile budgets with actual spend.
4. Identify those situations that consistently produce unexpected financial surprises.
5. Adopt fixed-cost agreements with your partners.

If you have questions about anything I’ve said here or would like to know how these ideas might benefit your operations in actual dollars, just reach out.