Niche firms taking over legal discovery

For law firms that rely on litigation for a big chunk of revenue, here's the good news.

Although there's talk that revenue will soften as corporate clients tighten spending, many law firms have experienced the opposite, with billings from litigation up year over year.

Here's the unpleasant part. Much of the added spending by business clients is not ending up in the pockets of lawyers. It is going to service firms that have taken over much of the investigative work at the heart of lawsuits and other litigation.

These so-called legal process outsourcers now are dominating the initial phases of discovery. Not only are their costs lower, they also are far better positioned to analyze huge streams of electronic data pivotal to the outcomes of commercial lawsuits.

It wasn't so long ago that big law firms owned that market and would engage scores of contract lawyers to read through boxes of corporate paper - email printouts, memorandums, internal reports, and other documents - to prepare for trial. And they charged a premium for the service, often billing attorney time at $200 an hour.

The going hourly rate now among legal process outsourcers is about $50.

For a time, law firms pressed to no avail to keep control, but most eventually were forced to concede that turf.

"Clients are saying to firms, 'We are not paying you to look at these documents. We have other firms that do it [less expensively],' " said Mark Stewart, chair of Center City's Ballard Spahr law firm. "Lawyers at big firms would say we need to be masters of the documents, and clients would say work it out, or we will give the work to someone else."

The way that legal process outsourcers have taken over this lucrative business is a classic example of market economics in the professional services world. Until about a decade ago, big law firms had a lucrative business model enriched by the costs of discovery. Defending a Fortune 500 company against a major product-liability lawsuit or class action required that lawyers comb through thousands of documents. Having armies of lawyers doing this tedious low-level work was expensive enough.

But those costs increased greatly as emails were added to bank and credit card records, cellphone records, and other information that all came to compose enormous electronic databases subject to discovery. That made the cost of hand searching even more prohibitive, spurring such entrepreneurs as Mark Zamsky, chief operating officer of Compliance Discovery Solutions, a Philadelphia-based firm that conducts document review and electronic database searches. With offices in Miami, Washington, New York, and Los Angeles in addition to Center City, Zamsky's firm can field a thousand lawyers to conduct document review at any one time. The company has revenue of $75 million to $100 million a year and charges about a quarter what a major law firm would charge.

As it turns out, very few law firms do much document review any longer. The handful that do, such as Drinker Biddle & Reath, with its Tritura subsidiary, and Morgan Lewis, which has a 100-member electronic discovery and document review group called eData, have thrown enormous resources into the effort.

Morgan has had a particularly successful run. It set up an electronic discovery unit in 2004 and now has 100 computer technicians, lawyers, and others working full time. Not only does it handle discovery work on matters for Morgan clients, but it also has a large list of corporate clients who use Morgan for discovery while turning to other law firms for legal representation.

Stephanie Blair, the Morgan Lewis partner who leads the practice, said the discovery market is now dominated by firms that do nothing but that. Morgan, she said, was able to compete because it got in years ago and made a commitment to stay.

Does she ever worry that computer searches might miss a key piece of evidence, the proverbial smoking gun?

"Every study I have ever read says machines are better than humans," said Blair, who is based in Philadelphia. "There is always some nightmare scenario where an email got away. But machines tend to be more accurate and reliable than humans."

And just as important from the perspective of corporate clients, they don't cost as much.