Your firm is modern, savvy and strategic-minded. You know your best chance of pulling away from the pack is to focus on high-margin matters and leave the commoditized work to less nimble firms, even alternative legal service providers. E-discovery? There are offshore document review services for that.

Wait, though. What if that approach is all wrong—at least when it comes to e-discovery?

At the height of the financial crisis in 2008 and 2009, with revenues shrinking and profit margins being squeezed, a handful of large law firms, including Morgan, Lewis & Bockius and Winston & Strawn, invested millions on a bet that they could make a big return on e-discovery work. Nearly a decade later, it's paying off—to the tune of tens of millions of dollars a year for some firms.

The rest of Big Law largely ceded that revenue to alternative legal service providers. But now the pendulum is swinging back. The analytical capabilities needed to sort through and prioritize the ever-growing trove of documents is making legal review more attractive to some clients. The issue, says Winston & Strawn e-discovery and information governance practice leader John Rosenthal, is that the per-document price of e-discovery has declined, but the volume of documents makes it hard to control overall costs. Reducing that expense requires analysis by e-discovery lawyers, on the front end and throughout the process, he argues.

“Firms are now waking up to the reality that you need to be able to own the discovery at each stage of the EDRM [electronic discovery reference model],” Rosenthal says. “That's why I think you see more people in particular getting into the analytics.”

Being involved only partially raises other problems, Morgan Lewis e-data practice leader Tess Blair says. “I think a lot of law firms have realized, even when completely outsourced, lawyers on the case are accountable,” Blair says. “[E-discovery] is not a delegable duty.”

But firms that want to get into the game would have to make a major upfront investment. Blair, whose firm started in 2004 with an e-discovery practice and then invested heavily in internal technology and people in 2008 before building it out incrementally ever since, says she can't imagine starting that from scratch now.

Still, she says, more firms have started to get into the e-discovery game over the last 24 months. And she can't blame them for wanting to try. “If you run the risk and the reward is going out the door, that is a real problem for law firms,” Blair says.

Consultant and recruiter David Cowen of the Cowen Group has spent his career placing e-discovery professionals in law firms and alternative legal services providers. He says he doesn't see as many firms looking to get into the space in a big way, however.

“The guys that are in that space are in, but I don't see a lot of others getting into that space because who the hell can catch up with these guys,” Cowen says of those firms who have made it big. He says that some of them have created new revenue streams that are now near the top of their respective firms' highest earning practices.

Instead, Cowen's practice has focused more on innovation officers within law firms. And that's an area that can learn a lot from the e-discovery space.

All of this talk of innovation is real, but it's “muddled,” “organized chaos,” Cowen says—just like e-discovery was in its infancy. If firms don't get on board at the early stage, they will be left behind, he says. Just as many law firms are now finding out for themselves in the e-discovery world.

How They Made Millions

The last decade has seen experimentation across the board in how firms handle e-discovery. A significant number of firms have at least one e-discovery partner—but after that, Rosenthal says, they have taken different tacks. Many use different e-discovery vendors for projects as they pop up. “The overwhelming majority of law firms are still in the Wild West,” he says.

A second model is the use of preferred vendors, where a firm contracts with a small, select group of e-discovery vendors. The third, more recent way is a managed services model, which involves contracting with just one outside vendor for all matters. Both the firm and vendor have project managers that work together, while the firm's contract lawyers do document review.

The fourth model is the one Rosenthal was hired to create at Winston & Strawn after doing the same at now-defunct Howrey. Essentially, it's a full-service e-discovery vendor inside the firm's own firewall, he says.

A few other Am Law 200 firms have taken this route, investing millions of dollars to build out the people, processes and technology to offer the full e-discovery spectrum. In doing so, they've not only held onto revenue from existing clients, but also generated a new revenue stream as e-discovery counsel for non-firm clients. And, their leaders say, the practices are profitable, too.

For Nelson Mullins, the 2009 launch of the firm's wholly owned e-discovery practice Encompass started four years earlier when a big pharmaceutical client liked how the firm argued the e-discovery motions in a case. In a subsequent matter, that company was being represented by Jones Day, but it asked Nelson Mullins to handle the e-discovery component. From there, things snowballed.“To do this well, you can't just stick your toe in this water,” says John Martin, a Columbia, South Carolina, partner in charge of Encompass. It requires a dedicated internal staff of lawyers and technologists, data review centers and data hosting centers that can run 24/7 at scale, he says. “It's been hard for that investment to make sense for a lot of other firms,” Martin says.

ALM

At Nelson Mullins, that investment morphed from two lawyers, including Martin, to 84 dedicated Nelson Mullins staff, another 500 to 1,200 contract review attorneys hired on an as-needed basis, a data server center in Dayton, Ohio, two main data review centers in Columbia and Nashville and several more across the country. Much of that technology came in-house about two years ago.

About one-third of the 84 full-time professionals are lawyers who bill out at normal Nelson Mullins rates and focus on e-discovery strategy and arguing in court. Another third are attorney project managers who manage the reviews in the review centers. The final third is the fastest-growing group, Encompass' technology team.

The group charges for some items on an hourly basis, but 90 to 95 percent of its matters are carried out under an alternative fee arrangement, such as flat fees. While the team started off by representing a few firm pharmaceutical clients, now 5 percent or less of the team's work is for existing Nelson Mullins clients—bringing in revenue that the firm otherwise wouldn't capture.

Martin says the team is one of the top three practices at the $380.5 million law firm, which soared onto The Am Law 100 this year at 88th place with a revenue jump of more than 18 percent.

Morgan Lewis has had an e-data practice since 2004. As the volume of work increased dramatically in 2008 and 2009, Blair said the firm reached a crossroads: Would it go all in or leave the space? It went all in, bringing in significant software capabilities and a team of lawyers and technologists.

ALM

The group, headed by a lawyer, is now up to 54 technologists. Two partners and about 20 other senior attorneys or associates, spread through the firm's offices, work in the group. They are traditionally staff attorneys, but Blair said some may have the opportunity to make partner. The group has about 125 Morgan Lewis-employed document reviewers, and the firm uses contract review attorneys for any surge in work.About half the group's revenue comes from existing firm clients, and most of the work is done on AFAs or subscription pricing. Blair says her team's financial performance is consistent in terms of revenue and profits with other practice areas at the $1.86 billion firm.

Both Blair and Martin say their competition is alternative service providers rather than other law firms.

When Winston & Strawn decided in 2008 that its 50 percent focus on litigation was enough to warrant creating an internal e-discovery vendor, it hired Rosenthal to help build it.“It makes sense both from a financial standpoint, from a cost savings to your clients standpoint and giving you capabilities other firms don't have,” Rosenthal says. “Law firms are risk adverse, though. To go to your management team and say, 'I need a few million dollars to build this out and I have to create a staff of dozens,' I give credit to [Winston chair] Tom Fitzgerald.”