John Martin of Nelson Mullins.

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.

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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.

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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.”

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The group now has 24 technologists, two data storage centers and two review centers in New York and Washington, D.C. Rosenthal said they looked at cheaper locations for the review centers, but felt the best talent was in the bigger markets. Inside the law firm, there is an e-discovery committee of about 20 regular-track lawyers who are generally “issue spotters” while another four nonpartner-track attorneys are focused full-time on e-discovery. An additional 110 contract review attorneys, employed by Winston & Strawn directly, are also on the team.

About 60 percent of projects are for existing clients, 30 percent for clients not otherwise working with Winston & Strawn, and the rest of the work is data management and privacy consulting. It's often priced a la carte—for example, per gigabyte of documents culled or reviewed. But next year the team will start offering more flat-fee pricing models to go along with the group's longtime requirement that every matter have a budget at the start of the engagement approved by the partner and client.

Rosenthal said Winston & Strawn's e-discovery revenue has grown by double digits until this year, where it will be flat at north of $30 million for a firm with $823 million in overall gross revenue. He says that a few large mergers and multidistrict litigations were resolved early this year, but the pipeline is picking back up.

Recently, Rosenthal says, he received what will likely be a multimillion-dollar engagement recently that he wouldn't have received without this practice. “When you walk into a pitch for litigation, most firms can't say, 'And the single-largest cost component, we can handle in-house with our staff, and here's the budget,'” Rosenthal notes.

About 80 of Midwest-founded Thompson Hine's 400 lawyers are in the firm's business litigation section. The group's clients generally don't have large litigation matters by “coastal standards,” says practice head Brian Lamb, who is based in Cleveland. Even so, the firm was seeing e-discovery revenue go out the door.

“We created a discovery department to try to capture a slice of the work that used to be done by partnership track associates, and then was going over to India or some suburb in Michigan in a review farm,” Lamb says.

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Thompson Hine's e-discovery group started in 2015 and fits in with a broader push by the firm into project and process management and alternative pricing models, known as SmartPath. “After clients stopped paying [for e-discovery work], we did what everyone else was doing, hired contract attorneys,” Lamb says. “We had this push and this pull. Yes, it's cheaper for the client, but we started to see who the good reviewers are and have to say goodbye to them—and then Jones Day [for example] may pick them up, and we see them on the other side of a case from us. So we said, let's cherry pick those best people and convert them to full-time Thompson Hine employees.”

The firm now has four to five full-time e-discovery lawyers, who bill out at $105 to $115 an hour. That's about half of what the firm's first-year associates bill, but more than the average rate for contract lawyers in the Cleveland area, around $50 to $70 an hour, Lamb says. Thompson Hine offers clients the ability to use regular contract attorneys as well if they want that cheaper rate.

Lamb says the firm averages about one e-discovery-lawyer hour to one contract-lawyer hour, allowing the firm to recapture about half of the revenue it had ceded to LPOs.

“I'm not trying to sell this to every client,” Lamb says. “Some clients on the East Coast sell pencils for a living. They get sued a lot and they don't want to hear about $115 an hour, because for them litigation is a cost of doing business. They just want the absolute cheapest solution.”

But many clients aren't comfortable outsourcing e-discovery, Lamb says. For those willing to pay a little more, the discovery department ensures that Thompson Hine lawyers maintain control over the client's entire matter.

Why and Why Not

Value and peace of mind is essentially what all of these firms are selling when they insource e-discovery. “You can trust us,” their argument goes. “We are better at this than any contract lawyer could be, and our strategic counsel is present throughout the full engagement.” But these lawyers agree that insourced e-discovery isn't for every firm. A significant litigation base is needed, even if the program is geared toward clients who otherwise don't use the firm.

The models of these departments are as varied as the firms. McDermott Will & Emery recently hired a chief strategic counsel, Christopher Adams, to run McDermott Discovery, full-service e-discovery group within the firm's litigation department. Drinker Biddle & Reath created an in-house capability that is now a separate entity called Tritura Information Governance, a limited liability company associated with the firm. It is run by two of the law firm's partners. The firm still has an e-discovery practice as well.

Troutman Sanders' wholly owned subsidiary eMerge bills itself as combining strategic legal thinking with e-discovery technology through a team of lawyers, technologists and project managers.

“Our integrated e-discovery services ensure that knowledge gained at each phase of the process is leveraged to reduce costs and improve outcomes downstream,” Troutman Sanders says on its eMerge website.

Other firms offer alternate forms of e-discovery services as well, including Reed Smith, Norton Rose Fulbright and Skadden, Arps, Slate, Meagher & Flom.

Aside from the major upfront investment, e-discovery service programs require constant attention and tweaking. Firms need to stay on top of changes in technology as well as regularly evaluate staffing levels and locations. Winston & Strawn's Rosenthal says his firm is rethinking whether it needs to open review centers in cheaper locations across the United States.

And Morgan Lewis' Blair notes the threat of artificial intelligence is real. “The next thing that is about to happen is that machine learning is going to become … another disruptor in how e-discovery is handled,” Blair says. Much more of the process will be automated, perhaps requiring smaller groups to handle the work, she says.

“You have to change the strategic plan pretty frequently as the world here changes,” Blair says.

Swap in the world of law firm innovation for the world of e-discovery and the necessary attributes could be almost identical. A willingness to take risks, make investments, continually tweak the plan and generally think outside the box. Even if firms aren't thinking of starting an e-discovery operation, the lessons learned by those who have are applicable far beyond document review.