Lawyers are not paid to be bean counters or number crunchers, but the truth is that our clients are business people, and they are required to predict, track, adjust and be held accountable for budgets in all of their work projects. It should therefore come as no surprise that those business people have the same expectation of their law firms to which they pay thousands and sometimes millions of dollars for legal services. It is entirely understandable, and totally fair and reasonable, for law firm clients to expect and demand a budget that reflects accurately the anticipated costs in light of whatever information is available at the point at which the budget is being generated. That budget should be flexible and created in a way that allows it to be adjusted as time passes and more information surfaces.
There are typically three phases of the budgeting process: (1) projecting the costs based on assumptions, before all of the necessary information can be identified; (2) refining the total budget based on actual information that replaces the prior assumptions; and (3) tracking and adjusting the budget based on the implementation of the e-discovery plan by the legal team. It is important in each of these three phases to clearly articulate what your numbers are predicated upon, so that when requirements or scope change (as they undoubtedly will) within or between each phase, it is immediately transparent why that change occurred and how the change will impact the overall budget.
Steps within each phase
1. Identify the Project Tasks
Projects vary, but the typical discovery will include collecting, processing, culling, hosting data reviewing and ultimately producing data relevant to litigation. So the first step in each phase is to each line item or service for which you will incur a cost. For example, if the client data will be hosted, some vendors and law firms charge a user, data load and/or database setup fee.
2. Making Educated Pricing Assumptions
Once you have a complete list of line items, you should make educated assumptions about how many “units” of each project task the client will need to buy when completing the first phase of the budgeting process. If you structure the budget well, it should be fairly easy to replace your Phase One assumptions with actual numbers as those numbers stream in for Phase Two, and then have a budget comprised entirely of real numbers for the final phase.
Assumption-based phase one example
Imagine that the only thing your client has told you is that we can expect to collect data from 10 of their employees. The client wants a budget and they need it ASAP. Impossible? Well, it may not be possible to give the client a precise number they will have to spend, but there’s plenty that you can do to start creating a meaningful budget that the client can use. Begin by identifying the tasks and make educated assumptions on what must be purchased within each task.
You know you’re going to have to get the 10 employees’ information from the client’s systems to yours (or your vendors), so you should find out how your collection vendor charges for their services. Does it charge per custodian? Per hour? Per the volume data? Once you find that out you’ll be in a position to form an assumption about the cost per custodian and plug that into your budget. That cost doesn’t necessarily have to be exact, but it does have to be clear so that your buyer will understand what drives their cost. For this exercise we’ll hypothesize that the vendor will charge $500 per custodian, meaning the total collection charge for Phase One of the budgeting process is $5,000.
Next you know you’re going to have to take the information the client has provided and convert it – or “process” it. Processing is typically charges per gigabyte. You will have to make an educated assumption about how much data has be collected from the 10 client employees. Using industry averages you might say you expect to see 3-5GB of email data per custodian, and 5-7GB from other data sources. But for purposes of this example, let’s assume each custodian will likely have 10 gigabytes of information to be processed, for a total of 100 gigabytes. Applying the industry standard of $100 to process each gigabyte, the hypothetical processing number for use in the first phase is $10,000.
This is a critical step that will have significant impact on ensuing phases. Oftentimes a processing vendor will work with you to cull the information without charging an additional fee. Other times the vendor will charge a lower per gigabyte rate for processing but also charge you for its culling work. Regardless, you should estimate the percent that will be culled based on your previous experience and based on what you know about your case. We typically do not charge an additional fee for “standard” culling, so for our example, the charge for this task is $0. However, we have also made an assumption that the culling will reduce the universe of information we collected from the client by 60 percent, meaning that that there will be 40 gigabytes of information (40 percent of the 100 collected gigabytes) to be used in the next steps of the process. Note that in some cases it makes sense to incur additional costs for advanced technology at the culling phase to reduce the dataset even more, sometimes to as low as 10 percent of the volume collected from the client. The budget is a good way to gain visibility of the value that will be added by money spent on advanced technology.
Hosting and storing data
So now you have 40 gigabytes of client data that you need to review in some way. In this step of our example, we’ve learned from the vendor that it will charge a loading fee, a monthly storage fee and user fees for each person accessing the data. We’re told by the service provider that the loading fee is $200 per gigabyte, which is $8,000 for all 40 gigabytes. The hypothetical monthly storage fee is $40 per gigabyte, and we’ll assume based on our discussion with the client that the time we’ll be storing the information will be a total of 24 months, so the total storage fee is $38,400. We know after considering the next step (reviewing documents) that there will be a total of 30 users at $100 per user per month. If we anticipate the review portion of the project will go on for four months, that total brings the user fees to $12,000. In all, the hosting and storage fees total $58,400.
The sum of the first four steps is $73,400, but the step of actually reviewing the documents through the use of review software is usually where the big ticket spend comes. In our experience, 85 to 90 percent of discovery costs are reflected in review time, so it’s extremely important that the person creating a budget understands all of the things that go into this cost.
At the outset, the number of documents almost always drives the cost of review. This is straightforward. It costs more to review one million documents than it does 100,000 documents. Thus, the first step is to determine how many documents you are expecting to have to review. The number of documents per gigabyte can vary widely, but we’ve been seeing an average of about 4,000-6,000, down from the 10,000 that we used to see years ago. Choose a number that reflects as closely as possible the data of your client. For this exercise we will use 5,000. With 40 gigabytes of post-culled data, we can assume that there will be 200,000 documents to be reviewed.
Next you will want to determine, the number of documents per hour you think your reviewers will be able to review. This number will be impacted by the type of documents, your software review tool, the experience of your reviewers, the use of advanced technology and the number of issues for which your reviewers will be looking, among other things. For this exercise, let’s assume our reviewers will each review 50 documents per hour. If you divide 200,000 by 50 documents per hour, you get 4,000 attorney hours which you’d multiply by the reviewers’ hourly rates. Assuming a $150 blended hourly rate (which may or may not be higher than the law firm or Legal Processing Outsource company you choose to use), the first level of a purely linear review would be $600,000.
Of course, there’s more to a review project than the first level review. Most of the time you will want to have a second level or quality control review that may also include a review for privileged information and the creation of a privilege log. We usually hold off on estimating these review levels and tasks until after the first level review begins, but for clients who insist on a number at the beginning, you’ll be required to make more assumptions. Let’s assume that there will be a second level and privilege review of 5 percent of the 200,000 documents (which is 10,000) at a slower rate of 20 documents per hour. That comes to another 500 attorney hours times the blended rate of the reviewers, which in this example are attorneys whose rates are closer to $250 an hour. In turn, the second level/privilege review is another $125,000.
Brainstorming and revisiting the assumptions and workflow
Without using advanced technology, the total estimated Phase One budget for our hypothetical review is $798,400, which we’d round to $800,000 for budgeting purposes. But Phase One of the budgeting process is still unfinished. The final step in this phase involves brainstorming and revising the assumptions and workflow with an eye toward finding reasonable ways to reduce the volume and increase the pace of the review. This part of the process is imperative. This is where e-discovery professionals demonstrate their worth by coming up with creative, defensible strategies to reduce the cost. For example, in this scenario we’d very likely recommend to the client that it take advantage of advanced technology such as email threading to increase the rate of our reviewers to 75 documents per hour. That would knock $200,000 off the first level review price, resulting in a more cost-effective budget of $600,000.
Keeping track of the assumptions and replacing them with real numbers
The important thing to remember is that when you build your budget, each of the assumptions and other line items should be clearly reflected and easily adjusted and replaced with real numbers as they begin to trickle in. Once you begin collecting the client data and moving through each of the steps of Phase One, you will begin to assemble all of the actual numbers that will put you in a position to provide a Phase Two budget, at which time you’ll be able to track your own performance and determine if you are on budget, or if there is a need to adjust the budget based on a circumstance that you were unable to foresee in the beginning.
Budgeting and sticking to budgets demonstrates excellence
What’s often lost on lawyers and legal teams is that the budgeting experience can provide you with an opportunity to demonstrate excellence and innovation. We’ve found that the process gives us a reason to continually discuss with our clients ways to improve the quality of the review while reducing the overall price. Because of the iterative nature of our budgeting process, we are frequently provided opportunities to demonstrate our creativeness and thoughtfulness, which in turn results in an actual cost that is much smaller than the estimate we gave at the outset based entirely on assumptions. And that means no surprises, except for perhaps one. Our only surprise to the client is that we beat our original budget. In our opinion, that’s the only acceptable surprise and should be the goal of the budgeting process each and every time.