Alternative Fee Arrangements: Panacea or Problem: Delegate strategically to reduce downstream litigation costs

One of the greatest challenges facing in-house counsel today is the soaring cost of litigation. One of the primary contributors to those extraordinary costs is the ever-growing creation of data and data sources, resulting in the unpredictability of e-discovery. For years the e-discovery industry has been exploring alternative fee arrangements (AFAs). The AFA methodology was created to increase predictability in litigation-related spend. The foundation is simple: Provide cost predictability and the ability to create future budgets based on historical spend. While AFAs have certainly met their cost predictability goals, in an age of complex electronic discovery, it raises a question as to whether or not the model has sacrificed expertise and strategies that provide valuable, high-quality solutions for an overall lower cost. We think so.

Rather than relying upon AFAs alone as a solution to the budget problem, perhaps we should look toward the use of more strategic methodologies to better control costs. Strategic alternative fee arrangements (SAFAs) could be the answer. In the e-discovery world, AFAs often take the form of per document charges, an all-in processing flat fee or some combination thereof. But those AFAs do not incentivize the service provider to reduce volume (and therefore cost). Instead, we should look to implementing early case assessment and litigation readiness strategies to help mitigate e-discovery costs. At first blush, the higher initial spend in per hour analytics or consulting may seem counterintuitive to cost savings, but if the exercise results in a reduction of the reviewable universe by 40 to 50 percent, total case cost goes down. The perfect SAFA model would combine the cost-predictability goals of the AFA while encouraging new strategic approaches to traditional tasks, resulting not only in a lower total case cost but also in giving the case team a strategic advantage over their adversary. Knowing their case early on can direct case strategy.

Utopia or Reality: A New Approach

The traditional electronic discovery budget looks like a laundry list of unit prices and assumes, for the most part, that a linear process will be followed: collection, processing, search terms, maybe analytics and a review of the resulting data. In this model, ensuring that each unit price is as low as it can be will lower costs and create predictability, but at what effect on total case cost? What if the collected data contained information that was particularly harmful to your client’s theory of the case? What if the collected data does not include a key custodian? What if the collection was generally overbroad due to similarly overbroad corporate data retention policies or nonexistent litigation readiness plans? In failing to take a strategic look at what the case team hopes to accomplish in discovery, those unit prices often result in spend which could have been avoided altogether. In addition, that traditional model does not necessarily identify the key documents early enough in the case to assist the client in reevaluating its strategy.

The analytics tools that are available today make it possible to spend time and resources on a true early case assessment that can result in an overall lower total case cost. Ultimately even greater savings and efficiencies could be achieved. As with law firms, engaging an experienced partner early on to help formulate strategy is important. Delegating the execution of that strategy to more cost-effective resources and engaging a consultant with specific e-discovery subject-matter expertise (and likely a higher billable rate) broad enough to span information governance, litigation readiness and e-discovery can reduce downstream discovery spend.

Real World Implementation of an SAFA

Is this utopia? Not at all. Let’s take a look at a recent example in a large financial services inquiry. XYZ Financial was faced with an inquiry requiring it to gather information from all custodians who worked on a particular financial services product. In an abundance of caution, XYZ over-collected and gathered more than 12 million records from 150 custodians. Rather than throw all 12 million records into the discovery hopper, XYZ, with the assistance of outside counsel and in partnership with a skilled discovery consultant, strategized on ways to identify the key documents relevant to the core issue in the case and to triage the collection by likely eliminating documents outside the scope of the case.

Using various analytic tools, XYZ Financial was able to identify the 10 key custodians and evaluate their data in detail. That evaluation identified an 11^th not previously identified or collected key player and effectively eliminated the vast majority of the 150 custodians from ever being processed or reviewed. In addition, the case team identified the key documents that would prove XYZ’s position early enough that the case team completely changed its litigation strategy and used this key information to leverage a successful settlement.

Had counsel performed traditional keyword searching of the originally collected custodians followed by attorney review, the process would have reached nearly $3 million. The SAFA approach, through the implementation of its unique methodology, enabled XYZ Financial to identify key documents quickly and produce relevant data for a total cost of $150,000. The process proved to be cost-effective in a manner not otherwise achievable by a more traditional approach. XYZ realized a savings of 73 percent in review costs alone.[1] There was a savings of 92 percent overall if you include collection.

At first blush, paying a consultant (aka partner) rate to take a strategic look at the overall discovery process may seem cost-prohibitive. But when it achieves the kind of savings XYZ Financial saw, there can be no doubt that a linear AFA could not have achieved comparable results. As the adage states: Measure twice, cut once. Taking a step back and examining the problem, even at a slightly higher upfront investment, will enable clients to save money and carve a more well-informed and measured approach to the litigation strategy.

So, are AFAs dead? Not entirely. The AFA model is still an effective tool for handling small cases where little strategy is needed. If, however, in our world of Big Data, your case volumes are drowning you, combine the best of both worlds. Strategically attack your data set to reduce volume before you accept an all-in AFA that might actually be costing you more time and money and a loss of competitive advantage in the litigation. The good news? SAFAs can put you back in control of your discovery spend, and just like AFAs, SAFAs will be the standard before you know it.