Preface: A partner once explained CALR write offs for me this way: “I don’t charge any of my clients for Lexis and Westlaw because I don’t understand the charges, I can’t control the charges, I can’t explain the charges and I can’t defend the charges.”Background: It wasn’t always this bad. I personally recall the early days of CALR. When Lexis rolled its behemoth Deluxe, terminal (it was about the size of a washing machine) into the Pace Law Library in about 1980, the main menu screen was 90% blank space. Lexis had only 3 files at the time which covered a limited mix of Ohio cases, Ohio statutes and some federal case law. Although you could view the full text an opinion online, you couldn’t print out the full case.

Westlaw decided to compete in this emerging area with a strategy of denial. They opted to protect their print reporter business by limiting their online product to include headnotes only! No full text searching or displaying of opinions. My first and only encounter with an early Westlaw “Headnotes Only” terminal occurred on a visit to the NY State Attorney General’s office Library in the World Trade Center. A library that was also notable for having its furniture built by residents of the New York State prison system. (Talk about cost control!).

By the mid 80s each system had added hundreds of full text libraries covering legal, business, scientific, as well as local, state and federal regulatory materials. Each vendor took a different approach to billing. Westlaw billed primarily based on time and Lexis billed based on transactions.

At this point both Lexis and Westlaw were sufficiently simple and their billing systems so straightforward that it was possible to provide the average associates with a simple set of principles and guidelines that could assure cost effective research.

Both systems were also completely “pay as you go”. The more you used – the more you paid. So there was strong incentive to limit the use of the systems and to strive for cost effectiveness. But that all changed….

The Fixed Fee Contract and the Death of Cost Recovery

By the late 1980’s both services started to offer unlimited access to a custom defined subset of content for a fixed monthly fee. Normally a significant number of databases were “excluded” from the contract and charged at retail rates. Although the vendors were now offering a fixed fee for a large chunk of content, they didn’t simplify the underlying rate structure. So firms were left to fend for themselves in developing a method for apportioning the fixed costs between clients and the firm use while staying compliant with ABA and court rules regarding disbursements. The most common 4 approaches under fixed fee contracts were 1) variable discount, 2) fixed discount, 3) blended rate discount or 4) overhead

Initially most firms chose one first two methods below

1) Clients were charged a variable discount based on the volume of use each month

2) Clients were charged a fixed percentage discount based on an estimate

Both of these methods made cost effective research training almost impossible because they required associates to mentally apply a discount to hundreds of unknown and undisclosed retail price points.

In an effort to clarify the message to client and simplify cost effective training some firm’s took an innovate approach:

3) Blended rates – A few firms have jumped off the bus and developed their own simplified billing systems which offered a predictable hourly and transactional rate for all files. This allowed lawyers to focus on research quality and relevance and not focus on the totally collateral issue of selecting the cheapest of 1 million options.

The blended rate was based on historical usage patterns. The increased predictability of the blended rate could provide a “win –win” for both the firm and its clients. Firms improve their cost recovery and the effective discount offered to clients improves over time as lawyers become more confident in their ability to predict and control costs.

4) Overhead. A small minority of firms treated the entire cost of online research as overhead. Some firms reverted back to cost recovery after a brief experiment. The dire predictions that all use will become overhead have not yet materialized.

But the flat fee contracts created an opening for clients to object to paying for online research at all… Since partners weren’t prepared to explain their firm’s particular algorithms for cost recovery – it was easier to agree to a write off than to argue. Even good faith attempts by firms to make a fair allocation of these fixed cost was lost if the fog of confusion.

And the Winners Are… The Consultants

The growing complexities of Lexis and Westlaw billing combined with the increased “push back” from clients spawned a cottage industry of “contract negotiators” who charge firms a hefty fee based on a promise to reduce the costs of flat fee contracts. Ironically the approach of some consultants actually causes cost recovery to decline which in turn results in a net increased cost to the firms.

Consultants became part of the problem. Since the majority of consultants have never done legal research and couldn’t tell a precedent from a pretzel, they overlook hidden costs of the contracts they recommend. A contract may reduce the monthly commitment of the flat fee contract while increasing the overall cost to the firm. These costs include, the increased time spent on lawyer training, increased write-offs due to the complexity of the contract and the unpredictability of the client costs erodes partners willingness to pass along the charges.

The Future of Cost Recovery

If cost recovery for online research is to survive at all, it will be as the result of a radical shift to simplicity and transparency. It appears that vendors are getting the message. Bloomberg Law entered the online market with a simplified approach to cost recovery including a limited number of price points and offering content and features which trigger no costs at all. Westlaw Next has dramatically fewer price points than the older platform. Fastcase and Loislaw have been positioned as lower cost sources of primary law which firms treat as overhead and make no attempt at cost recovery.

All indicators suggest that since clients will continue to resist online research charges, firms will hedge against increased overhead by using one or several of the following strategies; cancelling either Lexis or Westlaw and selecting one major provider; exploring lower cost alternatives such as Bloomberg or Fastcase, or expanding or developing a specialized team of lawyer/librarians and research attorneys who conduct research and deliver the results to the associates and partners.