Costs can add up.
Several years ago, a leading car company purchased an eDiscovery analytics appliance. For a relatively small amount of money up front and what seemed like a reasonable per-gig charge, they got quality processing and analytics capabilities. Since the company had only minimal amounts of eDiscovery work, the per-gig charge amounted to little more than an annoyance and all seemed well.
Unfortunately things were about to change. After some serious quality issues arose with their cars, law suits came pouring in, and the company was faced with an overwhelming amount of litigation. With no time to go through another request for proposal (RFP) process and the desire to keep much of the work in-house, the company began feeding the data through their appliance and the results aren’t hard to imagine. As the data poured through, the per-gig pricing began to take its toll. $5 million dollars was the charge in a single year, and the register is still ringing up charges.
Now, when an organization is facing litigation of this scale, $5 million probably seems like a trivial expense. However, when you compare it to what they could have paid for a solution with equivalent capabilities, the irrationality of the per-gig pricing model becomes clear.
For or Against Proportionality?
Any discussion on the costs of eDiscovery would be remiss without the introduction of the fundamental concept of proportionality. At its root, proportionality is the notion that a party should not pay more for discovery than what the case as a whole is worth. It is a legal concept that calls for containment of eDiscovery costs. I’ll be so bold as to state a party should pay nowhere near the value of the case for discovery.
While proportionality may not come into question for the car company referenced above, charging clients per gig literally flies in the face of any cost containment methodology. Many of the vendors charging per gig for their solutions routinely contribute to the blogosphere on the topic of proportionality. How can a vendor support the concept of proportionality, yet function as a primary contributor to the problem’s existence? Software solutions should solve business problems, not introduce budgetary and proportionality issues. It is an inherently flawed solution, if your objective is to be proportionately thorough in the search and analysis phase, only to be charged incrementally more to meet that objective.
When District Judge Sandra Beckwith opined in Moody v. Turner Corp.1, that unchecked eDiscovery (and associated costs) can become the focal point of a case, which can overshadow the very merits of the case itself, it emphasized the need for organizations to evaluate the cost structure of eDiscovery activity. It is not uncommon for data volumes in a single small case to run into multiple terabyte ranges……that’s 1024 Gigs multiplied by [xx] terabytes!! One can get to six and seven figures for processing costs alone, and that’s before outside counsel even gets their beaks wet. Receiving an invoice for six figures worth of processing costs for a case seeking the equivalent epitomizes Judge Beckwith’s well-circulated idiom of the “ESI-discovery-tail wagging the poor old merits-of-the-dispute dog.”
To be clear, incremental increases in costs come with increases in data volumes. Ever increasing data volumes are at the root of the eDiscovery nut. Someone still needs to collect, analyze and review, but a material incremental cost should not come from the technology intended to support those processes. I do surrender to the fact that discovery is not discovery for its own sake. There is strategy, gamesmanship and shades of grey; meaning parties are not interested in full disclosure. However a company would be in a much more comfortable operating position knowing that whatever shade of grey is required, the costs for collection and analysis were paid for in the quarter the solution was purchased.
So where does per gig pricing even come from, and will it survive?
Per-gig pricing comes straight from the legal market, courtesy of the insurance industry. Insurance companies most frequently pay for all the costs associated with litigation, and as such, their rules end up being the gold standard in the legal industry. One of those rules is that while they will pay for the costs of the litigation, they are quick to shy away from paying capital costs associated with software purchased for the sake of the trial. Even if the software reduces the cost of the litigation, it is mountains of paperwork and bureaucracy to get the insurance provider to pay for it. The result is law firms are far more willing to implement a solution where the costs can be categorized as operation costs and passed on to the insurance company. This is the origin and the very lifeblood of per-gig pricing.
Charles Skamser recently posted, “The cost of eDiscovery is still way too high and much of the costs are still being driven by legacy pricing models that reward vendors and service providers based on the amount of data that is processed.” From the safe haven of the legal market, per-gig pricing has ventured out to corporations leaving a trail of disgruntled customers in its wake. Software vendors and service providers alike have contributed to the madness with some actually claiming a per-gig pricing model “simplifies” eDiscovery costs and introduces some level of predictability. Can we agree that easy revenue generation does not equate to simplification on the client’s end?
Will it survive? Sadly, the answer is “yes” for some. Despite the extraordinary costs of per-gig pricing, the insurance industry isn’t about to change, and the legal market has no incentive to rock the boat. So per-gig pricing will continue to exist for a portion of the market. However, the future of per-gig pricing behind the firewall is not nearly as certain.
While law firms may be indifferent to costs, companies most certainly are not. As Mark Chandler, General Counsel of Cisco, stated back in 2007, “…the most fundamental misalignment of interests is between clients who are driven to manage expenses and law firms which are compensated by the hour…” Unfortunately, the chasm has only increased. The company in the intro is not pleased with the bill it paid this year and is not interested in repeating the decision long term. eDiscovery applications are not significantly different from other types of enterprise applications, so it stands to reason that they will need to fall in line with the economic advantages presented by perpetual license models. After all, I am not paying Microsoft based on the number of words in this post.
Perpetual licensing holds clear advantages.
The mechanism that will move us from the current per-gig pricing trend to standard perpetual licensing is fairly obvious: competition. The yin and yang of per-gig pricing is that you make your decision to re-buy it every time you load data into it. It isn’t a situation users are financially compelled to stay in. As a result, it only takes one major incident to motivate a company to look for more advantageous pricing models. Even now, the Global 2000 seem to have grown wise to this game and are far less interested in the per-gig/pay-widget models that had been acceptable just a few years ago.
The other issue companies have with per-gig pricing is it severely restricts the number of use cases a robust search, collection and data analysis tool can be employed against. A product that charges per gig is really a pure eDiscovery product, because IT budgets simply don’t support a pay-per-use model. While legal budgets are built around operations costs, IT budgets are built around capital costs. The result is that, as a rule, when IT buys something, they want to buy it not rent it. Barry Murphy’s recent post, Analysis of eDiscovery Ownership Issues, provides anecdotal evidence that a majority of firms report legal departments as the owner of eDiscovery. While eDiscovery ownership is a topic best left for another discussion, a correlation may exist for this evidence. Legal departments simply have the means to absorb per-gig fees. In many instances, this ownership model prevents a business from reaping the full benefits of the great technology in which they have invested.
Many of the leading eDiscovery products on the market have applications far beyond eDiscovery. Whether those applications are cyber security, information assurance, digital investigations or records/knowledge management, a robust data search, collection and analysis solution can be a true value-add to disciplines far beyond the realm of the general counsel. Per-gig pricing really serves to limit potential value, inhibiting a company from fully leveraging such a product. In fact, you can tell just based on the pricing model whether a product has a value proposition that extends beyond eDiscovery.
Given the limitations and extreme costs associated with per-gig pricing, it is clear a pinnacle has been reached, at least for behind-the-firewall applications. I formally pronounce the days are numbered for per-gig pricing, behind the corporate firewall. This antiquated pricing model will clearly continue to play a role in the law firm market, but even there I suspect continued price compression and calls for alternative billing will be so severe over the coming years that companies hitching their wagons to this type of a fee structure will find it difficult to compete long term.
1Case No. 1:07-cv-692 (S.D. OH, Sept. 21, 2010)