The Secrets of E-Discovery Vendor Pricing

TASA ID: 4285

When I attend legal gatherings and mention in casual conversation that I am a 20 year veteran of E-Discovery service providers, I usually get one of two reactions: suspicion or confusion. These reactions arise from negative experiences in dealing with vendors or from a lack of knowing the role we play as it relates to the legal profession.  With the growth of E-Discovery in the law, it is more important than ever for the legal community and the service providers to gain understanding and collaborate as partners.

The plaintiff in a recent case, Northstar Marine v. Huffman, Case 1:13 cv 00037 WS C (Ala. S.D., 08/27/13), found out how costly this lack of understanding could be. They made the mistake of agreeing to discovery terms which cost them thousands more than expected, causing them to miss discovery deadlines while they fruitlessly tried to find less expensive options. As one would expect, the court took issue with this explanation for the delays.  

As in Northstar, courts are readily weighing in on E-Discovery issues, making it clear that legal professionals can no longer afford to ignore it in their practices. To achieve the swift and efficient conclusion demanded by your clients, it is critical for both lawyers and E-Discovery service providers to collaborate in a meaningful manner.

To accomplish this, we must address the inconsistencies in pricing across the industry and share ways to avoid the few disreputable bad apples that have contributed to the misgivings placed on vendors. I hope that lifting the veil on pricing dynamics will help to increase the transparency between service providers and the legal professionals we serve.

Hidden Fees in E-Discovery Pricing

When that vendor invoice arrives in the mail, you may recall that famous saying from the movie Forrest Gump, "You never know what you're gonna get."

This unknown comes from unexpected or hidden fees that appear on the invoice. Communication can often be to blame, but that breakdown may not be due to nefarious intentions. Even so, hidden fees are one of the biggest factors contributing to the distrust of vendors.

The most common fees that unexpectedly appear on invoices relate to ancillary services like technical labor, project management time and case termination. These services are, by nature, ambiguous, adding to negative feelings when they appear.

Technical Labor:

Whether technical labor is billable is often misunderstood even from within the vendor's own team. No two data sets are alike, blurring the lines between a task that is extraordinary and, therefore, billable, and those that are merely a part of the ordinary course of business. A certain amount of exception handling is usually included in general data processing costs, but when the number of problem files starts climbing, it can be necessary for the vendor to perform extra tasks to ensure this data is properly handled.

To avoid this surprise, make sure your vendor explicitly describes which items may fall under this category. Set the expectation that they should communicate immediately when data issues are identified that will incur additional cost.

Project Management:

Also billed on an hourly basis, project management time differs from technical labor. Project management time is often billed at a higher rate similar to how a partner in the firm would bill his or her time at a higher rate than an associate. The individuals performing these tasks generally have a greater understanding of E-Discovery and the law.

Project management relates to the discovery-specific workflow and duties dealing with the content of the data itself. Data analysis, keyword testing, user facing software management and review quality control are some of the items that may lead to these billable hours.

Case Termination Fees:

Case termination fees are another item which habitually avoids discussion until the services are actually needed at the very end of the case. They also vary wildly from one vendor to the next, ranging from no-cost to tens of thousands or higher for large matters. Amy Bowser-Rollins, a veteran Litigation Support Manager and founder of the Litigation Support Guru website, takes issue with this particular item, saying, "The cost to take case data offline needs to be time-based and not unit-based. Our clients will not approve a huge cost at a point in the timeline where the case is winding down."

Different Vendor Pricing Models

Flat-Fee Arrangements:

A relatively new option in vendor pricing, flat-fee arrangements, are attractive in that they allow firms to more accurately estimate the total cost of E-Discovery services. There is a misconception, however, that this also equates to lower overall cost. It is a very real possibility that you will actually wind up spending more when using flat fee services.

Flat-fee arrangements have a tendency to be fashioned to include every possible scenario that could arise in your case. Service providers must attempt to calculate how to make a profit in the event you need an above average amount of services for your project. Although you get the benefit of knowing what the general expenditure will be, you may actually be paying for unnecessary services.

Even if the predictability afforded by flat-fee arrangements is your goal, it may be beneficial to calculate the projected cost based on per gigabyte fees as a comparison. I've seen instances where clients had paid almost double with flat-fees as they would have had they used individually billed services. It is beneficial to have all the facts to make an informed buying decision.

Per Gigabyte Pricing:

The long term industry standard for pricing arrangements, per gigabyte pricing, is still very popular among clients and vendors alike. Per gigabyte pricing generally falls under the heading of a la carte arrangements because it can also mean that other services, like tiff conversion, OCR, bates numbering, and others are billed individually.

One benefit of a la carte pricing is that you receive an itemized list of the services rendered. As great as that sounds, this is also where hidden fees come into play. Sales representatives wary of scaring away a client can be hesitant to rock the boat with a client by mentioning accompanying fees. Some on the vendor side justify this with the attitude that the landing of the project justifies the initial misrepresentation. Unfortunately, the few that have adopted this approach contribute to the unusually high level of distrust that all service providers must face.

To the benefit of attorneys and their clients, per gigabyte pricing has dropped significantly. Within the last ten years alone, the cost of data processing has dropped roughly 90% from over $2500 per gigabyte. Considering the increase in data volumes overall, it may not seem like total costs have decreased, however.

The Freemium Model:

Everyone is bound to have heard the "free" marketing gimmick related to a product or service. It's become so popular in technology circles that it has even led to a new term: "freemium." Recent years have seen a rise in this approach in E-Discovery circles.

Rather than actually being free, these services act as a loss leader, allowing the vendor to charge more in other areas. This model commonly equates to low or no cost data processing followed by considerably higher costs upon export and production. Although not an explicit charge, there is a good chance that you are paying for that service through increases in other line items.

Conclusion

The challenges faced in the Northstar case aren't an isolated incident. With data volumes rising and E-Discovery being a part of more cases, the cost issue isn't going away. However, when firms and service providers collaborate in a meaningful way, opportunities to reduce cost abound. Here are four ways to achieve more transparent and beneficial vendor pricing:

1. Understand your needs. The more you know about the needs of your case, the more likely you can avoid paying for services you don't need. Do your homework. 
2. Be open to communication. Make yourself available to answer questions and ensure everyone is comfortable discussing any and all issues with your team.
3. Be timely. Don't leave your vendor waiting for information or payment. Delays in both areas can increase your costs due to the vendor needing to increase prices to account for these delays.
4. Collaborate early. Having to switch gears after discovery is underway costs both you and your vendor time and money. Learn the lesson of Northstar and collaborate early in the process. 

As Amy Bowser-Rollins concludes, "From a law firm perspective, we need service providers to think outside the box on pricing so that it becomes a no brainer decision for our clients." More than ever, vendors are willing to answer this call.

Reprinted with permission from the October 28, 2013 edition of New Jersey Law Journal. ©2013 ALM Properties, LLC.  All rights reserved.  Further duplication without permission is prohibited.

This article discusses issues of general interest and does not give any specific legal or business advice pertaining to any specific circumstances.  Before acting upon any of its information, you should obtain appropriate advice from a lawyer or other qualified professional.

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