Are Alternative Fee Arrangements the Wave of the Future?

When the world of eDiscovery was young, it made sense to charge per gigabyte, much as a laundromat charges per shirt. Although the presence of electronic data, devices, and storage were becoming increasingly prevalent in daily life, the litigation industry was a bit slow to catch on at first, and the per-gigabyte pricing model stuck around. 

The Wave of the Future

These days, what used to be a half-dozen shirts dropped off at the cleaners has become an entire bushel.

wave of futureAccording to the International Data Corporation, the total amount of worldwide digital content created in 2010 exceeded one zettabyte, the highest volume of data ever recorded in history. And yet, that number is predicted to double by the end of this year. If imagining every byte as a single grain of sand, the total data created would encompass 400 Hoover Dams.

If you can imagine sifting through even a fraction of those grains of sand for data relevant to specific litigation, it becomes clear why the old usage-based pricing models no longer make sense. The clamor from clients for more reasonable and predictable cost structures has become deafening, while legal teams are frustrated at the lack of an industry-standard alternative. Meanwhile, total litigation costs are rising everywhere, and the exorbitant (yet vital) electronic discovery costs are largely being blamed.

The world has changed, especially where technology is concerned. Remember when emails weren’t considered admissible evidence because they were too informal? Courts took a long time to recognize electronic data as valid. These days, corporate communication via emails can form the entire foundation of a case. While the courts are finally embracing many aspects of technology, one area remains stubbornly set in outdated ways: existing pricing structures for eDiscovery. Is it time to leave usage-based pricing behind? Can the idea of alternative fee arrangements (AFA) finally bring eDiscovery costs into the twenty-first century where they belong? 

History of Existing Price Structure

Historically, the idea of alternative fee arrangements was limited to single-service solutions. Clients would pay one subcontractor for computer forensics and another for data mining, while hiring yet another for electronic discovery. All the services were separate, and paid for separately, according to usage. Again, when the amount of data was so much smaller, this method was completely reasonable.

Multi-service solutions started being offered to allow clients a one-stop solution for their litigation support needs. However, though the offered services themselves had changed significantly, the pricing structure never did. Despite the advantages gained to both parties by adapting a multi-service approach to eDiscovery and other technologically-based litigation support, the billing remained based on usage, not service.

At a small level, usage-based fees make sense, and are very attractive to clients. After all, you only pay for the information you harvest and the specific services used. Clients feel confident that they’re not being overbilled, and might even feel like they’re saving significantly over the more standardized prices associated with alternative fee arrangements.

For minor litigation, they may even be right. What happens, though, when the litigation isn’t minor? Litigation, by its nature, is pretty erratic. One month a firm may only need $10,000 worth of electronic discovery services; the next month, a huge and unexpected case may push them into 20 times that amount. With no predictability comes a disastrous attempt at budgeting, or more accurately, the impossibility of either maintaining or predicting said budget. Any savings that seemed worth cheering over on the usage-based model go right out the window with just one complicated lawsuit.

The high costs don’t only impact the client, either. As with any company, higher operating costs from litigation support are passed on to the client as higher fees. Yet, in the months or years when there’s a lull in the action, the same teams may be struggling to stay in business due to lack of revenue.

The level of havoc wreaked on client electronic discovery budgets and counsel operating budgets next led to a market push toward retainer-style pricing systems. Much like retaining counsel directly, an upfront fee is paid in exchange for exclusivity. This structure, though an improvement in some ways over usage-based pricing, too easily leads to client overpayment and frustration, combined with provider undercharging for actual support efforts. A better solution is needed, and soon.

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