The Demise of Electronic Discovery's Per-Gigabyte Price Model

I’ve written on several occasions that one of the best ways to learn about timely topics, especially in an industry changing so rapidly, is via webinars and podcasts. I had the opportunity to listen to E-Discovery—Without The High Price Tag on Digital Detectives, a great series held regularly by Sharon Nelson and John Simek, President and Vice President of Sensei Enterprises, respectively. This episode featured Bill Gallivan, Managing Executive of Gallivan Gallivan & O’Melia. Digital Detectives is available for free on both the Legal Talk Network and on iTunes. (Note: I am not affiliated with any of these enterprises.)

Upward Price Forces and E-Discovery

The amount of electronically stored information (“ESI”) now doubles every 18-24 months. Corporations are thus faced with the impossible situation of simultaneously having to double their outlay to third-party e-discovery vendors. Why?  The answer is pretty simple. Almost all e-discovery vendors still charge their clients based on an anachronistic per-gigabyte (i.e. per volume of ESI) model that ignores both the present and future of e-discovery.

According to Gallivan, there are least two key reasons why the price of processing ESI is increasing so rapidly.

The Current Price Model. Per-gigabyte pricing artificially inflates the price of electronic discovery. First, begin with the fundamental premise that the volume of ESI processed by a vendor cannot be equated with the value derived by clients. This is described in greater detail below. Second, the marginal costs to vendors of storing twice as much data—or, for that matter, any multiple thereof—does not warrant a commensurate increase in price. This is truer than ever with the provision of cloud-based Software-as-a-Service (“SaaS) e-discovery solutions. The actual value to clients cannot justify the price. Clients are left holding a bag filled with expenses compared to the amount of ESI therein. Why should they?

Venture Capital Gold Rush In Electronic Discovery. Gallivan notes that the past few years have seen VCs make significant investments in e-discovery vendors. Few VCs are in the habit of allowing the value of their investments drop even if short-term change will result in long-term growth.

Forces Driving Down The Costs of E-Discovery

At the same time, Gallivan notes that there are forces driving the price of e-discovery down, which is incredibly important for smaller firms, including solo practitioners. He notes that the monetary stake of most matters for small practices is $10,000 or less, a figure that underscores the need for price sensitive solutions. It should be axiomatic that  the potential penalties for e-discovery non-compliance are no less onerous for small firms than they are for large ones. Irrespective of size, failure to comply with e-discovery rules can result in harsh sanctions and adverse results, as Green v. Blitz demonstrated in dramatic fashion in the corporate context. Smaller firms subject to extraordinary risks need to be able to afford proper e-discovery solutions. Period.

The first downward force is the commoditization of e-discovery tools and services, a point I have been driving home for some time. In a crowded, commoditized market characterized by price elasticity, prices will fall, accompanied by a rush for market share. In this scenario, absent hoped-for and new significant differentiators between vendors, market share may be gained by a race to the bottom when it comes to per-gigabyte pricing—at least while the model lasts. However, vendors must understand that this model will exhaust itself.

New Pricing Models. In my recent piece on Data Security and the Imperative of Private Clouds, Steve d’Alencon, Chief Marketing Officer of CaseCentral, stated succinctly: “Per-gigabyte pricing is erroneous and unsustainable.” Why such a bold statement, with which Gallivan, Charles Skamser (below), and I agree?  Because the volume of data stored by e-discovery vendors for a single legal matter is not the same as the value that the client derives. As Gallivan asks:

What is the value to your company of instituting a compliance regime that covers the business-critical process of e-discovery.

There is no per-gigabyte response to that question.

Charles Skamser, President and CEO of eDiscovery Solutions Group, makes critical points about market maturation and value-based pricing:

Technology markets historically go through a natural cycle of evolving from artificially high prices during the early adoption phase to a commodity based price during its mainstream buyer phase. As the eDiscovery market matures from a model that relies on service providers and law firms to perform the data processing to a model that enables the user to license software and process its own data, pricing will evolve from a per gigabyte service pricing model to some type of annual fee model that more closely equates to the value that the end user receives from the use of the technology.

Think of it this way. Assume that Corporation (A) has a market cap of 17 billion dollars. It is constantly involved in litigation, both as a plaintiff and defendant. It has a lot to lose in these cases and, as Gallivan states, its “risks never go away” and indeed increase as compliance becomes more complicated with shifting rules and legal doctrines. With the overwhelming amount of ESI increasing at record rates, per-gigabyte pricing quickly becomes prohibitive. I do think that some argue correctly that the amount of corporate ESI that is redundant across corporate matters mitigates this to some extent, and should be considered in any subjective pricing approach, as stated above.

I will belabor my point: the question of value cannot be addressed gigabyte by gigabyte, and only value can properly guide e-discovery pricing in both the short- and long term. Vendors should take note. Some square pegs will always be square; some round holes will always remain round.