eDiscovery and Alternative Fee Arrangements

When Will the Industry Adopt Alternative Fee Arrangements?

One has to wonder how Adam Smith would have viewed the current pricing situation in the ediscovery and computer forensics industry.  Over the past 8+ years, the industry has seen a hyper-expansion of new vendors entering the marketplace.  With low barriers to entry and a lucrative new practice, this makes complete sense.  What doesn’t make complete sense is that ediscovery costs have continued to escalate despite the overabundance of vendors willing to supply the services.  One would think that these firms would be fiercely competing on price to the point where margins are razor thin.  The cloud and other technology innovations have further increased the ediscovery efficiencies such as eliminating duplicate copies, document production and loading data. 

How does this make sense?  Why hasn’t the e-discovery industry adopted alternative fee arrangements that have become prevalent in the legal industry?

There are three basic reasons that have created an artificial barrier to the normal supply and demand curve in electronic discovery and digital forensics:

    Complex Business Model:

    • eDiscovery is very complex and unpredictable.  The advancement of the cloud and social media has only added to the abundance of potential responsive data and complications in collecting ESI.  It is very hard to set up a basic budget when so many variables are unknown.  To make matters even more complicated, attorneys do not typically bring in ediscovery vendors until later in the process.  This creates a chaotic atmosphere as ediscovery vendors approach cases on a reactionary basis instead of utilizing its talents in a proactive environment.

      Overly Cautious Attorneys

      • The fear of sanctions and spoliation charges has made attorneys overly cautious in their approach to ediscovery.  Nobody wants to be the next Zubulake, and lawyers have taken the conservative approach of preserving every potential source of electronically stored information as a precaution.  This mindset drives up the ediscovery vendor’s work which drives up the cost.

        Immature Industry

        • The ediscovery and digital forensics industry is still very immature.  The legal precedents, rules and standard practices have not taken effect, and it has created an environment akin to the Wild West.  Old practices, such as billable hours, have created incentive-driven environments where unnecessary tasks are performed for the sake of fees.  With nobody to call out the vendors on inefficient pricing models, there is no reason to voluntarily curtail this practice.


        Although there are inherent drivers that are supporting the high cost environment of ediscovery, change will eventually take effect.  End-users have started to push litigation counsel to support alternative fee arrangements such as fixed fee per deliverable, capped fees, flat fees per period and portfolio fixed fees (one flat fee for an entire process—ie. litigation).  As more external law firms are forced to adapt, the trickledown effect will eventually reach the ediscovery industry.  This will force firms to cut costs to cope with the decrease in revenues per case.  Some firms will thrive.  Some firms will die.  However, like Adam Smith’s invisible hand, eventually the laws of capitalism will triumph and decrease the escalating costs of ediscovery.