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Wednesday, January 12, 2011

Legacy eDiscovery Pricing Model is Dead

The King is dead. Long live the King (French: Le Roi est mort, vive le Roi!) is a traditional proclamation made following the accession of a new monarch in various countries, such as the United Kingdom.

The original phrase was translated from the French Le Roi est mort. Vive le Roi!, which was first declared upon the coronation of Charles VII following the death of his father Charles VI in 1422. In France, the declaration was traditionally made by the Duc d'Uzès, a senior Peer of France, as soon as the coffin containing the remains of the previous king descended into the vault of Saint Denis Basilica. The phrase arose from the law of le mort saisit le vif—that the transfer of sovereignty occurs instantaneously upon the moment of death of the previous monarch. "The King is dead" is the announcement of a monarch who has just died. "Long live the King!" refers to the heir who immediately succeeds to a throne upon the death of the preceding monarch.

The Legacy eDiscovery Pricing Model is Dead. Long Live the New eDiscovery Pricing Model (Legal Market Translation: end users are tired of paying way too much for eDiscovery) is a proclamation that we have been hearing for several years now. And, one that I have talked about on this Blog at some length.

2011 Could be the Year of Change? Given all of this, I believe, along with several others in the industry, that 2011 will be the year that sees an industry wide transition from per Gigabyte pricing based upon the amount of unprocessed raw Electronically Stored Information (ESI) to a more value based and more easily forecasted model. There are already some smaller regional litigation service providers that are offering flat fees for what amounts to Early Case Assessment (ECA), additional processing (if required to unpack data) and document review. However, it appears that most of the larger providers are still firmly entrenched in the legacy models.

The Cloud Will Effect Pricing 2011 is also the year of the eDiscovery moving to the Cloud with infrastructure-as-a-Service (IaaS), Software-as-a-Service (SaaS) and Platforms-as-a-Service (PaaS along with the other XXX-as-a-Service (XaaS) that will emerge (at least as a new acronym). And, this move will also have a dramatic effect on pricing. One of the value propositions for Cloud Computing is that there is NO UPFRONT COSTS FOR INFRASTRUCTURE and users only have to pay for what they use. In practice in the eDiscovery market when you start to examine private corporate clouds vs. true public clouds and what “users” will have to purchase / license, the full financial benefits of Cloud computing may not emerge immediately. However, I fully expect and would be very comfortable predicting that in the not too distant future in the eDiscovery market that there will be no upfront costs and pricing will in fact be based upon the value to the end user. The journey to that point, however, will be interesting and probably a bit bumpy.

Business Value-as-a-Service There is also a very new trend emerging that I call Business Value-as-a-Service (please not that this is my term and therefore you may not find it with Google Search or Bing) in which a large IT provider can offer to support an entire business line (e.g. corporate legal) with a all-you-can-eat comprehensive package of technology, consulting, services, training, etc. all for a flat monthly fee. The concept and the value proposition is to provide corporations with a predictable and repeatable cost structure. In some respects it is just a variation on a managed services approach. However, I think that the advent of virtualization and Cloud computing provide the added flexibility to be able to offer a truly comprehensive service for a flat fee.

2011 Theoretical Example So, what might a disruptive new pricing structure look like in 2011? One that would cause the market to chant, “Long Live the New King!”. Let’s assume that MegaCorp (my theoretical multinational conglomerate) has historically processed 25 terabytes of data with third party service providers and is looking to bring all of that in-house. Based on $500 per GB for processing (please note that this is just for example) , a 50% culling reduction, $25 per month per GB for review for 6 months and $5 per GB for Storage for another 6 months without review, the annual cost for eDiscovery for MeagCorp using the outsourcing model is about $15.5M.

If they decided to bring this in-house under a traditional model, the cost of the hardware and software would be about $5M in year one (1) with another $2M for annually for internal HR costs plus another $1.5M for Maintenance. Running these cost out over 3 years would be $11M (please note that this get really complicated when you start to factor in hardware obsolescence and upgrades, etc.). There is already a significant savings just bringing eDiscovery in house. However, what if pricing were calculated as a flat monthly fee with a five year buy in and some unlimited amount of usage?

What if we took the model and ran it out for 7 years, assumed that new hardware would have to be purchased/upgrades at least 2 times, HR expenses would remain somewhat constant and set a monthly fee of $350,000 for the full 7 years (please note that there is some amount of cost of money factored in)?

MegaCorp would have a predictable cost model, the vendor would have a build in predictable annuity and a new disruptive pricing model would be born. Please don’t read too much into my Theoretical Example as it is just “an example”.

Beyond 2011

Looking beyond pricing in 2011, I beleive that someday we will see self provisioned eDiscovery processing in the clouds with the user only paying for exactly what they use. True value based pricing. But then again, that is like science fiction in today's market.

Conclusion Everyone in the industry (with the lone exception of the service providers) have come to the conclusion that it is time for a new eDiscovery pricing model. And, I think that the market is wide open for new, innovative and disruptive alternatives. Should be an interesting year for all parties involved.

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At January 18, 2011 at 7:30 AM , Blogger jw said...

The predictability of the MegaCorp pricing example assumes static volume (25TB per year). A McKinsey /IDC study estimated that corporate storage demand will increase by an average of 50%/year from 2006 thru 2011, not to mention the disruptive impact of new data types that require new and complex search/processing/review tools and methods. While corporate storage demand is not directly correlated with eDiscovery demand, the two trend lines are definitely related. For the foreseeable future innovation, quality, and the ability to link cost drivers to case requirements will be more important in controlling ED costs than uniform pricing models.


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