Legal Commentary

Why Must "More Work" Always Mean Higher Price?

By Patrick J. Lamb

Like other parts of business, law departments have budgets to cover their internal costs. The budget typically does not expand even if more work comes over the transom, at least until a case for growing the department is made during the next budget cycle. During this budget cycle, more work typically means that the law department members must 'suck it up' and work harder to complete the needed work. Not to put too fine a point on this, but the law department cost is fixed even if the work and output is variable.

Most law firms don't work the same way. At least not now. Nor, does it seem, do legal technology vendors. I say this after reading a fascinating article, The Lure and Lore of EDD Commodity Pricing. The article strongly resists the idea of 'commodity' pricing. Given the pejorative use of 'commodity,' that isn't revelatory. I thought this statement, however, was a gem:

            Pieces of the e-discovery process like bulk document scanning, backup tape restoration, or small, straightforward cases may be done for a set price. However, vendors are in fierce competition for business, and pricing plans obscure the true cost of e-discovery services. For example, some vendors offer free or inexpensive collection but charge for processing. "That all sounds good in theory, but you have to know that if a vendor offers one piece for free they have to be making money somewhere," says Speros.

Unfortunately, there is no standard pricing model used by e-discovery consultants and vendors, and their models are often deliberately opaque. Some aspects of the work are billed by volume, others by the hour or by gigabyte of data processed. Often, these pricing models can provide bad incentives for vendors and lead not just to overbilling, but poorly designed processes. Speros says that too often lawyers do not understand what vendors are offering.

In fact, many times the pricing models may actually induce vendors to perform unnecessary tasks, but which generate more fees. "When vendors were getting paid per page produced, you'd see a lot of blank pages printed and unnecessary documents produced," says Speros. "Pricing per gigabyte of data produced is more predictable, but you find that when compressed files or other unforeseen issues are stumbled upon, the true size of a discovery request explodes."

The problem is the same one law firms have: there is an expectation that 'more work' must correlate to 'higher price.' Particularly when dealing with software solutions, I question this premise. I have asked countless e-discovery vendors what is the actual cost was of running data—wildly divergent amounts of data—through their system. None have answered directly, and when I suggested the notion of sunk cost versus variable cost, some have acknowledged the obvious: there is no marginal cost for running additional data through software solutions.

When I think back to the situation I described at the beginning, that is, law departments and the fixed cost on which they operate despite variable amounts of work, I am forced to ask 'why'. Why must law firms and EDD vendors work differently, price themselves differently? To ask the question is really to answer it. There is no requirement that they do, it is a choice. Certainly for labor intensive jobs, costs are, to a degree, variable. But they are not variable to the degree that law firms and EDD vendors make them out to be. Not all hours contribute equally to overhead, for example. I mean, why do law firms love associates who bill those extra hours? The revenue produced falls almost entirely to the bottom line. Same with vendors.

Expectations are good things. But they are not unquestionable. To the contrary, expectations should be continually questioned. Chief among the expectations to be questioned are the manner and means of pricing.

If instead of assuming that every hour must produce a certain measure of profit or more, firms and vendors looked at their delivery of services the way a law department does, pricing would not be the same. It would be possible to predict costs and price accordingly. And best of all, it has nothing to do with 'commodity' (turn and spit) pricing.  It is just a manner of pricing, a system, just as hourly billing is a system. It is possible to do this. I just checked and there is no 11^th Commandment that says 'thou shalt bill by the hour.' Or the gigabyte.

Full post as published by In Search of Perfect Client Service on January 28, 2011 (boomark / email).