Is it Time to Change the Billing Model for Review Services?
By Jon Canty, CEO
In ComplexDiscovery’s 2020-2025 Worldwide Software and Services Overview, spending on review-related software and services was estimated to constitute approximately 68% of worldwide eDiscovery software and services spending in 2020, for a total of $7.41B in 2020, growing to a total of $9.53B by 2025. With document review constituting over two-thirds of the total eDiscovery costs, how document review services are priced and billed have never been more important.
While there are several modern analytics- and AI-based approaches to document review strategy, pricing of review services has become dominated by two billing models: 1) the historically based hourly billing model; and 2) the increasingly popular per document review model. Under the first arrangement, hourly review teams consist of document reviewers, quality control leads and/or project managers all billing at different hourly rates. Perhaps due to the traditional billing structures of law firms, this model is easily understood and has long dominated as the primary billing method. However, per document review, which consists of: 1) a negotiated per document fee for the review, 2) full quality control sweeps and 3) project management of the entire review corpus, has emerged as the requested billing method by an increasing number of firms today. Considering that both approaches involve the substantive review of documents within a review platform, initially it might seem like the differences are primarily financial and only expressed as line items on an invoice. Indeed, it may seem like we have two apples and oranges pricing models both capable of producing quality work product. Per document gets higher marks for cost predictability, but customers may wonder if they are getting value compared to the modest, easy to understand hourly market rates for licensed attorneys.
However, when it comes to the actual execution of the substantive review, the two models require dramatically different operational approaches with results that impact both the cost and quality. To better appreciate the differences, let’s examine the underlying pricing models and profit motivations.
Hourly Billing Pricing and Profit Motivation
In the hourly approach, clients engage review teams of various sizes choosing a provider based on trust and the lowest hourly rate for the reviewer. There tends to be a market rate per geography, so price variance is minimal across providers. Because hourly is inherently cost unpredictable, clients inquire about average documents per hour for cost estimation. In absence of an authority, ~45 documents per hour might be a typical quoted rate. With this guess, a client can divide documents to review by docs per hour and multiply that by the hourly rate to get a rough estimate on reviewer spend.
Reviewer spend, however, is just one part of the equation. Most hourly models include review management time for quality control. Review consultancies typically suggest or impose a ratio of review leads to reviewers that varies from organization to organization and project to project. The review team leads bill at a much higher rate as well. Their hours must be added to the hourly calculation to generate an accurate estimate.
The profit motivation for hourly billing projects is driven by maximizing the hours billed to the client and minimizing the amount paid to contract attorneys. This creates at least three disincentives that review operations utilizing this model must fundamentally account for and guard against.
There is no incentive to embrace or even seek review efficiency. In fact, workflows that create efficiencies lead to faster coding, which necessarily means fewer billable hours.
Unless the client has authorized and agreed to pay increased rates for overtime, offering “time and a half” rates to review attorneys must be avoided. Thus, while it can be argued that larger teams lead to a more varied product and extra quality control, the profit motivation for hourly billing supports overstaffing a case and letting people go rather than paying more out-of-pocket for reviewers who may develop the most knowledge of the case over time.
While the first level review margin is thin, the review manager margin is significant. Indeed, these individuals may not make more hourly than the reviewers, but their billable rate is much higher. Slow and steady for the reviewers maximizes profit, but a healthy amount of oversight and QC from review leads is the sweet spot for profit margin. As a result, quality of the review team is not prized since quality management shifts naturally to the more profitable activity of review lead quality control.
This is not to say these disincentives cannot be managed and accounted for through adept project management and protocols. After all, the hourly model has been the historic norm and remains incredibly popular. However, perhaps the fundamental existence of these known disincentives is part of what is driving the increasing demand for per document pricing.
Per Document Billing Pricing and Profit Motivation
The per document model pricing is also influenced by market norms, but the main determination for pricing is the complexity of the review. Coding complexity applied to each document determines the per document rate. For instance, a review project requiring basic up/down responsiveness calls will be priced at a lower rate than a review requiring calls for Responsiveness, Privilege, Confidentiality, Hot/Key and a slew of other issues. This rate is established after understanding the nature of the review corpus, and an understanding of the review strategy, presumably from a review of the review manual. From there it is simple multiplication of document count times per document rate to determine cost. With this simple calculation, cost predictability is achievable to the penny and, once agreed to, the review provider has accepted significant financial risk not found in the hourly model.
The per document profit motivation is entirely driven by accuracy and efficiency, incentives that run parallel with the client’s shared goal of timely sign-off of an exceptional review set.
The dual requirements of accuracy and efficiency practically necessitate a tremendous sense of project ownership by the PMs starting on the first day. Project managers must immediately immerse themselves into the case, timely elevate questions and calibrate coding decisions. Course correction and reviewer coding inconsistency can be extremely costly, and this remains just as true on day 30 as on day one. Similarly, accuracy the first time is paramount for per document, unnecessary QC overturns are costly and there is nothing more detrimental to a review provider’s profit margin than a fast, inaccurate reviewer.
The above drive for accuracy and efficiency often results in a far different team composition when compared to an hourly review project. Put simply, better reviewers are tied to profit. It is for this reason, individual reviewers tend to be paid more, offered more overtime, are more heavily vetted and receive significant training.
Interestingly, the above difference in staffing presents significant challenges to organizations that wish to offer both models. The per document shop will not be able to compete on hourly rate because their bench consists of better reviewers being paid more. The hourly shop will have neither the talent, leadership nor the efficient workflows to do per document without being completely upside-down.
The Per Document Model. And it isn’t really close.
If the results are the same at comparable cost, then per document wins on cost predictability and alignment of incentives. However, better accuracy and efficiency of per document review typically yields higher quality work product for the end client than the hourly model, which is too dependent on the review managers as a quality “safety net” to drive their margin. Further, the built-in lack of efficiency associated with the hourly model will typically require more outside counsel intervention to overcome mediocre results.
When it comes to costs, the per document model usually wins here as well. The per document model ultimately costs the client less despite being potentially more profitable to the service provider as well. To stay competitive with hourly pricing, per document rates tend to be pegged to an industry docs-per-hour rate, despite including all QC and project management. An hourly operation will almost always stay close to these industry speeds, yet the hourly model depends heavily on higher billable QC oversight which increases costs dramatically. In the per document model, that QC is built into the per document cost. Therefore, a per document review will cost less than hourly – while also yielding better results.
In the end, the comforts of familiarity found in the hourly model might keep it around for a while to come, but on the merits, per document is by far the better model, due to cost predictability and alignment of incentives with typically higher quality and typically lower costs. For those firms that are still using the hourly model, it might be time to consider a change. Your clients may soon demand it.