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Cloud vs. Appliance: Comparing the Total Cost for E-Discovery

John TredennickFor legal technology professionals involved in e-discovery, an ongoing challenge is to balance performance against cost. This is particularly true when selecting a review platform, because review is usually the most expensive, time-consuming and critical stage of the e-discovery process. Whether you work at a law firm or in-house at a corporation, you want a platform able to meet the demands of the case but that will not break the bank. 

With the increasing popularity of cloud computing, the answer to that challenge often turns on whether an e-discovery platform delivered via the cloud-also known as Software as a Service-is right for you or whether a locally hosted, appliance-based platform better suits your needs. 

It is beyond dispute that the cloud offers many advantages over an appliance. In June 2012, the National Institute of Standards and Technology issued its final recommendations on cloud computing. “Compared with traditional computing and software distribution solutions, SaaS clouds provide scalability and also shift significant burdens from consumers to providers, resulting in a number of opportunities for greater efficiency and, in some cases, performance,” NIST concluded. 

Still, some legal technology professionals harbor the belief that bringing e-discovery in-house is the more economical option. To find out if this is so, we undertook an analysis of the total cost of ownership (TCO) of cloud-based versus appliance-based e-discovery platforms. In order to accurately evaluate the true cost of each, we broke down all expenses required to support an application, including infrastructure, technology, staff and ongoing operational expenses.

Taking all costs into account, and using our most conservative numbers, the cloud proved cheaper by a long shot. As we explain in more detail below, the cloud resulted in cost savings of 36 percent over the appliance. 

A Hypothetical Law Firm

For our analysis, we designed a hypothetical, but typical, e-discovery client and analyzed its total costs over a three-year span, using either a cloud or an in-house e-discovery platform. Our hypothetical client was a large law firm managing a mix of 200 small cases of 25 GB each and 25 large cases of 200 GB each, for a total of 10 TB of data. Because it is rare for all data in a case to arrive at once, we spread it over the three years, for 3,333 GB per year. 

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Another assumption we made was that the data would be culled at a rate of 67 percent, the average rate reported by a recent industry survey. After culling, the annual quantity of data was reduced to 1,100 GB. We further assumed a maximum of 500 users on the system. 

In building our TCO hypothetical, we wanted to ensure that the expenses were accurate and realistic. Towards this end, we:

  • Selected popular in-house and cloud-based processing and hosting platforms widely available on the market.
  • Obtained actual quotations from hardware and software suppliers. 
  • Calculated annual hardware and software maintenance fees at 20 percent of the up-front capital expenditures. 
  • Accounted for technology refresh by giving hardware a three-year useful life.
  • Excluded full redundancy for the in-house platform. 

Notably, even though server downtime is a real risk, our analysis excluded business impact due to downtime because it varies so widely among companies. If downtime costs had been included, then the cost-effectiveness of an on-demand, cloud-based service would be even more dramatic. 

Examining Up-front Costs

The NIST report concluded a key advantage of the cloud is the ability to get started with no upfront costs for equipment acquisition and installation. This is because the cloud provider hosts and maintains the application. The following table illustrates this:

For our analysis, servers and storage were configured to meet the specification requirements of the selected processing and hosting platforms. Servers were configured to fulfill web/application, processing, search, analytics and database roles.  

Other One-Time Fees

Other one-time fees include site setup, processing and productions. The following table shows our estimates of typical fees:

For the cloud platform, the site setup fee includes site consultation, instructor-led web training and setting up standard fields, review forms, dynamic folders and user accounts.

The processing fee includes ingestion-the extraction of metadata, text and natives files-and culling-filtering the data via de-NISTing, deduplication, filetype filtering and date filtering.

There would be no processing fees for the in-house platform because the equipment costs and software licensing are accounted for in other expense categories.

Recurring Fees

Although both cloud and in-house applications involve recurring fees, the fees differ widely in nature, as the following chart shows:

The in-house appliance would incur annual recurring fees relating to hardware maintenance and software subscriptions associated with the processing and hosting platforms. 

For the cloud-based application, there are no maintenance or licensing fees. There would be a recurring monthly hosting fee, charged by the GB. Assuming a cull rate of 67 percent, then the data being hosted is 1,100 GB the first year, 2,200 GB the second year and 3,300 the third year.

Ongoing Operating Expenses

Just as the cloud platform required no up-front costs, it also requires no ongoing operational expenses. The same cannot be said for the in-house platform, as this chart illustrates:

The ongoing operational expenses required to support the in-house platform include:

  • Data center colocation to house hardware equipment and provide redundancies in power, cooling and 24x7x365 manned security versus an on-premise server room. 
  • Point-to-point connectivity between the data center colocation and office. Due to high traffic volumes for ESI, we factored in a dedicated GigE link offering speeds up to 1000Mbps.
  • Cost for staff office space. We estimated 2,000 square feet at $30 per square foot annually to accommodate a staff of seven. 
  • IT staff includes one network administrator, one help desk analyst and one database administrator to manage and maintain the infrastructure. We also included one programmer to assist with customization projects. 
  • E-discovery staff includes one e-discovery manager and three e-discovery analysts to support the in-house appliance. We budgeted for three project managers in the first year, five in the second year and eight in the third year. 

To set the salaries for e-discovery staff, we used the average salaries identified by The Cowen Group in its 2011 salary survey of law firm litigation support staff. For IT salaries, we used data from CBSalary.com. 

Adding Up the Total Cost

When the costs over the three-years are added up, the total for the cloud platform is $4 million versus $6.3 million for the in-house platform. That represents a savings of 36 percent with the cloud platform. The following table summarizes the numbers: 

Thirty-six percent cost savings using the cloud over an in-house appliance is clearly dramatic. A further advantage of the cloud, not shown by these numbers, is that it provides flexibility to quickly ramp-up when activity increases and terminate costs when the project is finished. 

With an in-house platform, operating expenses continue, regardless of the level of activity, and there is constant worry about the investment becoming an idle money pit.

John Tredennick, Esq., is the founder and CEO of Catalyst Repository Systems, an international provider of multi-lingual document repositories and technology for electronic discovery and complex litigation. Formerly a nationally known trial lawyer, he was editor-in-chief of the best-selling book, “Winning with Computers: Trial Practice in the Twenty-First Century.” Recently, he was named to the Fastcase 50 as one of the legal profession's “smartest, most courageous innovators.”
 

Comments  

 
#4 John Tredennick 2013-01-22 20:56
Paul:

Thanks again for your excellent comments. Here is a response to your second point.

The hosting fee is included in the recurring fees section listed for Year 1, 2, & 3, which increases every year since our data model has the client loading and hosting more data each year. We have a paragraph stating this.

"For the cloud-based application, there are no maintenance or licensing fees. There would be a recurring monthly hosting fee, charged by the GB. Assuming a cull rate of 67 percent, then the data being hosted is 1,100 GB the first year, 2,200 GB the second year and 3,300 the third year."

Thanks again for reading. I hope it stimulated some thought about this interesting issue.

John Tredennick
 
 
#3 John Tredennick 2013-01-22 20:55
Paul:

Thanks for your comments and for reading the article. Here are my thoughts on your first point:

In some cases you can charge fees to the client for an internal platform, and that is always a factor to consider. At the same time, we have seen clients that balk at these kinds of fees for internal systems. I can recall the debates at my firm over charging for Lexis/Westlaw, faxes, copies, and even litigation support. I have not seen the same concerns raised over third-party charges.

Per our data model, you will have to charge back $6.3MM to the client over 3 years to break even with an in-house appliance versus charging back $4MM to the client over 3 years to break even with a cloud provider.

With either approach, you can charge for project management, tech time and the like. It is just a matter of where the servers sit. Whether you can successfully recover all of your internal costs for managing hardware and software is something to be considered carefully. In my experience a few firms pull this off but most don’t.

Going further, the real issue is covering costs during the slower periods. Our data model assumes that we are hosting 1TB in year 1, 2TB in year 2 and 3TB in year 3. But what if there is suddenly a lull in activity. With the cloud product, you are only paying for what you are using. With an in-house appliance, you still incur on-going operating expenses regardless if there is work or not.

This gets even trickier with respect to staff. Fire fighters have an important job but much of the time they sit at the firehouse playing cards (forgive the metaphor). If your staff isn’t kept busy and doing cutting-edge work, you might have trouble keeping good people. A cloud provider can move the resources around to cover costs and keep the work exciting. You need that to attract the best and the brightest.

John Tredennick
 
 
#2 Paul 2013-01-15 18:54
Another question, where is the hosting fee for the Cloud column? There is a reference in the article, but I don't see the number in the charts. Most vendors charge around $20/gig/mth to host 3TB. That would be an additional cost of $60,000/month and a 3 year cost of $2.1 Million, which gets the Cloud column back in line with the In-house column.

Am I missing something?
 
 
#1 Paul 2013-01-15 16:40
This is a very useful analysis, however it does not account for any charge back fees to the client with respect to the In-house option. I've done similar research and the 36 % "cost savings" is easily overcome by charging the client a one time case fee and hourly for tech time.

Your thoughts?
 

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