Collaborating on a document file (often via an email attachment) is the principal usage that wikis were invented to resolve. Having said that, many still use shared folders on the local intranet and email to support their collaboration efforts despite the inherent problems of this method.

Most collaboration tools including wikis and other online and offline services have been designed to help people beyond the limitations of email and attachments. These services can offer substantial benefits to collaborators, especially when they are geographically remote from one another and in different time zones.

The Problem with document based collaboration.

Collaboration using a document which is passed back and forth has the following challenges:

Where is it? - the location of the document not fixed.
Is this the current version? - there is no sure way to tell which instance of a document is most recent.
Who changes what? - being able to easily identify the difference between two instances or versions.
Who can edit? - there are few tools available to differentiate permissions.
Save as what? the tendency to save new versions as new filenames introces many opportunities for error and confusion.
No remote access - going on the road or out to a meeting, one can always forget to take a file with them on their mobile computer.
Where's the attachment? - people frequently forget to include attachments - which introduces delays and hangups.
Where is the comment from so-and-so? - contributions form multiple parties usually take the form as text buried somewhere in an email, which can become very trick and laborious to integrate.
How did that get through? It is often difficult to vet and review changes, and unvetted or unintended content can linger on in a document.

What happens when document collaboration is pushed beyond its limits? In these situations meta information has to be remembered and managed by one participant who is the "controller" of the collaboration. Basically the farther you push document collaboration the more information the controller has to keep track of in their head. Inevitably they make one or more mistakes, and are held responsible for it (whether they were at fault or not). These mistakes can be business critical (example: collaborating on a contract).

Using Track Changes: "Track changes" is now a common feature in Microsoft Word and other word processors which solves part of the collaboration problem with documents, but introduces complexity and technical restrictions. The tracking changes function is typically restricted to use by participants who have identical software. The second is that using track changes, the meta information tends to quickly overwhelm the content and make editing difficult - until such a time as it is "approved" at which point the meta information is permanently lost. Microsoft created sharepoint software mainly to overcome these limitations, and gave customers of this software a collaboration oriented environment, however sharepoint is only available as an expensive enterprise option - out of reach to most smaller organizations.

From doc to wiki and back again

One problem with using wikis or other services to replace document collaboration is the lack (or difficulty) of support for formatting. Complex formatting is often lost when converting a document to html (which is required by web based services.) This problem has been alleviated by using wikis with a Rich Text Editor, also known as WYSIWYG (What you see is what you get) using this kind of tool, preserving formatting becomes a cut and paste operation. Care should be taken, though in pasting from Microsoft Word, due to the large amount of "junk code" that microsoft inserts in to the .doc file.

Google launched, in 2006 a collaboration suite including google docs, which provided a free alternative to intranet based applications.

Consensus view:
Document collaboration (using track changes) is workable and reasonably efficient in cases where there are only two people collaborating. Collaboration involving more than two people requires a different solution.