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What’s Sauce for the Goose is Sauce for the Gander: An Insider’s View of Electronic Document Discovery and the Emerging Demand for AFA’s in EDD and Enhanced Technologies

Compliance with electronic document discovery has now become the 8000 pound gorilla in the room. It is not uncommon for the cost of compliance with EDD to approach 40% of the budget for complex litigation.

EDD has also spawned an entire new industry, estimated to reach $1,500,000,000 by 2014, with law firms and independent vendors vying for a piece of the pie.  At the same time, with clients continuing to clamp down on the legal spend,  independent vendors are competing with law firms and are offering alternative fee arrangements, while simultaneously deploying enhanced technology in order to meet market demands.

Accordingly, we offer a guest post by Derek Shewmon of Campbell Solutions, an emerging leader in EDD.

  

The Future of eDD: A Vendor’s Perspective

 

Derek Shewmon

Campbell Solutions, LLC

August, 2011

 

America is currently in an interesting place.  The economy isn’t at its pre-recessionary level, our political system is beyond dysfunctional, global forces are legitimately challenging our competitive advantage and general public malaise is abundant.  However, one thing has remained constant despite all of the macroeconomic negativity: electronic discovery has not slowed down.  According to Clearwell’s “Gartner 2011 Magic Quadrant for E-Discovery Software” report that was released in May 2011, the ediscovery market is expected to maintain a compound annual growth rate (CAGR)
of 14% over the next five years.  That growth rate would bring the total market size to an impressive $1,500,000,000 by 2014.

$1.5 billion is a lot of cheddar.  The rapid growth rate experienced over the last decade has brought a whole new list of players into the field, some from the technological depths of Silicon Valley.
With venture capital-backed titans lined up to gorge on the growth of this maturing industry, you would think that the future would be happy times for all ediscovery and digital forensics vendors.  However,  the future for a lot of vendors isn’t so bright. There is a cold reality in the background of all of the mayhem that is primarily driven by the following factors:  fee pressure, consolidation and
technological innovation.

Fee Pressure:

eDiscovery and digital forensics vendors have a symbiotic relationship with law firms.  Thanks to the existence of Shark Week, we can confidently use the simile of ediscovery vendors being like remoras.  Ultimately, ediscovery vendors are only as healthy as our hosts (law firms), and our hosts have been under remarkable pressure over the past couple of years from a number of threats.  As Kowalski & Associates Blog has pointed out in prior posts, law firms are faced with threats from, among other things, Internet based legal providers, legal project outsourcing companies and alternative
fee arrangements
.

All of these factors, plus our current economic state, have placed considerable pressure on law firms to appease client cost demands.  These cost pressures naturally have a trickle-down effect on the vendors who serve the law firms.  Currently, the de facto pricing model for most ediscovery vendors is to charge by the data processed while digital forensics firms employ an hourly fee model.
There are defensible reasons for employing these models such as the unpredictable nature of ediscovery cases as well as maintaining an unbiased forensic expert.  However, unlike the go-go days of 2005, today’s marketplace is seeing increasing pressure from vendors to adapt to new pricing models with inherent transparency.  Our firm, Campbell Solutions, has discussed the increasing necessity of being open to alternative fee arrangements in numerous posts such as “Soapbox Out: Alternative Fee Arrangements” and “eDiscovery Paradigm Shift on the Horizon.”

The evolution of ediscovery has brought a lot of service providers out of the woodwork to capitalize on the explosive demand in the industry.  However, the laws of supply and demand are currently not indicative of a mature industry.  Costs have continued to escalate while more suppliers have rushed into the marketplace. Eventually, there will have to be a pricing correction that will result
in either lower hourly/data fees or a new pricing model.  Either scenario will surely create a massive ripple effect on the firms who have built an entire infrastructure around the concept of juicy hourly/data fees.  A solid overview of the proliferation of alternative fee arrangements is shown in a Christopher Guly article entitled, “Billable Hours Out, Alternative Fee Arrangements In.”  If and when a pricing correction occurs, the firms with bloated fixed cost structures will be forced to shut their doors or fall victim to the appetite of the behemoth competitors that are looking for the next kill.

 Consolidation:

As we stated above, the growth rate of the ediscovery marketplace was like a giant dinner bell to many corporations.  Some giants such as Iron Mountain and PWC carved out new divisions to  ompensate for the smorgasbord of ediscovery clients.  Other giants used the technological backbone of the ediscovery field to launch venture capital backed start-ups out of Silicon Valley.  The
large amount of resources that these companies possessed quickly helped launch its growth into the stratosphere of eDD.

The old adage goes, “a big dog’s gotta eat”.  This maxim held true for the world of ediscovery as these giants quickly turned their attention to growing quickly through inorganic acquisitions.  As we have stated in a post entitled, “Where Have All the Cowboys Gone?”, the ediscovery industry has felt like the wild west over the past couple of years.  Just like in the wild west, we had our California gold rush through a slew of favorable court decisions, an immature marketplace and a boom in ESI.  Like any gold rush, anyone with a pan showed up to cash in while the pickings were good.   The smaller shops who carved out a nice niche were soon overshadowed by larger competitors who were looking to grow.  Instead of solely relying on the costly strategy of organic growth, these giants also focused resources on inorganic growth, ie. acquisitions.  In the past couple of years, our industry has seen many big acquisitions such as HP/Autonomy, Symantec/Clearwell, AccessData/Summation
and Navigant/Ignited Discovery.

 Unlike other industries such as telecommunications and airlines, ediscovery doesn’t have high barriers to entry.  This means that consolidation within the industry isn’t necessarily a bad thing because there will always be room for nimble players who can effectively tweak the current business practices.  However, as you can imagine, consolidations that create superpowers could have an adverse impact on firms who cannot effectively cope.  Firms who rely on commoditized practices, broad focuses and are built around high hourly pricing models won’t be able to compete with the resources that these super-companies possess.  Much like how law firms are currently under attack from nimble competitors such as LegalZoom.com and Clearspire, ediscovery vendors are under attack from consolidation.  The firms who can effectively carve out a niche and demonstrate value should be able to survive.  Those who are set in the ways of the past will ultimately get smacked aside by the Invisible Hand.

 Technological Innovation:

Technological innovation has changed the landscape in electronic discovery over the past decade.  Now the industry is chock-full of lightning fast programs that have reduced the time and cost previously associated with electronic discovery and digital forensics.  The technological revolution that the ediscovery arena has seen over the past couple of years has been a godsend from a cost and efficiency perspective. However, there are two potential drawbacks that are developing from the rapid evolution of ediscovery software.  First, vendors are becoming over reliant on the software and entrusting complex litigation material to IT novices.  While this strategy may work fine 9 out of 10 times, the 10th time could be the one that leads to spoliation charges or other adverse sanctions.  The
bottom line is that a hammer is only as effective as the person wielding the tool.  In litigation scenarios, technology has not developed to a level that warrants human replacement.

Second, like all businesses, the technological evolution in ediscovery has left a handful of laggards milling around the industry.  These vendors haven’t embraced the efficiency of new technology and prefer to operate under the methods that worked in 2005.  From a forensics perspective, these are the vendors who will always advice on performing a forensic image (bit-by-bit copy) of a device under any circumstances.  While these vendors can be saluted for its resolve, the bottom line is that those vendors who do not adapt will be eliminated in the coming years.

Conclusion:

Overall, the electronic data discovery industry has seen a lot of changes over the past couple of years.  Despite the changes in the landscape, ediscovery will continue to grow for two primary reasons:  (i) litigation is a staple in this society and (ii) digital information will continue to experience exponential growth from new innovations.  However, the vendor landscape will inevitably start to mature along with the industry due to pricing pressure, consolidation and technology.  These perceived threats are not unique to the ediscovery industry, and every business has faced similar threats since Adam Smith put pen to paper.  Our gut tells us that the industry will eventually mature into a land of giants surrounded by sleeker, small competitors that excel in specific practices of functions along the EDRM model.

Survival among this maturing landscape follows the same prescription that any industry has followed, including law firms:  specialization and adaptability.  As a boutique digital forensics and  discovery shop, we are acutely aware of the landscape that is in front of us, and we would advise vendors who do not have the resources of a Kroll, Clearwell or AccessData to focus on the following competitive advantages: specialization and delivering value.  We are a specialized digital forensics and ediscovery firm that can deliver more value to our clients than programmable software run by amateur IT employees at a larger firm.  Furthermore, our vast experience in white-collar and securities litigation cases allows us to carve out a defensible niche among the “jack of all trade” vendors in the marketplace.

At the end of the day, the struggles that plague law firms are no different from those that ediscovery vendors face.  Our worlds are rapidly changing and are under pressure from new entrants, better technology and impatient clients.  We must recognize that it is up to us to always strive to deliver higher quality while being outrageously adaptable to our changing environment.  Then, and only then, will we be able to survive the ecological extinction that is facing our peers.

Derek Shewmon is a principal of Campbell Solutions, LLC (www.campbellsolutions.com ) and can be reached at  derek.shewmon@campbellsolutions.com .

The views expressed herein are solely those of the author.

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One Response

  1. […] bring our ediscovery and digital forensics knowledge to his law blog.  In a post entitled, “What’s Sauce for the Goose is Sauce for the Gander: An Insider’s View of Electronic Document Dis…“, we do our best to give an overview of the ediscovery landscape and highlight some of the […]

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