Market to manage electronic documents in a state of flux
Last year, more than 30 major e-discovery companies were acquired or merged, or they disappeared. To an outside observer, it looks like an industry that is shrinking or contracting.
But at the same time, venture capital firms poured millions of dollars into startups and upstart companies offering technology to manage electronic documents in litigation. It’s enough to make lawyers wonder: Is it an industry in decline or on the rise?
The answer is a little of both. Large corporate clients are resistant to paying millions for litigation support services when a lawsuit arises. Rather, large organizations are investing in tools to manage electronic records before litigation ever happens. “E-discovery revenue streams and technology are opening up opportunities for companies with a focus on data from the point of creation, rather than just from the point of a legal trigger event,” says Rob Robinson, an e-discovery consultant who tracks industry investment activity on his website ComplexDiscovery.
That means less opportunity for traditional e-discovery consultants and lawyers, who often treat litigation like crisis management. But it can mean new opportunities for upstart service companies that can help organizations manage electronic records proactively. “The difference now is that corporate counsel is driving the market,” says Sean Doherty, a New York City-based lawyer and industry analyst. “It’s not about cashing in on a couple of big pieces of litigation but a more measured approach around the enterprise business cycle. The e-discovery providers that will survive are the ones that can help clients cope with their ongoing needs.”
A SHRINKING PIE
Every year or so, a breathless new study predicts that the e-discovery industry is poised to explode. But those estimates have frequently proven to be grossly optimistic. For example, analysts at IDC Research claimed the e-discovery industry earned $9.7 billion in revenues in 2006 and predicted they would explode and hit $21.8 billion by 2011. But last year, IDC published a new set of figures. It said the industry had only just surpassed $10 billion in revenues, making a much more modest prediction of $14.7 billion in revenue by 2019.
The best explanation for this retrenchment is that corporate clients have been able to rein in their spending on litigation support services. In the more recent figures, IDC analysts assume a much more modest 9.8 percent compound annual growth rate, compared to a five-year compound annual growth rate of 17.6 percent in 2007. “These estimates are made under the assumption that corporate America will scale spending to keep up with data volumes,” says Monica Enand, CEO of the e-discovery software company Zapproved. “That’s impossible to sustain. Eventually, legal departments were going to have to find ways to get control of this spending.”
LESS FEAR LEADS TO NEW LANDSCAPE
The business of e-discovery is changing. That is at least partially thanks to updated Federal Rules of Civil Procedure, which makes the threat of sanctions less likely if litigants fail to preserve electronically stored information. Specifically, Rule 37(e) now holds that if lost ESI can be replaced or restored, no sanction will be imposed. If the information cannot be replaced and the requesting party is prejudiced, the court may order sanctions “no greater than necessary to cure the prejudice.”
Before the rule change, large clients felt compelled to keep massive amounts of data in the event of litigation. Now they are less terrified of sanctions and less willing to spend big bucks on a service provider who will collect and process massive data sets.
In response, old-line e-discovery vendors are responding by consolidating. Among the biggest moves were LDiscovery’s $410 million acquisition in October 2016 of Kroll Ontrack and the $240 million combination of OpenText and Guidance Software in July.
Others, including Silicon Valley investors, are seeing opportunities in the space. OpenView Venture Partners has invested $10 million in San Francisco-based software company Logikcull, and Chicago-based Esquify has recently secured a new round of funding from Network Ventures. This new generation of e-discovery companies hopes corporations will be willing to pay smaller sums but over a longer period to have data managed in anticipation of litigation.
That helps explain the investments by Vista Equity Partners in a company such as Zapproved, which offers to manage electronic evidence from prelitigation phases and through the close of a matter. “It sounds like a Chinese curse, but we really do live in interesting times,” Enand says. “The business is changing and up for grabs. The question is who can truly automate the processes of litigation.”
This article appeared in the November 2017 issue of the ABA Journal with the headline “Burst Bubble? At a time when the e-discovery market seems to be shrinking, some see an opportunity."