At a past meeting, a Director of Litigation Support at a major law firm told me that ediscovery vendors are more common than Starbucks. Is he right? If so, that could be an ominous sign for the industry as Starbucks did end up closing 600 stores two years ago.
Looking at the ediscovery industry as a whole, and you can see that there are certain fundamental problems that need to be addressed: (i) out of control costs, (ii) low barriers to entry that have spawned "imposter" firms and (iii) perception of end-user of a commoditized product. These problems can collectively start to form like storm clouds and create a violent upheaval in the industry.
For comparison's sake, let's take a closer look at another famous bubble: the dot-com bubble. In this bubble, you had the following factors that ultimately led in the explosion of the entire industry: (i) out of control valuations, (ii) technologies that lowered the barriers to entry and created such gems as "Pets.com", (iii) perception by investors of a commoditized product that would make money without proper due diligence. The bloodbath of the dot-com bubble was brutal. $5 trillion of market valuation was lost in the subsequent stock market crash, 50% of dot.com companies collapsed in the next couple of years and the industry was thrown on its head as a new wave of participants set course to dominate the remaining decade.
Will history repeat itself?
While it is a big stretch to compare one of the biggest stock market crashes in US history to the e-discovery industry, there are some definite common symptoms. The e-discovery and digital forensic industry has been growing unchecked for the last 6+ years as the courts and participants have tried to absorb the ever-changing landscape. More money has attracted more competition, but with the absence of the economic principle of supply and demand. This should be a red-flag because it is expected that costs should be pushed down as more service providers enter the arena and compete for clients. Without that economic release, the pressure put on the end user is going to reach dangerous proportions. Once that happensâ€¦â€¦
Like every big event, all the ediscovery industry needs is one catalyst to spark a chain of events that leads to a rapid cataclysm. With the Great Depression, it was Black Tuesday. With the dot.com bubble, it was massive sell orders of a couple of huge tech stocks in March 2000. With the Great Recession, it was the collapse of Lehman.
What, if anything, will trigger a potential metamorphosis in the e-discovery arena?
There are a couple of things that could trigger a shake-out in the ediscovery and digital forensics field. One that stands out is the current cost structure of the firms involved. Currently, firms are paid in billable hours just like their cousins, the law firms. This cost structure has recently been criticized by some in the industry as inefficient and a major driver behind the out-of-control costs of e-discovery. What if a couple large clients start demanding fixed pricing? Would that trigger a revolution? For my money, I believe that a fundamental shift in pricing could be enough to consolidate the industry. If pricing goes towards fixed fees, firms that have grown around the concept of billable hours will be faced with an uneasy situation of supporting a high fixed cost structure on potentially less revenue. If that faucet stops gushing, staff will have to be cut and in-house technology scrapped in order to survive. Big behemoths should have the resources to survive this shift, and possibly prosper by acquiring those who are not as fortunate. Smaller players who rely on cloud technology, keep a skeleton crew and who actually understand the nuances of digital forensics and ediscovery should be able to cope. The middle-tier players might not be as lucky. They are in the unenviable position of typically having high fixed costs and enough clout to peak the interests of the enterprising giants looking for the next acquisition.
Overall, we cannot say for certain whether the ediscovery industry is ripe for a monumental change. However, if history is any indicator, the industry could be in a position to undergo a reformation that is a staple of capitalism. Let's just hope that the market participants can see the storm clouds off in the distance before it is too late.