Last week I promised to write more on the topic of the perceived competitive threat from law firms in the electronic discovery space. This article will address the first in a series of challenges law firms face in being competitive with electronic discovery “vendors”. As a reminder, and for anyone keeping score to remind me later, it remains my prediction made many, many years ago, that law firms will not by and large be able to compete with litigation support providers in general, much less the much more sophisticated and competitive electronic discovery market.
Our system of justice is based upon a precedent or authority. Black's Law Dictionary defines "precedent" as a "rule of law established for the first time by a court for a particular type of case and thereafter referred to in deciding similar cases." Many of these views are not mine alone, nor where they originated by me. So, this is not some isolated electronic discovery vendor rant. If you’re an attorney with a law firm considering jumping into the cut throat electronic discovery business, you may want to pay attention to this series.
What is the motivation?
So why do some firms appear to be jumping in with both feet? As I mentioned in the first article, we have been here before where law firms try to capture revenue that they see going out the door.
$1.5 Billion! That is a lot of dough and not a small pot of money that lawyers are trying to recover. $1.5 billion in revenue by 2013 is just the software revenue too. That figure does not count acquistion, preservation, processing, review and production revenue associated with services. Add those up, services currently being pulled away from law firms by their corporate clients, the pot of gold is many billions more than the $1.5 outlined by Gartner in the Majic Quardrant. Lawyers are also getting hit very hard by the drain on attorney review revenue (the hourly billing) being caused by smarter, better and faster data culling and contract review techniques that have dramatically reduced the need for review attorneys. Fewer lawyers are needed today in a typical document review than even a year ago and certainly two years ago. As a result, law firms have and will continue to go after that revenue. Many, and likely most, won’t be successful and, regrettably, may go the way of Howrey. I for one don't relish the idea of watching good firms break apart becuase they made poor business decisions. Lord knows there are enough other business pressures on law firms today justify their bills for legal advice, much less ESI bills. But I digress and a topic for the next article.
Keeping up with the Joneses
The Joneses here are the electronic discovery providers. Keeping up with those Joneses is a full time job for those of us out here doing that now. Don’t law firms have their hands full competing with each other? Back in December 2009, George Rudoy, who writes the E-Discovery Law Blog for Georgetown Law School, stated that historically the decision for a law firm to outsource was based upon the following general factors. In this series, we will look at these initial set of factors:
So why do some firms appear to be jumping in with both feet? As I mentioned in the first article, we have been here before where law firms try to capture revenue that they see going out the door.
"Gartner estimates that the world’s enterprise e-discovery software market came to $889 million in 2009 in terms of total software vendor revenue. We forecast a five-year compound annual growth rate (CAGR) of approximately 14%, which means the total should reach $1.5 billion in 2013." "Magic Quardrant for eDiscovery Software"; Gartner; 13 May 2011; Debra Logan and John Barce.
$1.5 Billion! That is a lot of dough and not a small pot of money that lawyers are trying to recover. $1.5 billion in revenue by 2013 is just the software revenue too. That figure does not count acquistion, preservation, processing, review and production revenue associated with services. Add those up, services currently being pulled away from law firms by their corporate clients, the pot of gold is many billions more than the $1.5 outlined by Gartner in the Majic Quardrant. Lawyers are also getting hit very hard by the drain on attorney review revenue (the hourly billing) being caused by smarter, better and faster data culling and contract review techniques that have dramatically reduced the need for review attorneys. Fewer lawyers are needed today in a typical document review than even a year ago and certainly two years ago. As a result, law firms have and will continue to go after that revenue. Many, and likely most, won’t be successful and, regrettably, may go the way of Howrey. I for one don't relish the idea of watching good firms break apart becuase they made poor business decisions. Lord knows there are enough other business pressures on law firms today justify their bills for legal advice, much less ESI bills. But I digress and a topic for the next article.
Keeping up with the Joneses
The Joneses here are the electronic discovery providers. Keeping up with those Joneses is a full time job for those of us out here doing that now. Don’t law firms have their hands full competing with each other? Back in December 2009, George Rudoy, who writes the E-Discovery Law Blog for Georgetown Law School, stated that historically the decision for a law firm to outsource was based upon the following general factors. In this series, we will look at these initial set of factors:
“Law firms are in business to provide legal advice. Therefore despite the ever-present component of electronic discovery, law firms generally do not view their e-discovery services (sans consulting on the matters of compliance, discovery strategies, etc.) as profit centers, but rather as an unavoidable part of today’s litigation.
Given the point described above, it is therefore rare that a law firm would invest large sums of money into necessary infrastructure to support the ever-changing demands of e-discovery services and their perpetual maintenance to realistically compete head-to-head with the external providers.
A consistent mentorship and evaluation of the e-discovery providers coupled with well-organized and logical selection process of the providers assures some degree of comfort and somewhat predictable results that usually meets the requirements of the discovery exercises.” “To Insource or To Outsource”; Georgetown E-Discovery Law Blog; Posted by George Rudoy at 11:06 AM on 1 December, 2009.
The firms that have gotten into this business have discovered, like Howrey, that competing in the electronic discovery services space is expensive IF they want to compete head to head. The IT infrastructure required alone can be very expensive. Considerable IT budgets beyond the initial investments are then required each year. These are investments well beyond the annual IT investments of a typical law firm data center, even that of the Law 200. Keeping pace with the rollout and support of email and word processing software is a far cry from the expertise and infrastructure needed for today's advanced eDiscovery applications.
Lack of Security
Many law firms already have sophisticated data centers you say? Not so fast, let’s first look at security. One of the major components of delivering electronic discovery services is the ability to host reviews, sometimes with external reviewers, but certainly with lots of sensitive information being stored on the law firm’s network. The amount of information that a law firm must manage to justify a profitable electronic discovery business is mind boggling. Assuming a firm does have the volume (which will be addressed in a subsequent article), the complexity of the security aspects alone may well be more than most law firms can manage. According to one industry expert, Rob Lee, Director with the information security firm Mandiant and the curriculum lead for the digital forensic training at the SANS Institute, the state of law firm security today is “deplorable”. According to the March 25, 2011 post by Sharon D. Nelson, Esq, President of Sensei Enterprises, Inc, "deplorable" may be an understatement:
“[T}hat may be kind. Certainly we've never done a law firm security assessment without finding significant vulnerabilities and Rob's experience has been the same.” “The Deplorable State of the Law Firm Security”; {ride the lightning] Electronic Discovery Blog; by Sharon D. Nelson.Rob Lee goes on to say “…hacking into law firms is so easy that the Chinese don’t even waste their “A” teams on it – the junior rookie squads can handle it”. See “The Deplorable State of the Law Firm Security”.
Most electronic discovery providers undergo regular “vulnerability scans”. A “vulnerability scanner” is a computer program designed to assess computers, computer systems, networks or applications for weaknesses. While these scans vary from program to program, the basic principles of security scans remains the same – enumerating the vulnerabilities present in one or more targets. The company I work for undergoes monthly vulnerability scans, often by separate organizations because we do sensitive work for financial intuitions. How many law firms do you think undergo regular security scans and how many do you think could meet the security regulations of their clients?
Conclusion
Assuming law firms were willing to make the considerable investment in IT Infrastructure and on-going security measures required for a competitive electronic discovery business, are they willing to continue the annual investment required to maintain a world class, highly secure data center? If so, then that firm makes it past the first of many challenges it will face competing with companies that are years and some cases decades ahead of them. It is difficult enough for those of us who have been in this for almost 3 decades, much less someone just entering the fray. Next week we will discuss keeping up with quickly changing technology, how difficult it is to keep up and remain competitive. We will also discuss commoditization of processing and production and how law firms are going to find the profit margins on these services are very, very thin and in many cases services with loss leader or breakeven margins. Stay tuned, and please provide your input into this discussion.
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