eDiscovery: The Ongoing Shift
to Fortune 500 Clients
A Look at Trends and Major Players
in the Legal Vertical
August 2007
JULY 2007
FocalPoint Securities, LLC
11766 Wilshire Blvd.
Suite 1270
Los Angeles, CA 90025
Kevin Trosian
Director, Technology
Tel: 
ktrosian@focalpointllc.com
Nishen Radia
Managing Director
Tel: 
nradia@focalpointllc.com
John Robertson
Associate
Tel: 
jrobertson@focalpointllc.com
Table of Contents
Executive Summary .........................................................................................................1
Industry Overview ...........................................................................................................2
Rising Costs of eDiscovery................................................................................................................... 2
Why eDiscovery?................................................................................................................................... 3
eDiscovery Growth Rates ..................................................................................................................... 6
Tangible ROI to the Fortune 500 ......................................................................................................... 7
Technology Shift to Integrated Platform ............................................................................................ 9
eDiscovery Process.........................................................................................................10
Data Collection .................................................................................................................................... 10
Data Preparation ................................................................................................................................. 11
Data Review ......................................................................................................................................... 12
Data Production................................................................................................................................... 14
Competitive Landscape.................................................................................................15
Growing Competition......................................................................................................................... 15
Vendor Landscape .............................................................................................................................. 16
eDiscovery Pure Plays ........................................................................................................................ 18
ECM and Storage Security Providers ............................................................................................... 20
Storage / Security................................................................................................................................ 22
Executive Summary
Executive Summary
eDiscovery Technology Market
Could Exceed $5.1 Billion in 2011
Litigation costs and new laws are pushing a burgeoning industry forecast to grow at
a 28% annual pace, from $1.4 billion in 2006 to $5.1 billion in 2011. Importantly, this
estimate only includes technology, and is not reflective of consulting services, which
comprises a sizeable portion of many of the largest eDiscovery vendors. In fact, the
market for offshore review alone, a service-based business, could exceed $5 billion,
according to some estimates.
$ in Millions
Figure 1
eDiscovery Growth Rates
$6,000
Installed review
application revenue
$5,000
Hosted review
application revenue
$4,000
$3,000
Processing and
production revenue
$2,000
Tape cataloging and
collection revenue
$1,000
Collection
technology revenue
$0
2006
2007
2008
2009
2010
2011
Source: Protiviti Inc.
Including Services, Market Will
Approach $20 Billion
Some estimates put service costs at 4x-5x the cost of the underlying technology, a
standard estimate among most technology that must be integrated with service
offerings. Even at a conservative 2x the cost of the technology, the size of the market
can quickly approach $10 billion to $20 billion. And it is not the law firms that are
driving the adoption, but their clients, Fortune 500 companies with multi-billion
dollar revenue lines that face tens of millions of dollars in litigation costs.
FRCP Rule 26f Places Increased
Cost Burden on Defendants
As more documents and communications move from paper and voice to email, the
volume of electronic documents has quickly overwhelmed lawyers involved with
litigation. More importantly, the United States Supreme Court approved a number of
amendments to the Federal Rules of Civil Procedure, including Rule 26f, which governs
the manner in which civil actions and suits are conducted in federal court. The
amendments were enacted December 1, 2006.
Fortune 500 and Global 2000
Enterprises are Target Customers
High-profile cases are driving law firms, and increasingly also driving Fortune 500 and
Global 2000 enterprises, to consider the opportunities and challenges of eDiscovery and
adopt the requisite services and technologies. The eDiscovery marketplace is
undergoing rapid evolution due to technology adoption as well as legal
amendments, providing new growth opportunities for traditional software vendors.
Tangible ROI to the Customers:
Litigation Cost Reduction of 75%
According to Gartner, companies that have not "adopted formal e-discovery processes
will spend nearly twice as much on gathering and producing documents as they will on
legal services." And as the volume of information grows dramatically in size, this can
quickly become costly to both sides, as data, in both paper and electronic forms, can
reach terabytes in certain cases. Evidence, no pun intended, has pointed to eDiscovery
reducing the cost in certain areas of litigation by up to 75%. Large enterprises, when
hiring outside counsel, will look to these statistics as an easy target for reducing
expenses.
1
Industry Overview
Industry Overview
eDiscovery Spending to Reach $5.1 Billion in 2011
eDiscovery technology spending will grow from $1.4 billion in 2006 to more than $5.1 billion
in 2011 “as enterprises realize that they have no choice but to prepare for electronic discovery.”
Source: Forrester Research and FocalPoint Securities, LLC
Rising Costs of
Litigation
Legal costs in the United States and worldwide continue to play a major role in
business. Recent studies have shown that lawsuits represent over 2% of US GDP, more
than double that of most other Western countries. According to Pacific Research
Institute, legal costs can create nearly $700 billion in lost stock value and up to $400
billion in lost sales due to curtailed investments.
2.5%
350
150
$179
$295
$270
$261
$261
$246
200
$233
250
$260
300
$205
Millions
Figure 2
Rising Tort Costs in the United States
2.0%
1.5%
1.0%
100
0.5%
50
0
0.0%
2000
2001
2002
2003
Tort System Costs
2004
2005 2006E 2007F 2008F
Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends and Insurance Institute of
Michigan
Today, litigation costs and legislative oversight, including HIPAA, the Graham Leach
Bliley Act and Sarbanes Oxley, are respectively having a negative financial impact on
healthcare, financial institutions and the public markets in general. Not only are these
acts increasing the costs to Fortune 500 and Global 2000 companies, they are arguably
also providing more ammunition for lawsuits.
Legal Discovery
According to Law.com, more than 90% of new business records are created
electronically, and 40% of them are never converted to paper. As such, electronic
records have become the de facto form of evidence in business litigation, and therefore
the key component in discovery. As more information is being stored and
communicated electronically, from emails to Word documents to voicemails, producing
this “e-evidence” has become increasingly complex.
2
Industry Overview
Discovery represents up to 90%
of litigation costs
Legal discovery "is the act or process of finding or learning something that was previously
unknown." In effect, it is the full disclosure, at opposing counsel’s request, of
information related to lawsuits, corporate investigations, and regulatory audits.
According to multiple studies, this legal process of exchanging and reviewing
information represents approximately 75% to 90% of all litigation costs. In addition,
the eDiscovery marketplace is undergoing rapid evolution due to technology adoption
as well as legal amendments.
Electronic discovery, also known as eDiscovery, refers to any process in which
electronic data is sought, located, secured, and searched with the intent of using it as
evidence in a civil or criminal legal case. The nature of digital data makes it extremely
well-suited to investigation. For example, digital data can be electronically searched
with ease, whereas paper documents must be scrutinized manually. Furthermore,
digital data is difficult or impossible to completely destroy, particularly if it gets into a
network.
eDiscovery vendors no longer
service bureaus, but tech or techenabled services firms
Why eDiscovery?
Prior to the widespread use of enterprise content management solutions and databases,
eDiscovery was primarily limited to scanning and copy shop service bureaus.
eDiscovery became more complex as company documents moved to and remained on
servers and computers. This shift in eDiscovery has resulted in technology and
technology-enabled service providers becoming the industry’s dominant players. In
addition, the use of technology and technology-enabled service providers has enabled
in-house corporate counsels to cut corporate litigation costs, particularly those that are
outsourced to outside counsel.
High-profile cases are driving law firms, Fortune 500 and Global 2000 enterprises to
consider the opportunities and challenges of eDiscovery and adopt the requisite
services and technologies. According to international law firm Fulbright & Jaworski,
eDiscovery is the top litigation-related burden for corporations with over $100 million
in revenue. Further, companies with over $1 billion in sales are involved in an average
of 556 open legal cases, and adding another 50 suits each year. As these companies face
increased cost burdens, we anticipate a greater focus on the legal vertical by
traditional software vendors looking for new areas of growth.
3
Indusstry Ov
verview
w
Figure 3
eDiscovery
y and Litigation Costs Co
ould Exceed $9 BB in 200
08
Market Size ($Billions)
A Growing Cost
C
in a G
Growing Maarket
$6B
6
5
4
3
200%
% Growth from
m 2004
$3B
$3B
2
50% of Litiggation Support
275% Growtth from 2004
$0.8B
1
0
20004
2008
L
Litigation
Support
Ou
utsourced eDisscovery
Source: Protivviti Inc.
d
an
nd communiccations movee from paper and voice to
o email, the
As more documents
volume of electronic documents
d
haas quickly overwhelmed
o
lawyers inv
volved with
litigation. According
A
to the Taneja Group,
G
95% of
o all corporaate documentts are stored
in electron
nic form and
d email comp
prises nearly
y 80% of all communications. More
importantly
y, the United
d States Supreeme Court ap
pproved a nu
umber of ameendments to
the Federall Rules of Civ
vil Procedure,, including Rule
R
26f, whicch governs the manner in
which civill actions and suits are con
nducted in feederal court. In short, Rulle 26f forces
companies to reassess th
heir “electron
nically stored information”” and the ram
mifications it
holds in a legal environm
ment.
n email, elecctronic datab
bases, word processing
Companiess’ increasing reliance on
documents and other computer
c
filees has vastly boosted the complexity and cost of
complying with discoveery requests. Companies can easily in
ncur millions of dollars
paying for the recovery
y and searchin
ng of backup
p computer taapes and otheer computer
media in orrder to respond to an e-diiscovery requ
uest. A respon
nding compan
ny can try to
shift these costs onto th
he requesting
g party, but that
t
has beco
ome more diffficult to do.
he trend of co
ourt rulings over the passt few years has been to require the
Further, th
producing party to pay the
t lion’s shaare of the e-disscovery costss.
4
Industry Overview
Figure 4
Federal Rules of Civil Procedure, Rule 26f
Rule 26f states that both parties must meet at the beginning of the dispute to decide
which electronic information is available and how it will ultimately be produced.
The rule was put into place, largely, to avoid the disputes and sanctions based on
destruction of relevant electronic documents that have occurred in a number of highprofile cases. Importantly, the amendments to not only Rule 26, but also Rules 16, 33,
34, 37, 45 and Form 35 provide new guidance and rules for eDiscovery and
Electronically Stored Information (ESI). Not only must the relevant evidence be
preserved, but also the processes of obtaining it must be defensible and the
information must be reasonably accessible.
Source: United States Government (http://www.uscourts.gov/rules/newrules4.html)
Importantly, while Rule 26f does not have much of an effect on the settlement of
cases, it creates a profound effect on the adoption of eDiscovery technology and
services. The adoption of eDiscovery technology and services is expected to increase
with the exponential increase in the volume and complexity of electronically stored
information. In addition, the cost of eDiscovery is typically not a deterrent to filing a
lawsuit because each side of a lawsuit pushes the cost of their discovery requests onto
opposing counsel. As with many processes in the legal system, the producing party in a
lawsuit incurs the majority of eDiscovery costs.
It is highly likely that eDiscovery services and technologies will be employed once a
lawsuit is filed because most filed cases will make it to the discovery phase. The only
cases that do not make it to the discovery phase are ones where the cost of discovery is
greater than the settlement.
5
Industry Overview
According to Forrester Research, litigation costs and new laws are pushing this
burgeoning industry, which is forecast to grow at a 28% annual pace, from $1.4
billion in 2006 to $5.1 billion in 2011. In fact, the market for offshore review alone, a
service-based business, could exceed $5 billion, according to some estimates.
eDiscovery Growth
Rates
Figure 5
eDiscovery Growth Rates
2006
2007
2008
2009
2010
2011
Collection technology revenue
Tape cataloging and collection revenue
Processing and production revenue
Hosted review application revenue
Installed review application revenue
Total
$18.4
$35.7
$1,017.0
$339.0
$35.7
$22.9
$44.6
$1,175.2
$542.4
$44.6
$28.7
$55.8
$1,265.6
$867.9
$67.0
$35.8
$69.7
$1,594.7
$1,301.8
$100.4
$44.8
$87.2
$1,736.4
$1,952.7
$130.6
$56.0
$109.0
$1,910.0
$2,929.0
$156.7
24.9%
25.0%
13.4%
53.9%
34.4%
$1,445.8
$1,829.7
$2,285.0
$3,102.4
$3,951.7
$5,160.7
29.0%
$ in Millions
(US $mm)
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
2006
2007
2008
Collection technology revenue
Processing and production revenue
Installed review application revenue
Source: Forrester Research and FocalPoint Securities, LLC
6
2009
2010
2011
Tape cataloging and collection revenue
Hosted review application revenue
CAGR
Industry Overview
Tangible ROI to the
Fortune 500
Both Morgan Stanley and Merck were fined $1.4 billion and $253 million, respectively,
as a result of direct and indirect errors in the eDiscovery process. According to
Cohasset Associates, the cost of eDiscovery reaches $2.5-4.0 million per year per $1
billion in revenue. Contrast this to Sarbanes-Oxley compliance costs, which are
estimated at $1 million per year per $1 billion in revenue, according to AMR Research.
In short, eDiscovery costs up to four times more than SarbOx compliance.
According to Gartner, companies that have not "adopted formal e-discovery processes
will spend nearly twice as much on gathering and producing documents as they will
on legal services." And as the volume of information grows dramatically in size, this
can quickly become costly to both sides, as data, in both paper and electronic forms, can
reach terabytes in certain cases. Evidence, no pun intended, has pointed to eDiscovery
reducing the cost in certain areas of litigation by up to 75%. This is due to the use of
enabling technology that decreases the number of hours billed by outside counsel. And
while this may indicate this is not a good time to be a lawyer, remember that outside
counsel is hired by the Fortune 500 and Global 2000. As these companies constantly
look for ways to reduce expenses, the high cost of litigation is an easy target.
Figure 6
Changing Paradigm in eDiscovery
Traditional
Structure
New Structure
Corporation
Corporation
Law Firm
Traditional
eDiscovery Vendor
Traditional
eDiscovery Vendor
Law Firm
Source: FocalPoint Securities, LLC
Lawyers: Traditional Luddite
Customers of eDiscovery
Law firms comprise the traditional, old school customers of eDiscovery products
and services, and rightly so. Unfortunately, the legal profession, and the lawyers that
comprise it, has never been known as an early adopter. Like physicians, they are
reluctant to change what they consider to be “best practices.” For this reason,
eDiscovery has traditionally lagged the larger umbrella under which it falls, Enterprise
Content Management (See eDiscovery Vendors section later in this report).
While we have already experienced one Internet boom and bust, and subsequent
resurgence in technology, the legal vertical has never before been considered sexy.
Until now!
7
Industry Overview
The Luddites: A Historical Overview
The Luddites were a social movement of English textile artisans in the early nineteenth century who
protested – often by destroying textile machines – against the changes produced by the Industrial
Revolution, which they felt threatened their livelihood. The Luddite movement, which began in 1811,
was named after a mythical leader, Ned Ludd. For a short time the movement was so strong that it
clashed in battles with the British Army. Measures taken by the government included a mass trial at
York in 1813 that resulted in many death penalties and transportations (removal to a penal colony).
Their principal objection was to the introduction of new wide-framed looms that could be operated by
cheap, relatively unskilled labor, resulting in the loss of jobs for many textile workers.
Source: Wikipedia
In House Counsel: The Young
Turks and New Adopters of
eDiscovery
Many may laugh as we state this, but the Young Turks are the companies that
comprise the Fortune 500. Yes, these slow, lumbering behemoths that sometimes have
trouble getting out of their own path are rapidly adopting eDiscovery technologies and
services. Why? Plain and simple: Cost Savings.
As corporations force outside counsel to adopt eDiscovery solutions, they can rapidly
decrease litigation costs. Now, this may not be in the best short-term interest of outside
counsel, who will watch billing hours, and potentially rates, drop in the interim. But
corporations are not there to make sure the ski house in Aspen is stocked with the best
French wine. They are more concerned with having as many pennies as possible hit the
bottom line EPS. And with spiraling litigation costs, eDiscovery can have a tangibly
positive effect on the margins.
The Elephant in the Room
The bigger question then remains, how much pushback from law firms will eDiscovery
companies have to fight? Interestingly, anecdotal evidence has pointed to the Luddites
secretly using the “machinery” of eDiscovery, and seeing the benefit in adopting these
technologies. Not only does it provide a tangible ROI to the client, it enables the law
firms to provide better service and to follow their fiduciary duty of “acting in the
best interest of the client.” More importantly, though, if their client requests it, they
will adopt it.
Further, we anticipate that outside counsel that has spent the time to learn and
implement an eDiscovery solution is more likely to be chosen in the future. Why?
Because Fortune 500 companies do not want to pay the hourly rate necessary for the
outside counsel to learn a new technology or platform. Therefore, those multi-national
law firms that adopt an eDiscovery platform are more likely to win the mandate as
outside counsel for large corporations.
As the growth of eDiscovery solutions increases within corporations, we anticipate a
greater number of traditional software vendors placing a greater emphasis on the legal
vertical. We believe the legal vertical represents a solid area of growth in a multi-billion
dollar industry that until the last few years, failed to hit the major vendors radar
screens. However, with the rapid adoption within the Fortune 500, many major
software vendors have placed an increased focus on targeting in-house counsel.
8
Industry Overview
Technology Shift to
Integrated Platform
In the past, lawyers exchanged discoverable documents in paper format, undergoing
the labor intensive process of identifying, reviewing and redacting documents before
handing them over to opposing counsel. Within the last five years, integrated
eDiscovery solutions have developed along with the adoption of eDiscovery
technology and services.
Figure 7
Technology and Services Shift from Point Product to Platform
In-House Build
Point Solutions
Late 1990’s
2000
Integrated Solution
Mid-2000’s
CONVERGENCE
Source: FocalPoint Securities, LLC
As with most software and service solutions, the eDiscovery industry began as a
piecemeal effort reacting to isolated challenges, as opposed to creating an all
encompassing lower cost solution. Before providers began offering an end-to-end
platform in the legal vertical, the industry was comprised of companies from copy shop
service bureaus to consulting firms to technology vendors. The rapid advance of the
industry has caused many single product vendors to expand their product line by
integrating technologies such as coding, culling, processing and review. Figure 7,
below, organized by type of service, illustrates how different product lines can fit
within an overall eDiscovery content management platform.
Figure 8
The eDiscovery Platform: Key Areas of Focus
Printing/
Loading
Search OCR
Meta Data &
Text Extraction
Hosting
Collaboration
Document
Conversion
Culling Coding
Storage
Native File
Review
TIFF & PDF
Processing /
Coding
Content Management/
Review
Production
eDiscovery Content Management Platform
Source: FocalPoint Securities, LLC
9
eDiscovery Process
eDiscovery Process
The entire end-to-end eDiscovery process can be separated into four discrete processes:
(1) data collection, (2) data preparation, (3) data review, and (4) data production.
Figure 9
Data Collection through Data Production
Data Collection
•Retrieve data from the whole universe of possible locations
•The universe includes, but is not limited to: physical content, desktop PCs, laptops, network servers, enterprise applications, content repositories, email archives, backup tapes, and handheld devices
•Restore, if necessary, media form backup tapes and archives or legacy systems
•Filter data based on prenegotiated items like metadata or keywords
Data Preparation
Data Review
Data Production
•De‐duplicate data to •Display data in a •Output necessary eliminate common format
forms of data—
redundancies
PDF, TIFF, paper
•Allow for native •Port data to review of documents common, searchable as necessary
repository
•Support collaborative •Organize data—
document identify and management for legal categorize
team
•Conduct data relevancy analysis
Source: Forrester Research
Data Collection
Data collection includes processing, coding, and extracting metadata from electronic
files. The data collection process starts with reviewing the request to produce and then
developing a processing strategy specific to the case. Next, the legal team and
eDiscovery service providers identify the potential sources of data relevant to the
specific case and the best way to harvest and secure that data. Once a strategy has been
developed, the legal team and eDiscovery services providers start processing the data.
Processing and Coding
During discovery, the processing of information, electronic or paper, for a legal case is
first entered into a workflow strategy in order to prepare the documents for data
review. Processing includes the formatting and conversion of documents into a format
that normalizes the data so it can be appropriately indexed during coding. Prior to the
processing of electronic documents, it is likely that data forensics, including the
searching of drives and discs, may have already occurred.
Coding (Paper
Documents)
In the discovery process, paper documents need to be converted into electronic format.
The papers are scanned, typically by a service bureau, and then coded and unitized,
which includes keeping documents electronically arranged as opposed to using staples,
rubber bands, etc. When documents are scanned they are read by Optical Character
Recognition (“OCR”) technologies to aid in data normalization of the document.
10
eDiscovery Process
Meta data and Text
Extraction (Electronic
Documents)
Meta data, also known as embedded data or “data about data”, is a critical component
of electronically stored documents. Lawyers can use it to bolster their own cases,
streamline document review, and get the complete story of their adversaries’
documents. Software programs embed various categories of meta data in the
documents users create. Meta data describes how, when and by whom an electronic
document was created, modified, and transmitted. This administrative information
assists data retrieval and reviews a document’s history.
Figure 10
Meta Data
Source: LexisNexis Applied Discovery
Meta data represents a crucial difference between electronic and printed documents.
All the information in a paper document is displayed on its face. Not so with electronic
documents. Electronic documents carry their history with them. Paper shows what a
document said or looked like, where meta data tells where the document went and
what it did.
In addition, meta data allows electronic searching of various fields so lawyers can
quickly locate keywords and filter searches by other criteria, including a document’s
source, the name of witness, a time period, or a subject line. These search capacities
make it possible for reviewing lawyers to quickly sort millions of pages, eliminating
superfluous documents and filtering an otherwise unmanageable volume of
documents into a workable set for review and production.
Data Preparation
Data preparation includes document management, culling, and hosting. These
processes are primarily performed in order to organize and further minimize a data set
into a smaller more accessible and manageable data set prior to review.
Document Management
Once the documents have been processed into electronic format, the documents are
then placed onto a common repository, which is typically hosted. Document
management technologies, including Enterprise Content Management, then manage
the creation and flow of documents to provide the user with better access to the
information. Document management systems can automatically archive reports from
the enterprise applications. In addition, document management also plays a large part
in review, as counsel wants to make sure each document is accurately reviewed.
Culling
Culling decreases the available data set in order to reduce the number of documents
that must be reviewed, which is typically the most expensive cost of litigation. Culling
the data, which includes using queries or search, date ranges and keywords, assists the
legal team in finding the most relevant documents to a case and flagging them for
11
eDiscovery Process
review, response and/or discovery. With electronic data, many documents may be
identical or near-identical. To decrease this overflow of information, firms may employ
de-duplication technologies, reducing redundant copies of the same datasets, typically
found in emails.
Growth in the processing and coding market is affected by both the size of the data as
well as the price per gigabyte processed. Growth in the number of gigabytes processed
is estimated between 40-60% per year.
We believe this area comprises the most competition, as many copy shops and service
bureaus have entered this market. This trend may result in decreased margins for
culling services in the near-term or until the smaller and single product line
competitors can no longer compete in the smaller margin environment. We believe that
those companies who provide an end-to-end solution are well positioned to compete in
this environment by offsetting the decrease in culling margins with increases in one or
all of their other product offerings. However, we anticipate the overall competition to
decrease in the long-term as lower margins force numerous copy shop and service
bureau competitors from the marketplace. We further expect the future decrease in
competition to allow culling margins to rise once again when the number of
competitors in the space stabilizes.
Hosting
Data Review
Once the data set has been coded and culled it is then stored in a common, searchable
format in a separate repository. The storage of the data set in this repository is called
hosting. Some vendors in the eDiscovery marketplace focus solely on providing
hosting as their only product offering. Once hosted, the data can be made available for
review to either one or both sides in the case.
Lawyers construct their legal strategy during the review phase of litigation, reviewing
and analyzing all of the available documents pertinent to the case. Hence, it becomes
the most costly area of litigation. Estimates put the cost of review at 75-80% of total
litigation cost. While the other technologies and services mentioned can provide a
significant ROI to corporations and law firms, review offers the highest growth
potential in the world of eDiscovery. Knowledgeable workers focused on billable hours
form the bulk of the legal profession and review can take a significant toll on their time,
even after the data is culled and de-duplicated.
Figure 11
Review: Collaboration and Case Management
Source: iCONECT White Paper – Effective Collaboration and Case Management – The
Key to Your Success
12
eDiscovery Process
In general, the “billable hour” approach is antithetical to good supply chain
management practices. The typical “billable hour” approach rewards a lawyer or law
firm for inefficiency and provides few, if any, incentives to implement and improve
upon efficient processes. Moreover, vendor selection in litigation generally is
conducted on a case-by-case basis, primarily relying on “per-unit” cost with little
though towards long-term integration. What a client usually buys in this scenario is a
collection of individuals and organizations that, no matter how talented, should not be
mistaken for an integrated team sharing the client’s interest in greater efficiencies and
reduced costs.
Figure 12
Review: Highest Cost of Litigation and Highest Growth Potential in eDiscovery
Largest Perceived
Cost
Data
Collection
Data Prep/
Processing
Largest Addressable
Cost
REVIEW
Production
Source: Forrester Research
Growth rates for review applications are anticipated to be the fastest growing segment
of eDiscovery, with expectations of CAGRs of 50-60% over the next four years. Large
corporations with significant litigation costs are driving this trend, as in-house counsel
is forcing law firms to find ways to decrease their costs.
Two trends have taken hold in document review within the last few years. First, the
review tools are most closely correlated with Enterprise Content Management vendors’
solutions, providing a collaborative arena to host and share documents among lawyers.
Providing these content management tools has reduced the cost to law firms in the
United States. However, we have noticed a more important trend leading to offshore
review, which can reduce the cost of review by upward of 80%, without a decrease in
quality or skill.
The countries most likely to see to a benefit from offshore review work are both India
and the Philippines. India will most likely benefit because the country has a large
number of law students graduating annually and it has a large English-speaking
workforce. In addition, the Philippines will most likely benefit because its Constitution
was largely based on the U.S. Constitution. Therefore, the laws of the Philippines
typically mirror those of the U.S. Further, like India, English-language skills are high
and while the population is obviously smaller, education levels in the Philippines are
extremely high. In fact, two universities in the Philippines have reciprocity with the
US, wherein the lawyers educated at those schools can sit for the bar in specific states
in the U.S.
Native File Review
At times, documents must be reviewed in their native format, such as an Excel file. For
instance, when looking at a TIFF’d image of an Excel file, counsel cannot see the
underlying formulas. A new trend is emerging with native files, which includes both
13
eDiscovery Process
making the documents available for review as well as searching the native files. In the
Excel file example, this would include searching the underlying formulas. Searching
through underlying formulas in native files is still a legal gray area, but many times the
native files are just TIFF’d and sent to opposing counsel. Further, by TIFFing the files,
counsel also has the ability to redact confidential or non-pertinent information. And as
an irritant, by TIFFing files, opposing counsel cannot view the formulas or other
information that may speed its review process.
Data Production
Once review is complete, discoverable documents must be produced for opposing
counsel or the regulatory agency. Documents are typically produced in either TIFF or
PDF format, and can be electronically redacted prior to production. Production can be
done either electronically or with paper documents, although the trend is dramatically
moving toward electronic production on CDs or FTP sites.
14
Competitive Landscape
Competitive Landscape
Growing Competition
The competitive landscape has grown dramatically in the last few years, driven by both
the growth in corporate litigation post the stock market crash in 2000 as well as the
disparate universe of vendors. While the eDiscovery marketplace was initially
covered by the copy shops and service bureaus, many technology and service firms
have entered the fray, seeing both the dramatic growth and a relatively open playing
field. A few vendors have emerged as the dominant players, coming from many
different angles.
We view the leading companies as those that offer an end-to-end platform. While
many companies profess to offer a complete solution, based on our talks with
customers and industry pundits, we believe many of the vendors must bolster their
position through both acquisitions and research and development.
Traditional Software Vendors
Targeting the Fortune 500 and the
Legal Vertical
While the eDiscovery space has been around for roughly a decade, many established
software vendors had previously neglected to focus their attention to it. However, as
large software companies have seen the migration to the Fortune 500 clients, they
have also seen much larger revenue opportunities. Previously, many of the vendors
saw the limited number of multi-national law firms as a deterrent to creating a specific
vertical focus on the legal arena. Today, though, these same vendors have created a
legal vertical focused on clients they already have: large multi-national corporations
with billions in revenue.
With a growing focus on the Fortune 500 companies, traditional software vendors are
seeing long-term annuity streams coming from their clients. In addition, we believe
they have placed more emphasis on the legal vertical as they are also seeing a greater
customer lock-in from offering an expanded range of products. And finally, as few of
the large software vendors have focused on this vertical and targeted the in-house
counsel, the market remains wide open and a solid growth opportunity for firms
whose revenue growth has slowed.
Pricing Becoming an Issue
As more and more legal disputes involve the discovery of electronically stored
information, more and more companies have started offering eDiscovery processing
services in an effort to capture some of the large emerging market. These processing
service providers include; copy shops, coding vendors, storage vendors, and
temporary staffing review agencies. Therefore, with an increasing number of
companies entering the market, per unit eDiscovery processing rates have dropped
substantially and it is likely that prices will continue to drop for basic processing in
the near future. At the same time, however, competition may be creating some
problems, as consumer complaints about the quality of the services received from
eDiscovery service prodders have increased sharply.
Complaints about eDiscovery processing have become more visible for multiple
reasons. With the recent advent of eDiscovery, it is inevitable that more technology
and processing firms will run into difficulties. Second, while law firms and their clients
are becoming more sophisticated in the understanding of electronic discovery issues,
the tight deadlines can create a mad rush for deliverables. Even a minor litigation
matter may develop miscommunication errors and incorrect expectations on both
sides. Finally, with the rush of new eDiscovery vendors in the marketplace, it is likely
that a lack of experience will lead to a lower quality work product. So while pricing in
general may be dropping, we are seeing relatively stable pricing and margins for the
established vendors.
15
Competitive Landscape
Vendor Landscape
We have dissected the competition into three main categories:
1) Pureplay eDiscovery vendors, which includes those vendors that offer
either a compete solution or choose to focus only on the eDiscovery
landscape. It is important to note that this may include eDiscovery
divisions of larger conglomerates.
2) Traditional software and technology vendors with a specific practice
dedicated to the legal vertical.
3) Print and service bureaus, which may include copy shops that offer
nothing more than photocopying and scanning services
In the interest of space, we have not been able to include all vendors in the space. At
our latest count, depending on companies to include, nearly 500 vendors exist in the
space. We have chosen to focus on the largest, as indicated by our research and the
Socha-Gelbman report.
Figure 13
Competitive Overview on eDiscovery
Additional Providers
ƒ
ƒ
ƒ
Top 20 Providers (each
subsection in alphabetical order)
Small-competitors
Top 5 Electronic Discovery Service Providers
New Entrants
Fios, Inc.
Start-ups
Kroll Ontrack Inc.
LexisNexis Applied Discovery
Renew Data Corp.
ZANTAZ Inc.
Will grow in absolute terms as
number of firms increases and
average volume of work increases
35.1%
Top 6-10 Electronic Discovery Service Providers
Deloitte
57.9%
Electronic Evidence Discovery, Inc.
First Advantage
KPMG
OnSite E-Discovery
Top 11-20 Electronic Discovery Service
Providers
Capitol Digital Document Solutions
CaseData
Cataphora, Inc.
6.9%
Cricket Technologies
Do It Yourself
ƒ
ƒ
Daticon
DOAR Litigation Consulting
Law firms
Encore Legal Solutions
Corporate legal departments
Ibis Consulting, Inc.
RLS Legal Solutions
Moderate Growth; adoption rates
likely to increase over next 18-24
months due to legislation
Xact
Will grow in absolute terms; likely to
gain market share through
consolidation of the marketplace
Source: 2006 Socha-Gelbmann Electronic Discovery Survey Report, FocalPoint research
16
Competitive Landscape
Figure 14
eDiscovery: The Process and Competitive Solutions
Source: Forrester Research
17
Competitive Landscape
eDiscovery Pure Plays:
ACT Litigation:
ACT Litigation began as a technology-enabled services firm that began a concerted
effort on litigation support over a decade ago. The company has developed a number
of proprietary technology applications and stands as one of the larger vendors in the
industry, offering an end-to-end solution for eDiscovery.
CT Summation:
CT Summation, a Wolters Kluwer business, has begun a pointed focus on the
enterprise, an area we believe to have the highest growth potential in the eDiscovery
marketplace. Its enterprise solution, comprised of iBlaze and WebBlaze and integrated
with the Microsoft SQL Server, provides management, production, review and
searching capabilities.
Deloitte and Touche:
D&T has held a strong position in litigation consulting for years. We believe the firm is
stepping up its efforts in the space, as it is seeing the large revenue opportunities in
front of it.
Encore Legal:
Encore has built a strong technology and services firm dedicated to the legal
profession. The company offers an end-to-end solution from discovery through hosting
and support. According to the company’s CFO, Encore has grown revenue to
significantly more than $10 million.
Fios:
Fios has established one of the stronger names in eDiscovery and is currently venturebacked. Fios, unlike many of the other competitors, offers an end-to-end solution in
eDiscovery, from processing to production.
First Advantage:
In 2005, First Advantage, a publicly traded company, acquired True Data Partners of
Pasadena, California. With its acquisition, First Advantage now offers processing and
hosting capabilities. We anticipate First Advantage will continue to make forays into
the eDiscovery arena.
FTI:
FTI Consulting focuses on multiple areas, including forensic and litigation consulting.
It expanded its technology expertise in 2005, when it acquired Ringtail Solutions for
$35 million. Ringtail had developed a software solution to manage workflow and
document management and is still expanding its platform. We believe the product
most closely competes with iConect and CT Summation and its services most directly
compete with any of the large services firms.
Guidance:
Guidance EnCase Enterprise product focuses on electronic forensics for the enterprise.
It offers a software platform to investigate and analyze machines connected to the
enterprise WAN/LAN, while adhering to standards set by the courts so the evidence
can be admitted. Computer forensics can represent the first stage of the process of
eDiscovery, but is not always a part of the eDiscovery process.
Huron Consulting:
18
Competitive Landscape
Huron has been making a concerted effort to increase its eDiscovery practice, making a
number of acquisitions in the sector, including Aaxis Technologies and Document
Review Consulting Services (DRCS). Aaxis was an integrated services/technology
company focused on forensics and processing, while DRCS offered document review
services with contract attorneys.
iConect:
iConect offers a software platform consisting of data management and collaboration
technologies for document review. In addition, iConect offers hosted services through
its partners, including Savvis.
Integreon:
Integreon offers a focused suite of consulting services, including legal and financial. Its
eDiscovery practice provides an end-to-end solution, from processing to production,
while its overall legal practice provides a broad suite of solutions. The company offers
global services, including the US, India and the Philippines, utilizing the offshore
services to lower costs to clients.
KPMG:
KPMG, a services firm, has developed a strong eDiscovery practice out of its Cypress,
California offices. The overall KPMG solution is primarily focused on services
surrounding litigation support and risk management.
Kroll Ontrack:
Kroll Ontrack, a wholly owned subsidiary of Kroll, offers clients an integrated
technology and services component for eDiscovery. Kroll offers both forensics and data
recovery, in addition to its discovery services. The technology consists of both Ontrack
Inview and Ontrack Firstview, a document management and forensics tool.
LexisNexis Applied Discovery:
Applied Discovery, a subsidiary of LexisNexis, offers an end-to-end solution, including
forensics, processing and production. In addition, it is targeting the highest growth
area of eDiscovery, online review. We view Applied Discovery as one of the major
contenders in the marketplace and expect them to maintain a strong position, both
through future acquisitions and a large existing client base.
Merrill Corporation:
Merrill offers a wide range of services for eDiscovery, including imaging/coding,
hosting and production. In addition, Merrill has a large overall practice focused on
legal solutions. Its products can best be described as a mix of services and technology.
In March of 2007, Merrill entered the space with a bang when it acquired Lextranet, a
software provider of litigation support and case management systems. Lextranet’s
products primarily focus on the review step of the eDiscovery process.
Protiviti:
Protiviti, a wholly-owned subsidiary of Robert Half, focuses largely on audit, business
and technology risk. In addition, the company over the last few years has put a
concerted effort into its eDiscovery practice with the hiring of key personnel that have
been involved in corporate litigation for decades.
Renew Data Corp:
19
Competitive Landscape
Renew offers an end-to-end solution, from the planning stages of eDiscovery all the
way through review and onto production. Renew was founded in 2001 as the
combination of two companies, DSTX Limited and Progressive Data Recovery. Renew
integrates its services platform with its technology, providing clients with a full
solution to cover their clients’ eDiscovery needs.
Zantaz:
Zantaz works to improve workflow within a corporation, focusing on an end-to-end
solution of litigation management. It offers a recovery program through its
Media/Restoration Collection, processing through its First Discovery product, and
review and production with Introspect. On July 3, 2007, it was acquired by Autonomy
for $375 million.
ECM and Storage /
Security Providers:
Enterprise Content Management (ECM) provides a larger platform on which
eDiscovery is likely to rest in the future. Today, a few of the ECM vendors have
entered the legal vertical with eDiscovery solutions, while others are just beginning to
test the waters, off-label branding existing products.
Enterprise Content Management: Finding the Needle in the Haystack
Enterprise Content Management solutions capture and securely store information for future
retrieval. The market has been around for decades, with major players such as FileNet and
Documentum garnering the majority of the attention prior to the Internet Bubble. However,
as more information moved to the Internet, be it for online commerce or merely
communication, kilobytes turned into megabytes. Today, corporations are faced with
terabytes of information. And as the information increases, finding the right document in the
servers can be like finding a needle in a haystack.
ECM vendors enable users to do more than store documents efficiently. The documents and
the ECM system empower workers to track documents, employ knowledge management and
audit users and/or files. And as litigation increases a corporation’s exposure, ECM can
decrease legal costs for a firm. Hence, we believe this is the reason many ECM vendors have
looked at the legal vertical and eDiscovery as the next channel for revenue growth.
Source: FocalPoint Securities, LLC
20
Competitive Landscape
Figure 15
Entreprise Content Management: Competitive Landscape
Source: Gartner Group
Autonomy/Aungate:
While not a traditional ECM vendor, Autonomy has traditionally been known as a
search vendor. However, with its integration of Aungate, Autonomy has built a strong
presence in the eDiscovery arena. In addition, it announced on July 3, 2007 that it had
acquired Zantaz for $375 million.
EMC/Documentum:
When EMC purchased Documentum in 2003 for $1.7 billion, it definitively marked its
territory in the ECM market. Recently, EMC has been making more noise in the space,
having launched the EMC eDiscovery Proven Solution in early 2006, an integration of
products marketed for eDiscovery compliance.
IBM/FileNet:
Currently, FileNet, which was acquired by IBM in 2006 for $1.6 billion, has not made a
lot of waves in the eDiscovery landscape. However, as many of the ECM players have
added to their arsenal in eDiscovery, we anticipate that as the dust settles to the
IBM/FileNet acquisition, the company will begin to make more waves in the space.
Interwoven:
While one of the largest pureplay ECM vendor, Interwoven, in our opinion, has the
largest marketing campaign in eDiscovery among all the players in ECM. The
Interwoven Collaborative Document Management suite, which includes the
Interwoven WorkSite MP 5.0 point product, is designed to facilitate eDiscovery and
email management. In additions, Interwoven partners with FIOS, one of the largest
pureplays in eDiscovery.
OpenText:
21
Competitive Landscape
Arguably one of the largest pureplay ECM vendor out there, post its acquisition of
Hummingbird, OpenText has a significant focus on the legal vertical. Further,
OpenText has had an aggressive M&A strategy over the past few years, so we would
not be surprised to watch them make a few more acquisitions in the sector to expand
their offerings. Specific product lines include the Open Text Legal Solutions suite
including LegalKEY New Business Intake, Conflicts Management, Records
Management, Critical Dates Management systems and the Livelink ECM Litigation
Management product.
Storage / Security:
Network Appliance:
While not a named contender in the eDiscovery marketplace, we anticipate customers
and vendors alike will be seeing more of NetApp in the future. While NetApp is
primarily known as a storage company, content management and eDiscovery are
logical offshoots to its current business plan. In fact, NetApp has been seen at a number
of the recent shows and is likely to make more of an entrance over the next 6-12
months, in our opinion. However, NetApp has not dedicated a formal product line to
eDiscovery, instead marketing the capabilities of its current products, including the
NetApp Information Server 1200, as a viable solution in the eDiscovery market.
Oracle/Stellent:
Oracle acquired Stellent in November 2006 for $440 million, firmly entrenching Oracle
in the Enterprise Content Management sector. We believe Oracle entered the market to
take advantage of a market they believe reached $3.6 billion in 2006, with a 13% CAGR.
Now that Oracle has a content management suite to offer its customers, we anticipate it
will take Stellent’s foothold in the eDiscovery marketplace and expand the vertical
through acquisitions.
Symantec/Veritas:
Symantec acquired Veritas at the end of 2004, and is still working on the integration of
the two companies. And while making the leap from storage to eDiscovery appears
logical, currently Symantec has approached the arena from another angle. We
anticipate Symantec taking the step into eDiscovery from its storage platform in the
near future. Symantec now offers its Enterprise Vault product to attack the eDiscovery
market. Enterprise Vault primarily focuses on email archiving and messaging, a point
product solution in the eDiscovery market.
Imaging Shops, Printers
and Service Bureaus:
The competition from this group of companies could stretch any number of pages, as
this is a broad category with many firms that claim to compete in this area. That being
stated, many of these vendors have entered the eDiscovery fray, seeing the legal
vertical as a new potential growth outlet. In fact, many of the traditional and pureplay
eDiscovery vendors partner with the imaging and servicing bureaus, typically through
an outsourced agreement.
We do not view these companies as a serious threat or competition, though, as they
offer a commoditized product with little to no differentiation. Moreover, these firms
have watched their revenue base decrease as firms and enterprises shift to eDiscovery
and move away from paper input and paper production, the key strength of the service
bureaus. However, the most likely impact onto the market would be if the image shops
can productize a service or technology, as some have done, to offer more than standard
printing services.
22
About FocalPoint Securities, LLC
FocalPoint Securities, LLC is a leading independent
investment bank with a primary focus on companies
with revenues between $20 and $250 million, operating
in the technology, consumer, business services,
healthcare and industrial sectors.
The firm is run by seasoned veterans, with backgrounds
in law, public accounting, strategy consulting, senior
lending, private equity and investment banking. Some of
our principals serve on Boards of public or private
companies, adding further insight into the business
world. Moreover, we were educated at universities such
as Wharton, UCLA, USC, and the London School of
Economics.
Our goal is to provide unbiased, innovative advice. This
is accomplished by taking the time to truly understand
the unique aspects of each specific transaction and then
devising and executing a process that best achieves our
clients’ goals and objectives.
Each transaction is a journey. FocalPoint is there every step of the way.
FocalPoint Securities, LLC
310.405.7000
11766 Wilshire Boulevard
Suite 1270
Los Angeles, CA 90025
www.focalpointllc.com