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The eDiscovery Paradigm Shift

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Thursday, October 23, 2008

2008 Financial Crisis Not Slowing Investment in Litigation Technology Market

Having helped raise in excess of $75 million in my career for a variety of high tech software startups I was not surprised to learn that Recommind, which offers an “eDiscovery” service aimed at law firms, has raised $7.5 million in a first round of venture funding. Although the funding was announced on October 8, 2008 and has probably been in the works for some time, there is always money available for a solid technology investment. Further and as indicated on this Blog over the past couple of weeks, the Financial Crisis of 2008 will actually provide a windfall for technology vendors in the eCompliance and eDiscovery markets.
The full text of the Recommind announcement as seen on the the Venture Beat site is as follows:

Recommind, which offers an “eDiscovery” service aimed at law firms, has raised $7.5 million in a first round of venture funding. Despite the slowing economy, chief executive Robert Tennant says his company should stay very busy in the coming months.
That’s because San Francisco-based Recommind provides a key tool for litigation. Its Axcelerate product is used during electronic discovery, also known as eDiscovery, which is the initial process of sorting through electronic records. With financial institutions collapsing, and legal battles likely to follow, the need for eDiscovery may be on the rise. Tennant says Recommind has been getting increased requests from its law firm customers, and he expects more to come, even as many companies cut back on their costs.
“Some technology companies’ capital decisions will get delayed … but when a judge says, ‘Thou shalt produce,’ you have to produce,” he says.
Of course, there are other startups entering the market — either involved directly in eDiscovery or in archiving documents for legal purposes — and they’re getting funding, too. For example, Mimosa Systems raised $17 million earlier this year. Other competitors include eDiscovery company Attenex and enterprise search company Autonomy. (Recommind also provides enterprise search.)
But Tennant says Recommind’s service is particularly advanced. He calls it “eDiscovery 2.0″ — a phrase Tennant sounds slightly embarrassed to use, but which gets the idea across. Recommind’s Axcelerate automates the initial process of sorting through documents and judging their relevance, thus making eDiscovery faster and more affordable.
Recommind has also been in the business for a while, with customers like well-known legal firms Cooley Godward Kronish and Wilson Sonsini Goodrich and Rosati. It’s already profitable, and has been growing at about 100 percent per year, Tennant says. So why does it need the funding? There’s a big opportunity for growth, he says. Recommind will use the money to expand its sales team and also acquire some new technology.
The round was let by Kennet Partners.

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Which Channel is Winning the eDiscovery Wars?

Having spent the better part of the last twenty (24) months meeting with the General Council of many of the Fortune 2000, Partners from many of the largest law firms in the country, regionally based litigation service providers, many of the well know litigation consulting organizations and most of the leading litigation technology vendors, I have a very in-depth understanding of the litigation market requirements and what solutions are going to work and which ones are not. However, I am still trying to figure which channel is ultimately going to win the eDiscovery Wars.

First of all, let me point out that there is a war going on in this market because according to the 2008 Socha-Gelbmann Electronic Discovery Survey, the eDiscovery market is going to be a $4.67 billion market by 2010. But, the question is who is the ultimate end user and who do they want to buy there eDiscovery solutions from?

The Ultimate End Users and who makes the Buying Decisions
The ultimate end users in this market are the parties to the law suite with defendants leading the way with their deep pocketed insurance partners. However, historically and for a variety of reasons that are quickly changing, end users have conceded the management of litigation to outside council and therefore the control over the buying decisions and the "channel" to the end users was through the law firms.

As such, there are thousands of regionally based litigation service providers that service their local law firms and most of the litigation technology vendors and consulting organizations have a law firm channel. Further, over the past ten (10) years, most of the largest law firms in the country and many of the smaller law firms have also setup their own litigation service organizations.

So, it would seem that the law firms are winning the eDiscovery channel wars. Or are they?

Law firm Partners Questioning What they Do Best - Practice Law
Over the past twenty (24) months, I can even count how many law firm partners have told me that they went to law school to either change the word or make a lot of money or both and are not sure how they woke up one morning to find out that they were actually running litigation technology and service companies. Well, this is a bit of an exaggeration on their part. But, I have gotten the message or question loud and clear; why have law firms morphed into technology and document service providers? The answer is obvious; money and control. We forget sometimes (probably not that often) that law firms are a business and therefore are not different than any other business in their pursuit of higher revenues, greater profit margins and all of the other lofty goals of capitalism.

However, with the accelerating volume of Electronically Stored Information (ESI) and the changes to the Federal Rules of Civil Procedure (FRCP), I believe that we have reached a cross roads or what I would call a paradigm shift in the market. As a result, it is my observation that both the end users and the law firms are starting to realize that providing litigation technology and services in this new eDiscovery environment is no longer a game for amateurs. Or, put a different way, it may be best left to the technology and consulting professionals to figure out.

Therefore, I predict that law firms will be displaced as the defacto channel into the eDiscovery market. Obviously, they will always be the best source for references and leads and will also always have to be a partner in almost any matters. However, with ten (10) years I don't see many of them being in the litigation services and technology business. It's not what they do best.

Service Providers
The next group in the channel mix are the regionally based litigation service providers that have been providing local law firms with copying, scanning, blowbacks and other printing services. Over the years these organizations have formed a very strong bond with their law firm clients and have filled a very important market niche. However, with the accelerating volume of Electronically Stored Information (ESI) and the changes to the Federal Rules of Civil Procedure (FRCP), I believe that we have also reached a cross roads or what I would call a paradigm shift in regards to the regional service providers. As a result, it is my observation that both the law firms and the regional service providers are starting to realize that providing litigation technology and services in this new eDiscovery environment is a much different business model and takes a much more technologically complex staff to offer than the standard bread and butter litigation services that they have been offering in the past.

Therefore, I predict that over the next five (5) years regional service providers will either have to dramatically change their product offerings with a more technology and/or technology services bent or they will fade from the landscape like the dinosaurs.

The eDiscovery Consultants
The eDiscovery consulting game is a relatively new endeavor that has proven to be extremely profitable. As already indicated, with the accelerating volume of Electronically Stored Information (ESI) and the changes to the Federal Rules of Civil Procedure (FRCP), the end users, the law firms and in some cases the regional service providers have all been turning to the eDiscovery Consultants for help. And, at a very hefty per hour price tag I might add.

However, I am not convinced that this actually represents a litigation services channel. In most circumstances consultants want to increase their billable hours and stay as agnostic as possible in regards to partnering with and/or recommending required litigation technology.

The End Users
As with all paradigm shifts, these are interesting times for determining channel alignment. The end users are beginning to figure out that eDiscovery is a very technology oriented endeavor with the requirement for their internal Information Technology (IT) organizations to be heavily involved. Therefore, the solutions and third party relationships that they require to be successful are are more similar to the types of relationships that the IT department has then the legal department has historically had. As such, and with the IT players in tow, they are becoming less inclined to turn to their law firms or their regional service providers for answers or solutions. Alternatively, and with prompting from their IT organizations, they are turning to the new eDiscovery consultants and the eDiscovery technology vendors directly for assistance.

So, based upon my myopic twenty four (24) month US wide observation of this market, the winner of the eDiscovery Channel wars is going to the the litigation technology vendors with assistance from the eDiscovery consultants.

Postmortem on Law Firms and Service Providers
Without seeming to hedge my prediction, I have to say that the imminent demise of both the law firm and the regional service provider in the brave new world of eDiscovery is probably an exaggeration. However, for all the reasons that I have pointed out, it is going to become more and more difficult for these two groups to compete without making a commitment to make some dramatic changes and some "investments" in their organization to keep pace with the demands of the marketplace.

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