There’s an unusual dichotomy in the e-discovery industry right now. Industry observers see scores of e-discovery companies that have folded or disappeared as part of an industry shakeout, but at the same time there is agreement that there is still a growing opportunity to be had despite a slow economy. “There’s more than enough work for discovery consultants,” says Craig Ball, a court-appointed special master and e-discovery consultant in Austin, Texas. “In fact, as people recognize and understand the issue more, they have started to bring us in as early as they can.”

One reason for this trend is that e-discovery is different than your average niche information technology market. Unlike other technology purchases, law firms and companies cannot simply suspend litigation spending while waiting for market conditions to improve. However, in a down economy, litigants are changing the way they spend money on discovery services and are investing it more carefully.

The Altman Weil Flash Survey on Law Department Cost Control found three-quarters of law departments are facing budget cuts for 2009 of about 11 percent. This budget crunch has forced many litigants facing an e-discovery challenge to demand more from their litigation support consultants.

“In the last nine to twelve months, or the beginning of this year we’ve seen an impact on budgets, mainly impacting how litigants choose to manage discovery,” says Michele Lange, a director in the Legal Technologies division at Kroll Ontrack. “With the maturation of the e-discovery practice, our clients are telling us they want control and predictability.”

A survey conducted by legal consultant Ari Kaplan of corporate legal departments for FTI Technology, an e-discovery vendor, found that companies are looking internally to do more with fewer resources. During the current downturn, 86 percent of respondents are focusing resources on internal information management and policies. To reduce the cost of review, companies are investing in deploying document management and review software in-house or hiring their own contract attorneys.

According to George Socha, an industry consultant who helps produce the Socha-Gelbmann industry survey, in the year 2000 there were roughly 20 to 30 service providers doing e-discovery work. Today he says there are more then 600 or more offering e-discovery services of one type or another. However, hundreds of these companies may disappear.

Because many litigants are no longer able or willing to spend as much, e-discovery consultants and vendors will likely have to accept lower margins. But the overall market continues to grow. Socha believes that the market will grow 20 percent to $4 billion in the coming year. And he estimates as many as 10 million civil lawsuits are filed each year in state and federal courts, with more involving electronic evidence as time passes. “There’s no way 500-some providers can work millions of suits,” he says. “E-discovery is of growing importance in litigation, which means many lawyers either ignore the issue or bumble about without a technology partner.”

This remains an immature market, with no industry standard pricing models, but one way e-discovery companies are adapting to client frugality is more flexible pricing. Kroll has responded with a flexible pricing structure, accepting alternative fee arrangements, like charging fixed or flat rates for specific services like collection, review or production. “E-discovery is still new in the big scheme of things, but eventually a more consistent pricing model will emerge,” says Lange. “We believe companies that can offer a broad range of services for the entire discovery process will thrive.”

For clients, this can be good news. Just a few years ago, vendors could charge hundreds of dollars for every gigabyte of data processed. Today, storage and processing costs have fallen from hundreds of dollars per gigabyte to well under a hundred dollars. Unfortunately, pricing is not the best way to gauge the value a vendor may be providing. “It’s not a good idea to think about evidence in terms of gigabytes of data,” says Bill Speros, director of litigation support for Baker and Hostetler. “You have to recognize that compensating people by the gigabyte incentivizes them to process as much data as they can, and not necessarily to do it in a thoughtful or productive way.”

It may be possible to shop around for the lowest prices for specific services, but relying on multiple vendors drives up the overall project management cost of a case. That’s why vendors that can offer a full range of services, from hosting, processing and review to the end of litigation are thriving in the current environment. “It’s not easy to close a deal,” says Speros. “It can help if you can find one vendor for a range of service, because it’s easier to have one throat to throttle.”

A few years ago, corporations were forced to accept high prices for e-discovery services because they were reacting to a new and unexpected phenomenon, requests for millions of electronic documents in litigation. But now that many companies have experienced e-discovery more than once, they want to find ways to control costs. Established e-discovery companies are trying to offer services that not only help litigants find and process documents for litigation, but to prepare ahead of time, so there are fewer unexpected costs.

Lawyers are learning how to manage electronic evidence better. For example companies with well-designed IT infrastructures can quickly identify and suspend the rotation and destruction of electronic backup tapes that may have potential evidence. Additionally, technology for filtering files and removing duplicates can offer financial savings. Litigants with recurring litigation demands are learning not to reinvent the wheel, and reuse electronic data in multiple suits.

Lawyers are finding that clients are not delegating all decisions, but building their own software platforms and demanding their outside counsel and vendors learn their system rather than the other way around. Most importantly, clients are rejecting the use technology like TIFF files, which cannot be electronically searched; thus increasing the volume data and complexity in a case. “Requests for information are more smartly written than in the past,” says Mike Kinnaman, senior managing director of FTI Technology. “Clients are figuring out what they need from their outside partners and how to control costs.”

In addition to controlling technology decisions to their benefit, lawyers are learning the art of project management. “There are two things they don’t teach in law school; project management and collaboration,” says John Bace, research vice president of Gartner. “I talk to clients who stick with vendors who are technically inept so long as they’re great project managers. The only way to control costs is to manage all phases of discovery.”

WHAT’S NEXT

E-discovery is still an immature market in many ways. As with still-maturing markets, we are just now seeing vendor consolidation happening in earnest and pricing pressures squeeze out weaker players. Unfortunately, many upstart companies fought to outrace each other to the bottom in pricing their services. In particular, many companies that focused on hosting and processing digital evidence priced themselves out of business.

Meanwhile, software giants may be poised to change the market from one dominated by startups to a mature business. Companies like IBM, EMC and enterprise software giant California Associates have all joined the market. One major change that may be coming is that, as the market matures, e-discovery services will become more affordable to medium and small law firms. E-discovery vendors and consultants today readily admit they are still largely focused on big cases and clients with deep pockets.

While these are the most lucrative cases, the vast majority of litigation is not between deep-pocket clients. The question is whether e-discovery vendors can offer products and services to small or solo law firms which may have needs to handle and process digital evidence. “I’m comfortable that it will exist,” says Ball. “The question is, for a $100,000 case can someone offer a full-service e-discovery offering for $1,000 to $5,000? I think that’s a real need.”

In fact, at least one major vendor, Kroll, says it has plans to target this market. “For the last 10 years, e-discovery has been a do-it-for-me model; lawyers give us a box of tapes and tell us, ‘tell me what information comes out,’” says Lange. “But the other options are a do-it-yourself model of discovery or a modified consulting model. We’re looking at how to best do it; certainly our software is scalable enough that it can be used by small and large clients.”

E-discovery is still a growing business, driven both by a growing awareness in the legal community here, but increasingly overseas, where growth rates are even higher than in the U.S. “There’s still a growing demand, and you can see it in all sorts of ways,” says Ball. “People are still planning conferences, there are new players entering the industry all the time, and lawyers still consider it a hot topic. It’s just a business that needs a little maturing.”

Jason Krause is a freelance journalist based in Wisconsin.