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January 4, 2018

Disruption in the eDiscovery Industry

MHT Partners  | Business & Information Services Investment Bank

Electronic discovery (”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 size of the eDiscovery market continues to expand, topping $10 billion in value globally, as data volumes grow and its forms proliferate.  eDiscovery participants must make big decisions around technology, partnerships, and business models that could lead to their winning or losing in the market.  This environment, combined with the broader state of the economy, is driving and will continue to drive rapid consolidation.  A set of factors driving mergers is the criticality of scale in eDiscovery.

Service providers must have scale to:

  1. Drive prices lower each year, as clients expect
  2. Invest and manage data security as end client focus has been laser trained on this need
  3. Operate on three continents, driven by differing personal privacy laws and regulations in different geographies.

Beyond these factors, perhaps the most chilling to the eDiscovery market is the strategic question of how to approach RelativityOne….

It’s been approximately two years since Relativity (formerly known as kCura) unveiled a complementary SaaS solution to its namesake eDiscovery software.  Known as RelativityOne, it promises all of the functions and features of Relativity.  Now, however, the hosted SaaS data would reside in a Relativity managed portion of Microsoft Azure’s cloud, instead of multiple cloud offerings from partnering service or distribution providers. Relativity more readily controls technology updates to end users. Predictable revenue streams come in the form of license fees, as well as through fees for hosting data. This model could theoretically change the barriers to entry to the service industry – lower upfront costs, instant and over-the-internet upgrades, scalability, and decreased IT infrastructure costs.

RelativityOne’s introduction has caused consternation within the industry.  The software is the 400 lb. gorilla in the eDiscovery software space, counting, according to the company, 75% of the Fortune 500 and 98% of the Am Law 200 as users.  In the old model, their software would often be paired by clients with other software tools. Clients did not have to use all Relativity modules (e.g. processing) to provide a soup-to-nuts eDiscovery solution for end users.  Channel partners would stitch together these software tools and offer implementation, consultation, and support to their clients, often provided through proprietary platforms and/or as managed services.  RelativityOne’s introduction threatened the ecosystem, specifically Relativity’s channel partners, by moving from providing just software to services as well.  Relativity may well end up with an even more dominant hand in this industry.  There will potentially be less ability to include other software tools in solutions, valuable hosting revenue is shared (many say taxed) with Relativity, and Relativity may end up setting prices.  This doesn’t sit well with many of those partners and has created myriad second- and third-order effects.

Not surprisingly, eDiscovery providers have turned to alternatives to Relativity or have begun developing their own solutions for the steps of eDiscovery that Relativity performs in order to lessen their reliance on the industry heavyweight.  No options have arisen displacing the #1 player, as yet, but eDiscovery providers have learned their lesson not to become overly reliant on one software application.  The consolidation game has yet to play out, but suffice it to say, you do not want to be a small player left without a seat when the music stops.

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