With all of the mergers, acquisitions and investments (M&A+I) activity going on in eDiscovery today (not to mention other challenges), is there still room for smaller eDiscovery providers in today’s market?  This article from Legaltech^® News doesn’t paint a rosy picture for them.

The article (A Rising Tide of Private Equity, Consolidation Won’t Lift E-Discovery’s Smaller Boats, written by Frank Ready), states: “While private equity investments and M&A activity seem to be par for the course in the e-discovery industry these days, their aftershocks can sometimes leave the smaller clients on a provider’s roster feeling neglected. But given the high cost of talent, cyber insurance and other business costs at the moment, those customers shouldn’t necessarily count on a wave of modestly proportioned startup vendors coming to the rescue.”

“The cost of doing business, the cost of labor, the cost of cyber insurance—these things have just grown so much that the margin compression is beginning to affect the smaller players more than it does necessarily the enterprise providers of somebody with a great deal of scale,” said Hal Brooks, CEO of HaystackID.

The cybersecurity and cyber insurance angles may be a particularly difficult barrier for aspiring e-discovery entrants to overcome. Brooks pointed out that his own cyber insurance costs have “gone up by 400% this year” (a trend I covered here). He also noted that contracting with clients around cybersecurity provisions has “gotten extremely complicated” as providers look to negotiate the extent of their liability in the event of a breach—which of course adds to legal costs.

To be sure, some clients may not even feel comfortable trusting a smaller e-discovery provider with their data in the first place. “The pandemic has sort of shifted people’s concern about who they do business with. Their concerns for data security and all of that. They may or may not think that a smaller business, a small $10 [or] $15 million business, has the ability to provide them that sort of comfort,” Brooks said.

Besides, more robust e-discovery providers may not be willing to give up smaller customers without a fight. Zach Abramowitz, a legal technology consultant at Killer Whale Strategies, argued that e-discovery providers aren’t necessarily chasing big name clients in the hopes of attracting private equity—but rather large or high-profile cases.

“Now do big firms often litigate the big cases? Yes. But sometimes there are plaintiffs’ firms on the other side of these big cases that need to be serviced also. … I think what’s going on in e-discovery, as far as I can tell, is the big [investment] money chasing the big cases,” he said.

Brooks at HaystackID predicted that the space will be filled with “four or five” large service providers who offer everything from e-discovery to data management or cybersecurity.

Instead of seeking out lower-scale providers, he predicted that small enterprises or mid-market law firms will simply address the problem internally with a mixture of technology and new e-discovery staff hires.

“You’re seeing a lot of companies, mid-market companies start to bring things in-house,” Brooks said.

You can check out Frank’s article here, with quotes from other participants in the industry as well.

My take? While I agree that we’re continuing to see consolidation in the market from both the software and services side, I think there will continue to be room for smaller eDiscovery providers.  Two reasons: 1) Legal technology buyers are generally slow to switch from a provider unless they are highly dissatisfied, which continues to give smaller eDiscovery providers with established clientele a foothold, and 2) Challenges within the market is continuing to change and, sometimes, it’s the newer, more nimble entries into the market that are able to establish a foothold to support those changes.  At least until they’re acquired, that is.  😉

BTW, for the latest in mergers, acquisitions and investments (M&A+I) activity in eDiscovery, check out Rob Robinson’s abridged look at the M&A+I transactions here!

So, what do you think?  Do you think the days for smaller eDiscovery providers are coming to an end?  Please share any comments you might have or if you’d like to know more about a particular topic.

Disclaimer: The views represented herein are exclusively the views of the author, and do not necessarily represent the views held by my employer, my partners or my clients. eDiscovery Today is made available solely for educational purposes to provide general information about general eDiscovery principles and not to provide specific legal advice applicable to any particular circumstance. eDiscovery Today should not be used as a substitute for competent legal advice from a lawyer you have retained and who has agreed to represent you.