Industry Review
Contents:
Introduction 1
EDD Process 2
Market Size & Growth 3 Industry Trends 7 Current Market 9 Landscape VRA Partners, LLC 13 VRA Partners, LLC 3630 Peachtree Road NE Suite 1000 Atlanta, GA 30326 P 404.835.1000 F 404.835.1001 www.vrapartners.com VRA Partners, LLC is a
Electronic Data Discovery
March 2012
Introduction
The electronic data discovery (“EDD”) market, a subset of the larger litigation support and legal sector markets, has seen dramatic change over the past 10 years and even more dramatic change within the last 5 years. The market, which was not in existence all that long ago, is estimated by some experts to be over $3 billion and is expected to grow considerably over the next few years with some estimates at over 30% annually. Among EDD vendors, evolution has been rapid. The dominant names and players of the mid 2000s are in many cases gone, seriously wounded or now part of larger entities as a result of acquisition or merger. New market entries have consistently emerged, with some having subsequently disappeared, over this time frame. Most of the prevalent software companies in recent years were not even in existence in the early 2000s. Most service providers today don’t own the technology they use to provide service. For the majority of EDD service providers, the emphasis has shifted from developing or accessing proprietary technology to building workflows, developing middleware and providing technology and litigation expertise in order to utilize today’s commercially available technology in an efficient and seamless process. Buyers of EDD services and technologies are becoming more sophisticated and knowledgeable both at the corporate and law firm level and therefore simply gaining access to technology is no longer the primary factor in the buying decision.
The net effect of this considerable change in the EDD sector is a more stable, predictable and sophisticated overall market. It is a more attractive market for investment and consolidation than it was a few years ago with efficiencies of scale likely to gain increased importance over time.
VRA will review the following in this industry review:
A quick summary of EDD for those who are not familiar with the EDD process VRA’s view of the current market, its trends and its growth drivers
An overview of the M&A and capital market activity in the sector including VRA’s views of activity over the next few years
EDD Process
EDD represents the process of identifying, preserving, collecting, culling, processing, reviewing, and producing electronic information for use as evidence in litigation proceedings, compliance and regulatory matters, bankruptcy filings, M&A transactions, SEC second requests, and government reviews or investigations. EDD is often performed in the early stages of a civil litigation process and may continue up to and through a trial. EDD is primarily performed during the discovery phase of litigation (“Discovery”) after a complaint is filed by a plaintiff and a response is given by a defendant. During Discovery both the plaintiff and the defendant are given the opportunity to gather and investigate the information available in the case to determine facts, positions and strategies. The evaluation of available and potentially relevant electronic information is now a requirement as part of a Federal case. A description of the various stages of EDD is described below.
Identification and Preservation
Once served with the request for information, or investigative request, the party from which such information is requested must take steps to identify and preserve relevant documents. The party producing this information is placed with the burden of taking steps to prevent spoliation, or inadvertent or intentional deletion or destruction of potentially relevant information.
Collection
Once the data is identified and preserved it is collected. It is important that the collection process ensures that critical information is not compromised. Collection methods must be legally defensible, efficient, forensically sound and targeted. Data collected includes electronic word processing documents and spreadsheets, emails, web pages, social media postings, text messages, digital voice recordings, database compilations, digital photographs and computer logs. In the absence of strong retention policies and diligent archival processes, collection can include individually collecting computer hard drives, PDAs and phones.
Processing / Data Minimization
During the processing phase, all of the collected data is homogenized into a database structure and indexed for filtering and analysis. These indices are presented to the client for early case analysis or analyzed by expert consultants to help minimize the amount of data that must move forward to the attorney review process. Data minimization strategies such as de-duplication, file type filtering and known system file removal are typically applied during this process. Additional organization methodologies, such as the clustering of documents with similar concepts or similar content, can be applied during this process to facilitate the early analysis of the data by the subject matter experts and consultants.
“[for] EDD service
providers, the
emphasis has shifted
from developing or
accessing proprietary
technology to building
workflows, developing
middleware and
providing technology
and litigation
expertise...in an
efficient and seamless
process.”
Document Hosting and Attorney Review
After the information is processed, it is setup and hosted, typically through web-based applications, for attorney review. The attorney teams review the documents for relevance, privilege and specific issues. Project managers work closely with the attorney team to provide metrics on the status, productivity and accuracy of the review. Service providers supply the technical and IT support related to the hosting of these documents and certain companies actually provide the attorney staff and oversee the review.
Production
Production is the high-volume packaging of responsive data to opposing parties or investigating agencies. Production output may be electronic (e.g. bates file images or native format) or paper form. Production is often requested with short deadlines and EDD providers must maintain significant production capacity to meet these deadlines. Production is most frequently requested in electronic form, however, some production is still requested in paper form.
Market Size and Growth
The EDD market, while relatively new, is already a very large sector with industry experts Socha Consulting and the eDG Journal, estimating its current size at over $3 billion and $5 billion, respectively. The EDD market sizes of Socha Consulting and eDG Journal include EDD software, services and consulting expenditures. The market grew at a CAGR of 56.3% from 2002 to 2008 and grew at a slower rate of 10.9% annually between 2008 and 2010. In the initial phases of the Great Recession, many corporations initially froze spending which in some cases included legal spending. However, due to both the counter cyclical pressures of certain legal matters mentioned below and the overriding importance of pursuing and defending legal matters, corporations quickly resumed legal and EDD spending. As the economy continues to improve, EDD is expected to grow at annual rates of 30% and above.
Industry Review Electronic Data Discovery
EDD Growth Drivers
Primary drivers of EDD growth include overall growth of the legal market, increased adoption and acceptance of EDD in legal processes, increased regulation and most importantly the dramatic growth and proliferation of electronic information.
Growth of Legal Market
Because EDD is a critical component of litigation processes, regulatory investigations and ongoing corporate risk management, the overall growth of the legal market drives increased growth in EDD. As the level of legal activity grows, the demands for EDD grow as well.
The U.S. legal services industry is estimated to be a $280 billion market. The legal market in the U.S. is both unique in its size and cultural emphasis. It is estimated that the U.S. accounts for 47.6% of the $546 billion global legal services market. Legal service spending in the U.S. has grown steadily over time, having increased at a CAGR of 4.1% since 1998. Future legal market growth is expected to be between 3.0% and 5.0%, annually.
“EDD is a critical
component of
litigation processes,
regulatory
investigations and
ongoing corporate risk
management…”
Industry Review
EDD MARKET GROWTH
($ in billions)
Source: 2009 and 2010 Socha-Gelbmann Surveys
$0.3 $0.4 $0.8 $1.3 $2.0 $2.8 $2.6 $2.8 $3.2 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 2 00 2 2003 2004 2005 2006 2007 2008 2009 201 0
Legal Market Recession Resistance
Relative to other U.S. industries, the legal sector is uniquely unaffected by economic downturns. Though companies have become more vigilant over costs, including those related to legal matters due to the recent recession, the legal services industry involves counter cycle activities such as bankruptcy, reorganization and regulatory work that offset declines in capital markets, mergers and acquisitions, and other transaction oriented assignments.
Industry Review Electronic Data Discovery
2009 SHARE OF $546.8 BILLION WORLD LEGAL MARKET
United States, 47.6% Germany, 6.5% United Kingdom, 4.7% China, 4.3% Other Americas, 21.4% Other Europe, 9.4% Other Asia Pacific, 6.1%
Source: Datamonitor, “Industry Profile: Global Legal Services,” July 2010
U.S. LEGAL SPEND
($ in billions)
Source: U.S. Department of Commerce Bureau of Economic Analysis
$166 $176 $183 $195 $205 $224 $232 $242 $254 $267 $273 $264 $266 $281 $100 $150 $200 $250 $300 $350 199 8 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201 0 201 1
Additionally, product liability, intellectual property and employee related matters, among others, have low correlation to economic cycles. Legal spending remained relatively flat from 2007 to 2010, during the Great Recession, and in the last downturn from 2000 to 2002, U.S. legal spending increased 5.7%. The trends also display significant growth in the periods following economic downturns stemming from the reemergence of legal activities that correlate to positive economic trends as well as those lingering from poor economic trends such as bankruptcies and securities fraud (e.g. Enron, Lehman), with the latter types of matters often lasting years into economic recovery.
Increased Adoption
Within litigation, rules have been implemented that require EDD in various cases. The Federal Rules of Civil Procedure (“FRCP”) that went into effect on December 1, 2006 and were followed by several amendments, require organizations to manage their data in such a way that the data can be produced in a timely and complete manner when necessary, such as during legal discovery proceedings. These rules also expanded the definition of discoverable electronic material to include all forms of electronically stored information, such as email, voicemail, instant messaging, and other forms of digital information. While the rules focus on governing court procedures for managing civil suits in the United States district courts, they are often used as guidelines for other litigation matters and other non-federal court proceedings. Therefore, EDD is now used in most federal civil cases and its use in other cases is expanding.
As EDD technology and services have improved and EDD use has become more accepted, legal matters that were not previously subject to EDD are increasingly utilizing EDD in their processes. Despite this trend, there still remains a large portion of legal matters that do not involve EDD, today, that will likely adopt EDD in the future. With the growing acceptance of EDD, the market should continue to expand through adoption alone.
Increased Regulation
Additionally, EDD is now common in regulatory investigations and reviews. Regulatory investigations have accelerated due to the recent issues blamed for much of the economic crisis. The government is increasingly implementing new governance and compliance regulations and has intensified its oversight and investigations into potential non-compliance, particularly in the financial industry.
Dramatic Growth of Electronic Data
Finally, the largest growth driver of the EDD industry involves the dramatic growth and proliferation of electronic data. As is well documented, there has been rapid and exponential growth in digital information such as email, instant messaging, and electronic documents as well as the recent addition of new forms of communication such as social media. It is estimated that more than 90% of all information is created
“The trends also
display significant
growth in the periods
following economic
downturns stemming
from the reemergence
of legal activities that
correlate to positive
economic trends as
well as those lingering
from poor economic
trends such as
bankruptcies and
securities fraud...”
and retained in an electronic format and more than 60 billion emails are transmitted per day worldwide. According to the IDC Digital Universe Survey, the amount of digital information created, captured and replicated worldwide every year has grown from 190 billion gigabytes in 2006 to 1.2 trillion gigabytes in 2010, a CAGR of 57%. For any given case, it is estimated that the amount of data that is potentially discoverable has grown 10x over the last three years. IDC estimates that the amount of stored data will continue to grow at approximately a 40% CAGR or 44x over the next 10 years. All of this expanding electronic information is potentially discoverable and often involves multiple layers including information regarding the dates of creation and edit, the device on which it was created and more. The variety of forms of information and layers of information contained in these forms creates a substantial level of complexity that is growing.
Industry Trends History
In the early to mid-2000s, EDD was in its nascent stages. Large, high profile cases were typically the only cases where significant EDD was performed. In those cases, most companies had limited choice as to the vendors from which they could chose, as a limited number of providers existed and an even more limited number of providers with requisite technology and expertise to process electronic information existed. Early industry participants typically owned proprietary software as there were few third-party software solutions available. The prices charged for processing this data were excessive by today’s standards. More costly than the early pricing for processing data, was (and still remains) the expense of lawyers reviewing that data once processed (“Review”). The cost of Review was estimated to be 5x the cost of processing. Without tools available to map, cull and group this data, nearly every document and email was reviewed and generally in a highly inefficient manner by lawyers who were billing the client on an hourly basis. Additionally, processing technologies were unable to produce certain types of information in a reviewable format and frequently lost components of the original documents that could have provided critical information for the case (e.g. metadata, excel formulas, email attachments). Today, technologies and processes have improved, costs are being proactively managed by clients and vendors, decision making has shifted and the competitive landscape has evolved. Some of the current industry trends are described below.
Increased Focus on Costs
Corporations facing a high level of recurring litigation have placed an increased emphasis on managing their litigation costs and are pressing their outside legal counsel and vendors to become more efficient in providing EDD and Review services. Many early participants did not adapt to these pressures and have lost their first to market
“...the largest growth
driver of the EDD
industry involves the
dramatic growth and
proliferation of
electronic data.”
Industry Review Electronic Data Discovery
advantages. A few companies that have developed their business models around sophisticated use of technologies, efficient and customizable workflows and value-added expertise in managing EDD have thrived. These companies are able to manage EDD processes at lower costs to their clients by efficiently and appropriately processing data and applying technologies that greatly improve the efficiency of Review, the largest cost of discovery.
Growing Influence of Corporations
Due to corporations increased focus on costs and increased sophistication regarding EDD, many corporations are either contracting directly for EDD services or are directing their law firms partners to work with their chosen vendors. Corporations’ active involvement in the EDD vendor selection process has allowed certain companies to grow rapidly with a high level of recurring work from a recurring corporate client base. By working more closely with the General Counsel of their corporate clients and their law firms’ clients, these companies has been able to proactively reduce client’s litigation costs and dramatically improve their processes.
Commercially Available Technologies
Today, EDD technologies address several issues that early technologies did not and most of them are commercially available. New technologies now retain important information such as metadata that provide a history of an electronic document’s creation, authorship and alterations and can be processed and reviewed in their native format (e.g. excel formulas versus output only). There are also several technologies that allow for mapping of potentially relevant information, identification of privileged information, removal of duplicate documents and grouping of documents in several ways (e.g. conceptual, key word, clustering by custodian or by similar document, etc.)
“...many corporations
are either contracting
directly for EDD
services or are
directing their law
firms partners to work
with their chosen
vendor.”
Industry Review
EDD DECISION AND LEGAL COST PRESSURES Corporation CFO General Counsel Law Firm Litigation Support Vendor Legal Costs Proliferation of electronic documents Traditional Law Firm Model Potential cost of bad outcome Outsourcing efficiencies Advances in technology Automation of processes Corporation focus on cost $
$
$
$$
$
which reduces the amount of information that needs to be reviewed or speeds the review of information by an attorney. The newest wave of technologies are categorized as “Predictive Coding”. Predictive Coding is a process of using statistically supported computer assisted decision making to identify the most relevant documents in a data set. While, today, predictive coding is primarily used for early and quick assessments, it has the potential to be used in lieu of traditional review processes.
Increased Sophistication of EDD Customers
As a result of many of the factors described herein, corporations and law firms that are consistently involved in EDD processes have invested considerable time and resources in becoming more educated about EDD. Customers are now far more discerning buyers of EDD technology and services than they were historically. This increased sophistication works to the advantage of sophisticated vendors and to the great disadvantage of less sophisticated vendors.
Improving Economics for Efficient Providers
A confluence of factors including the continued growth of data on a per case basis, stabilizing prices, growth in data hosting, declining costs of data storage, availability of leverageable third-party software pricing and continued improvement in process through workflow, allow for improving economics.
Importance and Growth of EDD Outsourcing
Due to the increasingly complex environment for managing discoverable information, an increased focus on reducing litigation costs, synergies of knowledge gained in handling numerous matters and economies of scale inherent in EDD processing and hosting, outsourcing of EDD is expected to continue to grow. While some corporations and law firms have decided to build EDD capabilities in-house, most corporations and law firms will continue to utilize outsourced providers that can access the above mentioned benefits gained through focus and dedication to this non-core business function across several clients.
Current Market Landscape
The market is extremely fragmented. According to the Socha-Gelbmann Survey, the e-discovery market has around 600 current participants. There are a small number, estimated at 30, who have a national presence, are widely recognized in the market and offer a broad range of services. Socha-Gelbmann estimates that these national providers represent a little over 50% of the total e-discovery market. The rest of the market is made up of smaller regional or local providers of which most generate below $10 million of EDD revenue. Finally, there are a number of law firms, corporations, and government entities that perform a portion of their e-discovery requirements “in-house”. While there are a number of large companies that provide some level of EDD
“...corporations and
law firms that are
consistently involved
in EDD processes have
invested considerable
time and resources in
becoming more
educated about EDD.”
Industry Review Electronic Data Discovery
technology or service, there are very few that generate substantial revenue from EDD, particularly relative to their overall size. Some larger companies that provide EDD services include: (i) consulting companies such as FTI, KPMG and Huron; (ii) document management companies such as Xerox, Oce and Merrill; (iii) risk or information management companies such as Altegrity (Kroll) and Thomson Reuters; and (iv) legal outsourcing focused companies such as Epiq Systems, Dolan Media and Document Technologies. The size of these companies EDD revenues vary greatly. Software-Focused Providers
This group includes companies that are larger enterprise type companies such as Autonomy (HP), IBM, Symantec and smaller (a few of them sizeable) EDD software companies such as KCura, Equivio, Nuix and Recommind.
The larger group has developed and acquired varying technologies that are typically targeted at providing EDD assistance at the enterprise level and may include legal hold software, storage software, processing software and/or various data management or data analytics software tools. Some sell their software directly to corporations as well as to other service providers and some even provide project management and other service-related offerings. The smaller group typically attacks the market with certain function specific software to improve EDD processing, review or analytics though some attempt to cover the full spectrum of EDD needs.
“While there are a
number of large
companies that
provide some level of
EDD technology or
service, there are very
few that generate
substantial revenue
from EDD…”
Overview of M&A and Capital Markets Activity
M&A and capital raising advisory services are VRA’s core business, so our overall view of the industry is clearly derived and influenced by this perspective. So, while many industry players view the industry as being an active place for M&A and capital investments, VRA believes past industry activity will pale in comparison to the activity that we believe will take place in the next few years.
“...past industry [M&A and capital investment] activity will pale in comparison to the activity that we believe will take place in the next few years.”
Industry Review Electronic Data Discovery
RELEVANT M&A TRANSACTIONS IN THE SECTOR
Targets Acquiror / Investor
CaseCentral Guidance Software
CPA Global Cinven
Applied Discovery Siris Capital Encore Legal DeNovo Epiq Systems DiscoverReady ACT Litigation Dolan Media Document Technologies Harvest Partners Daticon EED
Unlimited Discovery Group Esquire Litigation Solution's Assets
Document Technology
Autonomy HP
Ignite Discovery Navigant Consulting
UnitedLex Sequoia Capital
Nuix Macquarie Capital
Ivize Modus
Azalea Capital
L Discovery Westview Capital
First Advantage Symphony Technology Group
Pangea3 Caselogistix Serengeti Law
Thomson Reuters Trilantic
LECG's e-discovery unit
Huron Consulting Group
PSS Systems IBM
Stroz Friedberg New Mountain Capital
Daegis Unify
Industry Review
PRIVATE EQUITY OVERHANG
($ in billions) $60 $60 $172 $331 $445 $485 $425 $0 $100 $200 $300 $400 $500 $600 2005 2006 2007 2008 2009 2010 2011
PUBLIC MARKET COMPARABLES
Note: Market data as of March 20, 2012
Note: Represents the amount of capital raised that has not been invested.
Market Data Financial Results Multiples
% of LTM TEV / LTM
Exchange / 52-Week Enterprise Gross EBITDA Net
Electronic Data Discov ery Ticker High Value Margin Margin Sales EBITDA
EPIQ Sy stems, Inc. EPIQ 7 9.5% $698.8 65.2% 25.1% 2.67 x 10.7 x
FTI Consulting, Inc. FCN 85.9% $2,086.8 38.9% 16.8% 1.33x 7 .9x
Huron Consulting Group Inc. HURN 91.3% $958.6 38.0% 18.4% 1.58x 8.6x
The Dolan Company DM 7 1.6% $455.4 55.7 % 18.3% 1.59x 8.7 x
Thomson Reuters Corporation TRI 7 3.9% $31,241.8 32.4% 24.7 % 2.26x 9.1x
VRA Partners, LLC
VRA Partners is an independent investment banking firm that focuses on providing merger and acquisition advisory services to leading middle-market companies and private equity groups located throughout the U.S. VRA Partners also assists companies with raising capital for growth, acquisitions, recapitalization, going-private and management buy-out transactions, as well as provides fairness opinions, valuations and strategic advisory services. The professionals of VRA Partners have completed more than 500 transactions with aggregate transaction value in excess of $35 billion across a broad range of industries. The founders of VRA Partners have over 100 years of collective investment banking experience and come from a variety of backgrounds, bringing to the firm a diverse set of industry experiences and observations that benefit our clients. Notwithstanding our past experience, every transaction and company is different, and VRA Partners approaches each assignment as such, allocating the time and resources to ensure that we are informed about the dynamics of each client’s business and industry. Our transaction experience and our commitment to fully understand the opportunities facing each client allow us to effectively articulate to the marketplace how and why that client is unique. Importantly, we maintain the philosophy of treating our client’s objectives and interests as if they were our own.
For more information, please contact:
Brock Matthias VRA Partners, LLC
P 404.835.1007 bmatthias@vrapartners.com
This document is for information purposes only and has been compiled from publicly available information. VRA Partners, LLC makes no guarantees regarding the accuracy and completeness of the information or opinions expressed herein. No data or statement contained is, or should be construed as, the recommendation for the purchase, sale or retention of the securities of the companies mentioned.
