Is Cloud Computing a Threat to eDiscovery Firms?

There is a deep misconception about how revolutions happen. We often forget that the images of crowded squares and symbols of power destroyed are the final effects of processes that were set in motion some time before those dramatic events.

The world of business faces similar revolutionary processes whose effects – we are told – are to be welcomed as they will ultimately benefit consumers. The Austrian economist Joseph Schumpeter coined the term “creative destruction” to indicate these situations, signaling that destruction has a benign connotation if it is a business that is wiped out.

Similar to political revolutions, business revolutions rarely happen overnight and their seeds are often very visible from the start, not only in hindsight. Even if consumers welfare is eventually increased, every revolutionary event leaves casualties on the ground. One such event is about to hit the eDiscovery market.

The advantages and opportunities that Cloud computing offers to eDiscovery customers are so enormous that many eDiscovery providers failed to notice that, by advertising them to their clients, they were unconsciously placing their current business at risk.

1)    The Cloud is not taboo anymore

This is Major Tom to Ground Control

I'm stepping through the door

And I'm floating in a most peculiar way

And the stars look very different today

-       David Bowie, Space Oddity

We have all been in meetings where lawyers and corporate executives were skeptical about beaming their most sensitive and confidential data to the cloud. It is perfectly human to feel more secure when what we care the most about is under our immediate and direct control rather than in a server in a remote area of the world. Cost savings or increased performance were not, by themselves, sufficient to change this perception.

Cloud computing providers have had to make significant investments to show that the security of a dedicated hosting infrastructure is not only comparable but likely superior to an on-premise solution, especially if we consider the costs and expertise needed to maintain it over time.

They must have done a few things right if they convinced the CIA and the FBI to host entire departments’ data in the cloud.

Looking at my personal experience, I don’t recall any meetings in the last year or so where the mention that our eDiscovery solution was hosted in the Cloud raised an eyebrow or triggered any concerned follow-up questions. The Clouds look very different today.

2)    A feature not a product

People that have spent too much time in an industry often tend to argue more about the details rather than challenging the underlying assumptions of that specific domain, which are unconsciously treated as dogmas.

In the eDiscovery domain one of these assumptions is that to successfully conduct a review of electronically stored information (ESI) it is necessary to license a document review platform. It seems impossible to argue against this statement as document review platforms find their reason of existence precisely in the need of finding a way to efficiently index, search, review and produce unstructured electronic data. However, Cloud computing and the ecosystem built around it will very soon challenge what has always been one of the cornerstones of eDiscovery industry.

In economic theory it is said that hierarchically organized firms exist because the transaction costs of coordinating production through the market exchange, given imperfect information, are greater than within the firm. By the same token, a software that bundles together several functionalities in an organized fashion is a viable economic option only if it is cheaper than separately sourcing and implementing all these functionalities from the market.

Purchasing and implementing separate software solutions to perform all the different functionalities needed in eDiscovery has been so far an unthinkable strategy. Multi-purpose document review platforms gained market share because they acted as a one-stop shop for all these needs (either by implementing these core functionalities directly within the software and\or by providing additional capabilities via an API or by different forms of integration).

Cloud computing is about to dramatically disrupt this business model by shifting the center of this ecosystem from the software to the data center.

In every eDiscovery process, the most important piece are the electronic data. Today, organizations are not only trusting the Cloud for their eDiscovery needs but they are also migrating large chunks of data from their onsite servers to AWS, Azure, Google and the likes. When data are already hosted in the Cloud the market dynamics change significantly. Each Cloud provider has optimized its environment to offer a set of additional services to the customer, including many of those offered by an eDiscovery platform. It is therefore perfectly reasonable to imagine that each specific functionality of a document review software will soon have to compete with one or more Apps or Add-ons offered by the Cloud computing provider.

3)    Faster, Cheaper, Better

The competition between native Cloud apps and traditional document review platforms has a clear winner. For 3 important reasons:

Positional advantage. The localization of data creates the first important imbalance in the race for the customer’s business. Identifying, collecting, exporting and processing the required data are time consuming processes. In addition, the current business model of almost every eDiscovery firm includes a specific charge for every GB processed through that firm’s indexing and extraction engine, thus adding further monetary costs to these tasks.

The presence of the data already in the Cloud will allow customers to either a) pre-index the data during the upload process and\or at specific time intervals or b) quickly and easily select the custodians and data source under investigation and immediately trigger the processing of these data. Any of the selected options will dramatically reduce both the time and the costs needed to get a first insight into the data set.

Elasticity. One of the greatest advantages of the Cloud is its (almost) limitless scalability. Computing power, data storage and virtual machines can be added almost instantaneously and, in some instances, the infrastructure itself runs software designed to detect spikes and drops in activity and optimize the environment accordingly and automatically. These capabilities allow customers to keep costs to the minimum when the extra capacity is not needed while, at the same time, being able to quickly upscale their infrastructure when a large project kicks in (usually a Friday evening with the review to start on Monday morning).

Full On-Demand customization. A complete de-construction of the document review platform will allow each of its functionality a) to be purchased separately and only for the time needed and b) to compete within the marketplace set up by the Cloud computing provider.

In the Cloud, customers will only be charged for what they need and only for the time they need it (why pay for the production module if it is only required for a specific amount of time before key deadlines?). In addition, customers will be able to pick and choose translation engines, analytics, machine learning modules, business intelligence dashboards and many other tools directly from the cloud computing marketplace. Those apps will have already been tested and successfully implemented within the environment so that they could be immediately run on the target dataset.

Document review platforms that already operate in the Cloud can compete on the scalability side, although many are hosted in the Cloud in the same way they were hosted on-premise (i.e. they are Cloud-native applications) and they may be unable to take full advantage of an elastic environment. Unfortunately, eDiscovery providers will not be able to match the same level of customization, speed and price structure that will be achievable within the Cloud provider’s environment.

4)    What to do next?

The eDiscovery landscape is changing but this doesn’t mean that commercial opportunities will decrease. Simply put, firms will have to adapt their business model along two potential trajectories:

a)     EDiscovery software makers will need to re-direct their efforts towards the new “modular” cloud platforms. On one hand, this will require higher specialization as competition will soon move from the platform level to each module of the platform (i.e. focusing on the indexing engine, machine learning and analytics individually, not as bundled together). On the other hand, forward thinking eDiscovery providers should try to conquer the Cloud marketplace by releasing an App version of their platform to be purchased on e.g. the AWS marketplace.

These two options appear to be in contradiction with each other only superficially. In fact, for an eDiscovery software provider it will make a lot of sense to not immediately offer just the modular version of their platforms. The eDiscovery domain is still dominated by information asymmetry and customers will need some time to effectively compare the various competing modules, and their initial preference will still probably be an out-of-the-box solution. In addition, this also represents a legitimate business opportunity. Once the software is available in the App store, it will be cheaper and faster to install in the customer’s Cloud where the data reside rather than exporting that data to the eDiscovery provider’s Cloud where the software is currently installed.

b)    EDiscovery service providers will see an increase in demand for professional expertise not only limited to digital forensics, project management and document review but also covering infrastructure management, optimization and troubleshooting. A specific niche will be data migration from onsite servers and legacy systems to the Cloud, from the perspective of an eDiscovery exercise (e.g. integrity of the data, speed of transfer, indexing options, normalization of data from proprietary databases).

This is excellent news for eDiscovery practitioners who will probably be in even higher demand in the near future, while eDiscovery providers will likely have to adapt to a reality where processing and hosting revenues will drop significantly. How quickly firms transform their business models - which for most of them is currently tilted towards data ingestion rather than professional services - will determine their success in the marketplace.

What do you think? Is the future of many eDiscovery firms at risk or is direct competition from Cloud providers an unrealistic possibility?