There has been progress towards answering this question, thanks mainly to the analyst community. George Socha and Tom Gelbmann’s EDRM framework has been immensely helpful in breaking down electronic discovery into its component steps. Other analysts, like Debra Logan at Gartner, were quick to embrace the framework, prompting every software provider to follow suit. As a result, there is today a common language that everyone uses to describe the e-discovery process.

The Electronic Discovery Reference Model (EDRM) breaks down the e-discovery process into a series of steps. Companies looking to buy e-discovery software to lower costs typically map different software products to each of these steps, to make sure that they cover the entire process.

But having a universally-agreed framework is only half the answer. To eliminate customer confusion, there also needs to be agreement on how different software products fit into the framework. This is especially important since there is no single, end-to-end solution for e-discovery which covers all aspects of EDRM. So customers are forced to think about how different software solutions fit together. And that is where things begin to fall apart.

Many software vendors feel it is advantageous to claim that they do everything, even though they do not. Customers are rightly suspicious of those claims, and so press vendors to provide more detailed information – hence the question, “when you say you do e-discovery, what exactly does that mean?”

In light of that, how can litigation support teams, corporate counsel, or legal IT people figure out which e-discovery solution best meets their needs? From observing this decision-making process hundreds of times, I have found 3 simple steps are incredibly helpful.

Step 1: Read the analyst reports

Two reports in particular make for required reading. One is Gartner’s MarketScope Report, which is available for free at certain sites; the other is the 451Group’s recent e-discovery report, which is summarized in a publicly available presentation. The helpful thing about the 451 Group’s report is that it tells you which software companies do which parts of the EDRM process. You do have to buy the report to get the full picture (it’s well worth it!), but the publicly available presentation will give you a flavor for their analyis, and I have drawn from that presentation in the figure below:

Analyst firms like the 451 Group map software vendors to the EDRM framework according to what they actually do, which is often different from what software vendors claim they do.

The 451 Group’s analysis highlights several important points. First, it shows that there is no single end-to-end solution. Even the products of giants like EMC (SourceOne), HP (IAP), and IBM (CommonStore) only solve one piece of the puzzle, information management. Second, it shows that customers have choices at each stage of the EDRM process. For example, to solve the problem of identification, collection, and preservation of electronic information, customers can choose from solutions as diverse as Guidance EnCase (forensic collection), Index Engines (back-up tapes) and Mimosa NearPoint (email archive). Third, it provides an independent assessment of what vendors do, as opposed to what they may claim. For example, Kazeon claims analysis and review capabilities, whereas the report shows its product does identification, collection, and preservation; Recommind claims its Axcelerate eDiscovery and MindServer products do processing, whereas the report finds that they do not.

Step 2: Evaluate the products prior to purchase

Just as anyone would test-drive a car prior to purchase, it’s critical to test-drive e-discovery software. Any vendor should be willing to provide their software free of charge for an evaluation on-premise. The most effective evaluations are when the customer uses the product themselves, either on a live case or test data. This is far preferable to just sending the data to the vendor who then loads it into their system, as in that scenario there are too many opportunities for the vendor to hide their product’s shortcomings.

Step 3: Check references carefully

The trick with references is to insist on relevant references. It’s not good enough for the vendor to dredge up some random person who says nice things; or even a credible knowledgeable person who is using the product in a completely different way. For example, if a company is happy with Autonomy’s IDOL for enterprise search, that does not tell you much about what Autonomy might be like for e-discovery. What really counts are references from other customers who are using the product for the same application that you are.

All this can sound like a lot of work, but I have seen people go through the process in as little as a month, and be much happier for it. A little work up front can save a lot of time (and heart-ache!) later on.

My own research, which has involved talking to dozens of attorneys, litigation support professionals, and in-house counsels, suggests a more nuanced picture, with the recession spurring changes to the type of electronic discovery that’s being conducted. Consider the following data points:

• According to a practice leader at a large e-discovery consulting firm, “discretionary litigation” such as many IP-related matters is down significantly, as firms are less inclined to fight every patent claim. But conversely, litigation related to the financial crisis, and regulatory inquiries from bodies such as the SEC and the FDIC, are up.

• According to a partner at a major law firm, second requests are down, along with M&A activity generally. The example he gave is the car industry: a year ago, if Chrysler had talked of merging with GM, there would have been all sorts of anti-trust concerns; today, the government is likely to encourage the deal. But on the other side of the coin, there are a lot more contract disputes as companies cannot live up to commitments they made in better times.

• According to a GC at a leading technology company, his CFO has become intensely interested in e-discovery as potential area for cost savings. As a result, the in-house legal team is actively evaluating in-house solutions to both lower costs and increase predictability.

I could go on with many more, similar anecdotes, but the themes coming out of these conversations are the same. More and more enterprises are waking up to electronic discovery as a way to make their cost savings targets for 2009. These are value-oriented buyers, who want cost effective solutions with a predictable fee structure. They are more cautious about what kind of litigation to pursue and are more inclined to settle cases where possible. That suggests more early case analysis, as a pre-cursor to settlement talks, but less document-by-document linear review, since fewer cases make it to the stage where linear review is necessary.

These shifts in the type of e-discovery being done will have a big impact on the vendor landscape. It promises to be a very interesting new year.

Leaving aside the personalities involved, and the history of bitter rivalry between these two companies, it’s easy to see why Guidance’s board rejected the offer. First, it’s only a 19% premium over Guidance’s share price on October 6, the date that the offer was made. Second, given 23 million shares outstanding, AccessData is offering a total price of just over $100 million for a company with $90 million in revenue and about $25 million in cash. Compare that to other e-discovery acquisitions, such as FTI’s $88 million purchase of Attenex or Iron Mountain’s $158 million deal for Stratify, each of which only had about 30% of Guidance’s revenue, and you cannot help feeling that the price is very low. Third, there’s the question of where AccessData will come up with the money. It’s hard to believe they happen to have $100 million in cash lying around and, with the recent market meltdown, debt is much less of an option than it used to be.

Still, this is not necessarily bad news for Guidance Software. Since its IPO in October 2006, the stock has fallen from a high of $17 per share to a low of $2 per share. The public markets are very unforgiving to small software companies. Guidance has recently made some bold moves, announcing usage-based pricing for its e-discovery product and several notable customer wins, but nothing has moved the stock. So an acquisition offer may be just the ticket to boost the share price, especially if it encourages other, more attractive acquirers to throw their hats into the ring.

Stay tuned, this might get interesting.

By comparing this year’s results to the 2007 survey, you get a sense for how much has changed in the e-discovery world over the past 12 months:

Top E-Discovery Software Companies

Note: arrows show change to rankings from last year’s Socha-Gelbmann Survey

Autonomy and Clearwell move up to the Top 5, overtaking Attenex and CT Summation which slip back to the second tier. There are also 3 new names ranked 6 through 10 (Epiq, iConect and Symantec) who displace Cataphora, Doculex, ISYS, and Oracle, none of whom even make it into the top 15. In other words, 70% of the rankings have changed since last year.

If a litigation support manager were to focus only on the Top 5 in making her ediscovery software decision, she would have a choice of some very different solutions. Autonomy positions itself as a high-end (expensive) platform for corporations, while Lexis offers a comprehensive toolset for law firms. Guidance and Clearwell are complementary in that both provide best-of-breed solutions for parts of the EDRM model: Guidance is the leader in collection and preservation, while Clearwell is the leader in processing, analysis and review. Finally, FTI takes a services-based approach which centers around RingTail, its hosted review application.

Looking lower down the list, there were some other interesting results, primarily around which companies were NOT ranked. Kazeon made it into the third tier (ranked 11-15) whereas StoredIQ, its main competitor, did not. Nor did Recommind break into the rankings, despite making a major push into e-discovery from knowledge management over the past year. But the most striking absentees are PSS Systems and Exterro, which have pioneered litigation hold management for Fortune 100 companies. I can only guess that they cover too much of niche market to warrant inclusion in an industry-wide report.

Top E-Discovery Service Providers

In contrast to the world of software, e-discovery services saw much less movement in this year’s rankings:

Note: arrows show change to rankings from last year’s Socha-Gelbmann Survey

There was only one change to the top 5: Fios moved up, displacing Guidance which plummeted 10-20 places down to a 16-25 ranking. In addition, there were two new players in the top 10, Epiq and Huron, who edged out Electronic Evidence Discovery and Ernst & Young.

Conclusion

Changes to the software rankings reflect broader changes in the litigation software market. As litigation discovery has moved in-house, corporations have become a major driver of purchase decisions that were previously left to law firms. Many software companies, such as Attenex, have struggled to make this transition, while others, such as Clearwell, have capitalized on it. There has been no such change in the service provider world and, as a result, the rankings are relatively stable.

It will be interesting to see what happens next year. Every other software space is dominated by a small number of players, like Oracle for databases or VMWare for virtualization. If the same is true for top ediscovery, then we can expect many fewer changes to the software rankings in future surveys as the leaders pull away from the pack.

Learn More On Litigation Support Software & Frcp Electronic Discovery.

The reason is obvious: Attenex Advantage partners – such as BDO Seidman, Deloitte & Touche, DiscoverReady, DTI Global Document Technologies, Forensic Consulting Solutions, Navigant Consulting, SPI Litigation Direct, VMAX Consulting and 10-15 others – compete directly with FTI. If they must now rely on FTI for their Attenex technology, it puts them at a massive disadvantage when competing for business. FTI could easily undercut them on price, since it no longer pays usage fees to Attenex; or, FTI could promise additional features in the Attenex product that its competition cannot match. It could certainly claim to be the world’s greatest Attenex experts (after all, who knows Attenex better than Attenex itself?). Perhaps worst of all, every time an Attenex Advantage partner works on a client using the Attenex product, it has to inform FTI at the end of the month so that it may be invoiced for usage, thus enabling FTI to track its client engagements.

Yes, FTI will likely make all sorts of promises about “Chinese Walls” and continuing to support other Attenex Advantage partners. But those promises are impossible to enforce (ask the editor of the Wall Street Journal!), and FTI could change its mind at any time, leaving service providers which depend on Attenex in the lurch. I don’t know anyone who would take that risk.

So the single greatest impact of the FTI-Attenex deal is that every other “Attenex Dis-Advantaged” partner needs to find an alternative e-discovery solution – and fast!

A second impact can be surmised from the market’s reaction to the deal. As the chart shows, FTI’s stock immediately popped 10%, adding about $300 million to its market capitalization. Partly, that’s because FTI negotiated such a great deal. It purchased Attenex for only 3.5x revenue, in a transaction that is neutral/accretive to earnings. Partly, it’s because FTI has a great track record with software acquisitions. For example, it acquired RingTail (a hosted review platform) in 2005 for $34 million, and today RingTail generates over 3 times that amount in revenue. Personally speaking, I have always been impressed by FTI’s team which is without doubt among the best in the business.

The interesting thing in this acquisition, unlike many others, is that the value will not come from selling the acquired product, since FTI is doing that already. In fact, FTI has been selling Attenex for years, and has even integrated it with RingTail. Rather, my guess is that FTI will use Attenex to grow its consulting business in several ways, such as:

1. By convincing clients to switch consulting firms, not technology. Let’s take a hypothetical example and say Ford is presently using Attenex through LECG. If LECG now uses a different electronic data discovery solution, then Ford is left with a choice: keep LECG and lose Attenex, or change from LECG to FTI and keep Attenex. Ford’s decision will, of course, be driven by many factors, and it will be interesting to see what happens in scenarios like this.
2. By winning a greater share of e-discovery dollars. Today, companies primarily engage FTI on life-threatening issues: stock option investigations, merger 2nd requests from the DoJ/FTC, and so on. By leveraging Attenex’s brand, FTI might extend that to also cover everyday e-discovery issues like run-of-the-mill litigation and regulatory inquiries.
3. By building an e-discovery footprint behind the enterprise firewall. Attenex has struggled to sell its product for on-premise deployment at enterprise customers in the past. Its website has no customer logos and I’m only aware of a couple of installations, neither of which is publicly reference-able. FTI’s strong consulting business might help change that and make it easier for enterprises to adopt Attenex.

I am sure there are other ways for FTI to get value from the deal that I am not smart enough to think of. My point is that, given FTI’s leadership talent and the scope of its consulting engagements, there are lots of things FTI could do with Attenex to create shareholder value far in excess of the acquisition price. That’s why I believe the second impact of the deal is that it will have a positive impact on FTI’s core business.