EDD: Look Who's Not Coming to Dinner

Electronic Data Discovery may, according to this piece, harbor a rich, hidden revenue and profit opportunity for firms—just bring the capability to perform EDD in-house.

Would that it were so simple.  My instincts to reject grafting this foreign body into a law firm rest on more than Management 101's dictum to "stick to your knitting" (or, in consultant-speak, "core competencies").  To begin with, there are evidentiary and potential malpractice issues:  When your firm handles electronic discovery in-house, you will need to be prepared to testify as to the "chain of custody" of the resulting work product.  The invitation to the cross-examiner to probe the swamp of conflicts of interest will be irresistible.   And, should anything slip between the digital stools, suspicion may arise not just of simple error or innocent lapse, but of evidentiary spoliation.

But this is a blog about economics, not about the Rules of Evidence or insurance premiums.

EDD appears to me almost uniquely ill-suited to bringing in-house because of some of the unusual characteristics of it as a market (some of which, in fairness, the author acknowledges):

• The demand for EDD capacity is innately characterized by spikes and troughs; capacity will, more or less continually, be lying idle or be completely overwhelmed, reducing you to outsourcing willy-nilly.  "You cannot build the church for Easter," but Easter happens several unpredictable times a year with EDD.
• EDD, quintessentially a hardware- and software-driven expertise, will be in a constant state of evolution.  An investment in EDD resources today will be obsolete—when?  One year?  Three?  Will they be fully amortized well before that?  And will you know what to buy at that point?  Remember, this industry is still young; it barely existed five years ago.
• Finally, the structure of the EDD industry itself, I would argue, makes building internal EDD capacity a remarkably short-sighted exercise.  I say this because the industry itself is in a profound state of disequilibrium, with anyone who's ever walked past a copying machine, it seems, declaring themselves an EDD vendor.   Profit margins are (in the short run) very high because demand is all but inelastic and clients needing EDD are usually in a frame of mind ranging from nervous to panicky.

These conditions will abate.  EDD is essentially a commodity business, with no meaningful brand differentiation on the current vendor landscape, which adds up to an industry susceptible to large-scale and rapid consolidation.   Once this process starts, margins will shrink and vendor shake-out's will occur.  Best of breed will survive.  But if you've built in-house capacity, the "fallacy of sunk costs" will tempt you to continue using it even if superior alternatives exist outside.

Iin the longer run, I challenge the notion that EDD is an industry:  I believe it's an ancillary expertise of firms who are already in a variety of neighboring industries, such as document management, storage, and forensics.  According to the Economist, in its current special issue on "The State of IT," at the turn of the century large companies had "Chief Electricity Officers" to manage this critical, arcane, and unpredictable resource.  I predict a similar future for "Chief EDD Officers."