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."