They are the data crunchers of the legal world, doing the digital equivalent of sifting through reams of documents in search of key phrases that can be used by companies as evidence to fight lawsuits or respond to subpoenas.

These data crunchers are known as “e-discovery vendors,” and they are part of a growing and lucrative industry built around the management of electronic data. E-discovery includes any kind of electronically stored information —
e-mails, text messages, and Facebook and Twitter posts — that law firms and corporate legal departments must gather, analyze and hand over to adversaries in litigation, or to the government in federal investigations into corporate malfeasance.

Many regard e-discovery as an unglamorous yet important part of the legal process, but it’s becoming a hot topic among leaders of law firms for one reason: money.

“We care about it because of the cost,” said Scott Kane, a Squire Sanders lawyer who leads the firm’s e-discovery and data-management team.

As the volume of information that companies store in the cloud is ballooning, so are the costs for sorting that data. Hundreds of thousands of dollars can be spent managing electronic data in a major lawsuit or government investigation, and that cost is getting passed on to corporate legal departments when companies are trying to cut back on legal spending.

“So much of e-discovery is about how to effectively get at the evidence in an economical way,” Kane said.

In the pre-digital age, law firms paid armies of junior lawyers by the hour to comb through documents and pick out relevant information.

“That way is not economical anymore,” Kane said. “When you had a single box of documents to review, you could pay an associate to go through it. When you have the electronic equivalent of hundreds of those boxes, you can’t pay a law firm associate rate.”

Today’s e-discovery companies are replacing that manpower with technology that uses “predictive coding,” which scans a sample portion of data for key words and phrases, then applies that to the rest of the data — essentially replacing human labor and judgment in picking out what’s relevant.

This approach had been used for years, Kane said, but did not really take off until recently, after several court decisions endorsed the practice.

“For many years, there wasn’t a court case saying this approach was okay,” he said. “It didn’t mean it wasn’t okay, it just meant there wasn’t an explicit decision that authorized the use of this approach. In the last six to 18 months, there have been several cases around the country that have endorsed this approach. Now, everyone — law firms, e-discovery vendors — are running around saying, ‘Of course we do predictive coding.’ That’s the flavor of the month.”

E-discovery companies typically charge by the hour or by gigabyte of data but are increasingly moving toward flat fees — mirroring what law firms themselves have done in the last few years to give corporate clients more predictability in legal spending.

“The approach we’ve been taking is to do everything by fixed fees, which is helpful to corporations,” said Abtin Buergari, chief executive of the District-based e-discovery provider Modus. “We can give them the cost upfront, so they can give the client the cost upfront.”

Buergari co-founded Modus in 2008. The company has since grown to a 210-employee operation that in 2011 earned $7 million in revenue.

Companies like Modus are poised to grow as the protection of vast quantities of data continue to be a prime concern among corporations. Buergari said that’s because the companies bring technical expertise that law firms are often ill-equipped to handle internally.

“Law firms are not technology companies, just like Modus is not a law firm,” Buergari said. “The most critical [company] data goes to a law firm. The CEO, CFO, COO — they [have] the kind of information the DOJ wants to look at in [antitrust investigations]. When you take their e-mail and hand it to a law firm whose business is not data management, it’s probably not the best thing. . . . I’d say in the next three to five years, we’ll see fewer law firms doing it in-house.”