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Tuesday, January 29, 2008

E-Discovery 2.0 Has Moved To A New Home

After 9 months struggling with the limitations of the simple-but-constraining Blogger platform, I am moving to WordPress. Please reset your RSS feeds to the following URL: http://www.clearwellsystems.com/e-discovery-blog/wp-rss2.php

You can also click here to see my latest posts on HP, ZANTAZ, LegalTech and more.

Tuesday, December 18, 2007

Top E-Discovery Software Vendors: Responses to Yesterday’s Post

Yesterday’s post about the top e-discovery software vendors prompted a couple of interesting comments. George Socha posted a response here, disagreeing with my conclusions; and someone else (“top8”, whoever that is) asked whether one should “always listen to the top 5-10 songs on the list…[or] use the top 5 software products, regardless of one’s situation.”

To clarify, I whole-heartedly agree with George that there is no such thing as a “best” e-discovery service provider – as George says, it really does depend on your situation and I can think of many cases where a smaller, less well-known firm is a better choice than a national brand.

But e-discovery software is different for 2 reasons. First, and most importantly, in software there are increasing returns to scale which do not exist for service providers. The more companies that use a particular software product, the better that product becomes. Speaking from personal experience, when you have a large number of demanding customers, they force you to make your product better – and give you the money to do it. That’s why most technology markets are incredibly concentrated: everything from databases (Oracle) to search engines (Google) have a single dominant player. We are still in the early days of the e-discovery software market, but ultimately I expect it will follow suit and consolidate around a very small number of players.

The second difference between e-discovery software and service providers is that enterprises cannot change their software vendors as easily as they can change their service providers. Once software is deployed behind the firewall, it is fiendishly difficult to get it out, requiring enterprises to pick a single product for all cases. By contrast, it is easy to change service providers, so enterprises can pick the most relevant expertise on a case-by-case basis.

To answer the question posed by “top8”, I am not suggesting that everyone should only read Harry Potter, watch American Idol, and (Heaven forbid!) listen to Britney Spears. Those are matters of personal taste where diversity is what makes for a rich, vibrant society. But there are very good reasons why so many corporations rely on Veritas for backup software, Oracle for databases, Symantec/McAfee for anti-virus, IBM for developer tools, and so on. In software, the best products only get better. That’s why, 5 years from now, the list of top e-discovery software vendors will be even shorter.

Friday, December 14, 2007

Top E-Discovery Software Vendors

There are two independent analyst reports identifying the top e-discovery software vendors.

The first, published in June 2007, is the Socha-Gelbmann Annual Electronic Discovery Survey. The authors, George Socha and Tom Gelbmann, probably know more about e-discovery than anyone else you are likely to meet. As someone who has filled out their 178-page survey, I can tell you it is excruciating in its detail and incredibly rigorous. According to the report, George and Tom contacted nearly 1,000 individuals and collected detailed data from 115 organizations.

The second analyst report is Gartner’s MarketScope, which is published today (December 2007). Its author, Debra Logan, is fast emerging as one of the leading lights of e-discovery and has great instincts about the market. For her report, Debra tells me that surveyed 30 vendors and checked over 90 customer references.

The results from the two reports are as follows:

Socha-Gelbmann Top Software Vendors (1) Gartner Top Software Vendors (2)
CT SummationGuidance
FTIIron Mountain/Stratify
ISYS Search SoftwareKroll
Zantaz (now Autonomy)Orchestria
PSS Systems
(1) Companies listed as “Top Electronic Discovery Software Providers Based on 7 Criteria” (Table 19 and 20), listed in alphabetical order. (2) Companies awarded ratings of “Positive” or “Strong Positive” (Figure 1), listed in alphabetical order.

Why are the lists so different? Primarily because of two main factors:
  1. Gartner’s list mixes service providers and software companies whereas Socha breaks them out separately. The Socha report has an entirely separate list for service providers.

  2. Socha’s report was completed 6 months earlier than Gartner’s. In that intervening period, several new players entered the e-discovery market. For example, Kazeon was ranked by Gartner earlier this year a “niche player” (lower left quadrant) in the enterprise search market, and has not been in e-discovery long enough to participate in the Socha study (or, if they did participate, they did not have enough e-discovery customers to gain a high ranking).

The first conclusion to draw from these lists is that any vendor not in them is probably not worth considering for e-discovery. If neither Socha nor Gartner ranked them highly, then the vendor either could not provide compelling customer references or has lost competitive bake-offs to someone who is on the list. Either way, they are best avoided.

The second thing that stands out is how different these lists are. Of the 21 vendors identified by Socha and Gartner, only 5 are ranked as top e-discovery software vendors by both of them. Those 5 are Attenex, Clearwell, FTI, Guidance, and LexisNexis. So, if you are an enterprise looking for an e-discovery solution, it is clear who you should call first.

Finally, it is worth noting that both these analyst reports are relatively new. This is the third annual survey for Socha, and the first MarketScope for Gartner. That speaks to the fact that e-discovery software is a new, fast-growing product area. More and more enterprises are adopting e-discovery software solutions, and asking analysts about them, because they offer such a compelling ROI.

Tuesday, December 11, 2007

Seagate Acquires MetaLINCS For $80 million

First ZANTAZ, then Stratify, and now MetaLINCS – all within 5 months. The e-discovery space is consolidating fast!

On December 6, Seagate announced its acquisition of MetaLINCS. Financial terms were not disclosed, but my sources tell me that the price is $80 million. Given that MetaLINCS is a 50 person company with fewer than 25 customers , this is a fantastic outcome and I congratulate the MetaLINCS team. My educated guess is that in 2007 MetaLINCS will earn $5 million to $10 million in bookings, making this a healthy multiple of 8-16X. Contrast that to the 5X revenue paid by Iron Mountain for Stratify, and MetaLINCS shareholders clearly got a great deal.

That still leaves the question of why Seagate, a non-entity in e-discovery, would want to pay such a rich price. The answer, according to Seagate, is its desire to grow beyond manufacturing hard drives by having its services group provide a broad range of “solutions”, including archiving, back-up, recovery, and e-discovery. EVault, acquired last year for $185 million, is the backup and recovery part of that equation; MetaLINCS is the e-discovery component; and, say the analysts, don’t be surprised if an archiving acquisition is next.

Does Seagate’s entry into the e-discovery market make any sense? I don’t think so, and here’s why: there is a mismatch between Seagate/MetaLINCS and its target market. Seagate’s services offering will appeal most to mid-market companies which often outsource archiving, backup, and recovery. Seagate admitted as much when it announced the EVault deal. But the mid-market will be the last place to adopt e-discovery software like MetaLINCS; it is the Global 2000 who will move first, as they are the most sophisticated and in the greatest pain. For the limited amount of mid-market e-discovery business that is out there, Seagate/MetaLINCS will compete with every other service provider, from Kroll to Stratify to the hundreds of mom-and-pop shops across the country.

Net net: this acquisition is great for MetaLINCS, is small enough to be immaterial for Seagate, and will likely have no impact on the e-discovery market which will be won and lost in Global 2000 companies that are not interested in a Seagate/MetaLINCS service offering.

First ZANTAZ, then Stratify, and now MetaLINCS. It makes you wonder who will be next.

Monday, December 10, 2007

An Eventful Day

Thursday, December 6 was a big day for several e-discovery companies. Starting on the home front, it was Clearwell’s 3rd birthday and we celebrated by announcing our deployment at Bear Stearns. Looking at where we are now, it’s hard to believe that 3 years ago the company consisted of a few guys with an idea. Today, we have over 100 customers who rely on Clearwell for e-discovery, and we are thrilled to count Ruben, Christoph and the team at Bear Stearns among them.

That same day, MetaLINCS announced its acquisition by Seagate (more on that to follow shortly), and Guidance announced the appointment of a new CEO. Victor Limongelli was promoted from President to the top job after what sounds like a comprehensive evaluation of both internal and external candidates by Guidance’s board. I always enjoy my conversations with Victor and applaud Guidance’s decision.

All in all, an eventful day.

Wednesday, December 5, 2007

ZANTAZ Announces Desktop Legal Hold Solution and Takes on Guidance

Technology companies are notorious for aggressive marketing, whereby they either announce products that do not exist or wildly exaggerate their capabilities. So when ZANTAZ announced its new Desktop Legal Hold solution alongside an image claiming that it can help you “become your company’s superhero”, I was naturally wary. Reading the press release only heightened my suspicion that ZANTAZ’s marketing department may be running ahead of its product development team. For example:

  • The release cannot name a single customer using Desktop Legal Hold. The best ZANTAZ could do was quote a retired executive from BASF, who spoke about the potential value from this type of solution (not the actual value realized from this specific solution by a current customer);

  • ZANTAZ makes a series of wild claims about the solution. My personal favorite: “Desktop Legal Hold automatically overcomes spoliation, obfuscation, misclassification and non-classification of important data” Need I say more?

  • Desktop Legal Hold is not listed in the “Solutions” or “Products” sections of ZANTAZ’s website. Perhaps I’m missing something, but I can only find it mentioned in the press release.

All of this will be re-assuring in the short-term to Guidance, whose Encase product is the leading desktop collection and preservation tool. I doubt customers will be rushing to entrust something as important as their legal holds to ZANTAZ until the product looks more proven, and its capabilities are more clear.

That said, ZANTAZ has clearly signaled its intention to attack Guidance’s core market. ZANTAZ wants to make it easier for its customers to get data into its archives. And it wants a piece of the revenue in this market: from Guidance’s quarterly financials, if you deduct revenue from services and its e-discovery product, it looks like the Encase business is worth $30-35M per year in license revenue. That’s a meaningful prize for ZANTAZ.

It will be interesting to watch how this develops.

Monday, November 26, 2007

Postscript To The Iron Mountain-Stratify Deal

In the past couple of weeks, I have spoken to several people close to the Iron Mountain-Stratify deal, and it has been interesting to hear their different perspectives.

The one thing they all agree on is that, as a business, Stratify was doing well. From a combination of news reports, Iron Mountain’s statements, and my various sources, I learned that Stratify’s revenue grew from $24M in 2006 to $30M this year. That is below the $40M+ it forecast earlier in the year, but healthy growth all the same. Gross margins are an impressive 60-70%, which is great for a services business, and profit margins are 20-30%. The vast majority of its 110 customers are law firms but – I know from personal experience – it has had some success in the enterprise. Net net: Stratify was in pretty good shape.

But at that point, opinions begin to differ. I heard 2 competing interpretations of the acquisition:

1. It’s a good deal for all sides

This was my initial reaction and the topic of a blog post written on the day the deal was announced. It has since been echoed in the press and by the analyst community. The story goes something like this:

Everyone wins from this deal. Once you factor in assumed stock options and retention packages along with the $158M that goes to existing shareholders, Stratify gets a multiple of 5.5X current year revenue, which is high for a services business. It also gets to operate autonomously under the Iron Mountain umbrella, with (supposedly) minimal interference from back East. For its part, Iron Mountain gets a growing, profitable business which it can grow more quickly, by selling into its installed base, and more profitably, by leveraging its existing sales force.

2. Stratify sold too cheap, too early

Why sell a profitable, growing business, especially one in a rapidly growing market like e-discovery? Given its growth trajectory, won’t an independent Stratify be much more valuable in 2-4 years time than it is today? Why repeat the mistake made by shareholders of VMWare and MySpace, who sold billions in value for a few hundred million?

The answer, say people who hold this view, has nothing to do with Stratify’s business and everything to do with its shareholders. On the one side, Mobius, the venture capital firm which owned 70% of the company, wanted out – the firm is winding down, some of its partners are raising a new fund and wanted an outcome to boost their VC track records. On the other side, the founder was tired after 8 years slugging it out and wanted a payoff. The business is not suitable for a financial buyer (sales are too lumpy and unpredictable, making it hard to take on large amounts of debt), so an acquisition was the only option.

With the benefit of more time to digest the deal, I have come to feel that both views are in fact correct. It’s a good deal for all sides, even though there’s a strong case that Stratify sold too early. Regardless, there’s still a lot for the Stratify team to feel good about – and, following the MySpace example, they can always go back and ask for a pay rise.

Monday, November 5, 2007

Advice For Service Providers: Leverage Technology To Swim Upstream

As companies use Clearwell’s e-discovery solution on more and more cases, I often find myself speaking to their litigation support service providers. Other than being in the same industry, these service providers have nothing in common: they vary from small shops to large, national companies; from unprofessional cowboys to highly principled professionals. But despite these differences, they all say the same thing: theirs is a very tough industry.

Perhaps everyone says that, but in their case there are good reasons for believing it to be true. It is very hard to differentiate litigation support services, other than by price; law firms make for demanding customers; barriers to entry are low so there’s constant price pressure from new entrants; and, it can take a long time to get paid, given that you are at the end of a long chain (enterprises must first pay law firms who then pay service providers).

That led me to wonder, “What would I do, if I were in their shoes?” The answer is that I would seek to differentiate my service by leveraging technology to swim upstream.

Neither of these ideas (leveraging technology, moving upstream) is original in its own right. Every litigation support service provider leverages technology in some way or other, and many have even built their own in-house review platforms. The larger ones have also sought in one way or another to swim upstream, meaning sell to their customer’s customer (the enterprise) directly rather than to law firms who then sell their services to enterprises.

But what service providers historically have not done is combine the two ideas: i.e., use technology as the means by which they can more easily sell to the enterprise. To paraphrase what the bright, forward-looking CEO of one service provider recently told me: “If I can get technology into the enterprise behind the firewall, then that makes my corporate accounts more “sticky”. It makes it easier for them to export data into my review platform and more likely they will use my services on any given case.” This technology does not have to be developed in-house; service providers can partner and integrate with providers of corporate e-discovery solutions to achieve the same effect.

My respect for litigation support service providers has only increased as I have come to appreciate the severe market pressures under which they operate. So has my excitement for the opportunity before them. Litigation support services is a large, fragmented, growing industry –- a level playing field in which service providers who innovate can see large returns.

Wednesday, October 31, 2007

Iron Mountain Moves Into E-Discovery, Acquiring Stratify

After months of rumors that Iron Mountain was going to do “something”, the grandfather of records management announced today that it is acquiring Stratify for $158 million in cash. My best guess is that Stratify will do about $30 million in bookings this year, making the purchase price about 5X revenue – a pretty good multiple for a services business with gross margins of 50-60%.

Iron Mountain’s motivations are not hard to guess. It stores oodles of electronic data for large corporate clients. Whenever those clients have a case, they retrieve a subset of that data and send it off to a service provider like Stratify for processing. Through this acquisition, Iron Mountain now has a chance to up-sell its customers on Stratify and capture that service provider revenue for itself. This will be compelling to customers if (and this is a big “if”) Iron Mountain is able to integrate Stratify with its archive, making it easy to pass data from one to the other. As one Iron Mountain customer at a major Wall Street bank told me, “Iron Mountain is great about getting data in; it’s awful when you want to get data out.” If Stratify can help solve that problem, even if it’s only in the case of litigation, then every Iron Mountain customer will cheer.

Given the obvious potential of this deal to Iron Mountain, the question is less about why they would want to acquire a service provider in general, and more about why Stratify in particular. E-discovery services is a large, fragmented market, and there is no shortage of players to choose from. That said, I think they found Stratify a compelling target for 3 reasons:

  • Good Technology: Unlike many service providers, Stratify (or Purple Yogi, as it was originally called) started life as a product company. It went through several incarnations: starting out in 2000 to “personalize the internet” for consumers, it soon moved on to knowledge management for corporations, before finally settling on e-discovery services for law firms. To fund all this, it raised over $30 million in venture capital and invested a good chunk of that in product development. The result is a sophisticated product that goes far beyond the review platforms that most other service providers have built.
  • Right Size: Many acquirers like companies in that $20-30 million in revenue range. On the one hand, they are big enough to provide a solid platform for growth; on the other, they are small enough to be affordable. When Iron Mountain analyzed the market, it will have found the vast majority of targets either too big or too small, leaving it with only a handful of players to consider, like Stratify, Cataphora and H5.
  • Willing Seller: It is no secret that Stratify’s largest shareholder, the venture capital firm Softbank, is winding down and was looking to sell its stake in the company. That, together with the inevitable fatigue that sets in after 7 years of slugging it out, most likely made Stratify a willing seller.

So, on paper, this is a good deal for both sides. Stratify gets a decent return for many years of work; Iron Mountain gets the chance to capture more revenue from its customer base. My congratulations to the Stratify team – I have huge respect for entrepreneurs who weather the dark days, re-invent their company, and lead it to a successful outcome. I wish them well on their new adventure.

Tuesday, October 23, 2007

“Web Services” For E-Discovery

Prior to working in e-discovery, I (Aaref) always thought standards bodies were a waste of time – or, at least, nothing more than an excuse for free travel to exotic locations. But George Socha and Tom Gelbmann’s EDRM project has changed my mind. In the second of a series of posts, our e-discovery guru – Kurt Leafstrand – explains one of many ways in which EDRM will have a big impact on e-discovery in the years to come:

Last week, I once again had the pleasure of participating in the (now biannual) EDRM conference in St. Paul, Minnesota. For those unfamiliar with it, EDRM is a fantastic collaboration between e-discovery software vendors, service providers, and consumers committed to addressing practical problems associated with e-discovery.

Looking back on both formal sessions and informal conversations with many participants, the one key theme that came across loud and clear is that the days of traditional, "throw-it-over-the-wall" (TIOTW) e-discovery are numbered.

I am sure you're familiar with the TIOTW approach, that endearing process whereby an enterprise gathers up a muddle of electronic data in all shapes and sizes, ties it up in a big bundle, rolls it in bubble wrap, and catapults it into the waiting arms of a service provider. They unwrap it, chant some incantations and perform other black magic for a few days (or it is weeks?) and throw a bundle back over the wall to their corporate client. In-house counsel takes a look and promptly realizes that the search terms she thought were sure things were completely off the mark, and that she missed a couple of custodians, and then... well, it's back over the wall again.

What’s going to tear the wall down? The EDRM XML schema, the first version of which is unveiled today by Clearwell and a large group of other vendors and customers. This will have the same impact on e-discovery as web services have had on e-commerce, enabling systems to pass data to one another over the internet, just as Travelocity passes information to American Airlines when you use it to make a reservation online.

What difference will this make? Well, I boil it down to 3 main things:

  1. Litigation risk will decline as early case assessment finally becomes a reality in the enterprise—making it feasible to process, analyze, and do first-pass review of documents in-house, and then transfer those documents and tags to service providers and outside counsel without having to start from scratch.
  2. E-discovery timeframes will shorten as enterprises become able to craft comprehensive e-discovery strategies more easily by executing and refining searches closer to the source of the data, and eliminate time-consuming back-and-forth exchanges between enterprises and service providers. And that’s a good thing, with the new FRCP (and coming soon, state rules!) pressure.
  3. E-discovery manageability will improve as enterprise-based e-discovery systems are able to integrate seamlessly with downstream litigation management systems. Previously, you were forced to either channel data into a complex external litigation management system too early -- making it difficult for internal counsel and other constituents to have access to the documents -- or pay for costly and time-consuming custom data conversions to migrate data between document "silos."

What to do with all of those unused CDs gathering dust in your office? I've heard they make great coasters…