TRIPLE TREE ediscovery: A DYNAMIC SEGMENT OF ENTERPRISE COMPLIANCE RESEARCH SPECIAL REPORT 2009 Emerging ediscovery vendors may find traditional sales and delivery approaches ineffective as simply being reactive to lawsuits gives way to a more proactive enterprise sales model. Vendors choosing to be proactive may start by addressing compliance needs for preventative best practices and solutions that ensure electronically stored information (ESI) is properly captured, identified, preserved, and analyzed. Along the way, considerations around scalability, technology, and a solutions roadmap will help differentiate ediscovery vendors from competition as they become further tied to the ongoing convergence between content optimization, search, compliance, and knowledge management.
INTRODUCTION ediscovery solutions optimize how electronically stored information (ESI) is sought, located, secured, and searched with the intent of using it as evidence in a civil or criminal legal case. When combined with the increasingly risk aware culture that permeates many techenabled organizations, rising volumes of content, and more complex content management workflows, a new spotlight has been cast on the importance of ediscovery. At TripleTree, we consider the breadth and context of data growth across all industries to be significant. For CXOs, the tools required to manage and optimize this growth call for advanced information management solutions features that are at the core of ediscovery and enterprise-wide compliance strategies. Because many roles within organizations leverage information and document handling and storage tools, they also have needs for ediscovery naturally leading to inconsistent definitions and vendor solution approaches. Alongside ediscovery, organizations are expecting more consistent content management solutions. In response, best in class ediscovery vendors are engineering their applications and services (and directing their messaging) to tie together disparate formats of electronically stored content and information (email, documents, images) with a strong focus on compliance. Today, litigation support is the biggest driver for ediscovery processes and procedures and represents a key reason why knowledge workers, IT, and legal departments need a common platform. It is further reinforced because ediscovery spans a number of functional areas (search, identification, content management, content analytics, archiving); and it is impractical and costly for organizations to use numerous tools and approaches for each need and gain accurate and complete ediscovery results. Many factors contribute to ediscovery s increasing relevance and alignment alongside other business applications. Legal precedents, Federal Court rulings from tech-savvy judges, and other new government regulations are driving ediscovery solutions to fill an important gap that exists between IT and the legal world. Not all vendors who claim to provide ediscovery features truly offer them. An in-depth understanding of the legal industry vertical is important but alone is not enough. Vendors who directly serve the legal market and provide (or partner) with technology solution vendors to address complex ediscovery and information management problems are the strongest contenders for market leadership. This report is TripleTree s second publication on Compliance and Risk (see Next Generation Compliance for additional perspectives). It briefly assesses ediscovery through the lens of technology and builds on the premise that ediscovery solutions exist as a subset of broader compliance automation initiatives. Our team currently tracks 70- plus vendors who we characterize as ediscovery specialists. In addition, we are watching a myriad of global firms chase the same fragmented market drivers of content management, search, and archiving. Given all the noise, it s easy to see how headaches for CXOs are multiplying and why more mature ediscovery approaches are warranted. PAGE 2
The functional micro-disciplines of compliance and ediscovery are illustrated in TripleTree s proprietary Q-Diagram (Figure 1). While this attempt at mapping such a wide array of compliance solutions across a continuum may not be perfect, it goes beyond the grid style rankings of many research companies by acknowledging specific and adjacent compliance technologies. Figure 1: Compliance Q-Diagram Goverance, Risk & Compliance (GRC) Business Risk Contract Training Certification Marketing Compliance Human Resources Presentation / Review Processing / Analysis Preservation / Collection ediscovery Content $5 Billion Segment Message Security by 2011* Data Backup / Archive IT Standards/ SOA Disaster Recovery/ Continuity Project Portfolio Asset Ethics Programs Resource Environmental, Health & Safety Change & Configuration Corporate Filings Service Industry Specific Regulations Regulatory Compliance ID & Segregation of Duty User Activity Monitoring Financial Controls Internal Audit Enterprise Risk Operational Risk Fraud Assessment/AML Risk Analytics IT Compliance Capacity Planning Performance Security IT Governance * Source: Forrester Research Source: 2009 TripleTree, LLC. All rights reserved. Unauthorized copying is prohibited. PAGE 3
MARKET INFLUENCES The ediscovery landscape is complex and suffers from a number of misconceptions, some of which are clarified below. Platforms Are About Scale Not Size. Perhaps the most critical component of an ediscovery solution is its ability to scale quickly and efficiently while integrating with other data sources. Too often vendors point to their revenue size and/or the amount of data they manage as the main benchmark(s) for success. However, the ediscovery market now calls for unique expertise that should force vendors to consider unique IP and scalability above revenue size and capacity as a key indicator of success. A considerable number of ediscovery vendors post revenues between $30m - $50m annually but cannot accelerate to the next plateau of growth. In particular, services-intensive businesses may struggle to make the transition to proactive ediscovery because of the inability to scale quickly. Other important business considerations: Business Models. ediscovery vendors bring solutions to market with a variety of pricing models that include subscription, case volume, cost sharing, and billable hours. Many ediscovery vendors began as professional services firms, taking on case-loads (and customers) and the requisite workloads to drive revenue. But like any business, law firms and offices of the general counsel don t want to pay for services they don t use thus, the case-driven model has become popular yet it exposes vendors to risk, including limited revenue visibility. Technology Delivery Models Define Scale. Professional services, software, services, and hybrid technology delivery models make up the vendor landscape. Software ranges from traditional on-premise licensing, to hosted licensing, to Software as a Service (SaaS); and services range from hourly and project based consulting, to tech-enabled business services (TEBS) and outsourcing. Hybrid technology delivery models blend software and services around a proprietary approach, and could also be an installed appliance with firmware. All point to the most important aspect of a distinguishable ediscovery business: scalability. Much of the ediscovery market has been defined as services-driven a tough basis on which to scale revenue as the market transitions to more proactive solution selling. End-To-End ediscovery Solution Roadmaps Represent Strategic Challenges. Specialized ediscovery vendors survive on their ability to execute on a specific feature set. As vendors who are truly emerging (< $20m annual revenue) manage through a critical stage of development and growth for their business, TripleTree has witnessed more than a few who have become distracted by partnering opportunities lying outside of their core competency. Because first impressions are critical, wasting a year (or more) with the wrong partner can impact marketing (inconsistent positioning), sales (conflicting messages), and customer service (up-sell and cross-sell). Specialist vendors can t count on any alliance to result in a preordained strategic exit, but they can usually count on a meaningful partnership to introduce new market opportunities that may have previously been unattainable. With few exceptions, winning exits for ediscovery vendors have consistently been a match between a global software leader and a specialist vendor whose solution complements the functionality of the larger acquirer. PAGE 4
Look To The EDRM Framework As A Reference (Not A Roadmap) For Value Creation. The Electronic Discovery Reference Model (EDRM) serves as a good framework for understanding ediscovery processes. However, the EDRM is limited in its ability to capture functional needs along the ediscovery continuum and does not adequately address the individual aspects of ediscovery delivery that can vary significantly from one implementation to another (data volume, size, scale, and delivery model), nor does it address how specialist vendors interoperate along the functional continuum. Understanding the limitations of the EDRM are crucial when planning or developing an ediscovery solution and roadmap. The following points summarize several limitations of the EDRM: Does not capture all ediscovery processes Not all ediscovery components can be positioned definitively in a single category on the model (i.e. search) Does not show how each functional solution integrates Too easy to claim full end-to-end functionality Figure 2: The Electronic Discovery Reference Model (EDRM) Processing Information Identification Preservation Collection Review Production Preservation Analysis * Source: EDRM - The Electronic Discovery Reference Model (www.edrm.net) Traditional Content Practices Alone Aren t Enough For ediscovery. Distinct knowledge of the legal market will be table stakes for ediscovery vendors who aspire to successfully compete as the market evolves. Even global vendors with content management and other significant resources at their disposal don t have the tools and expertise to execute a seamless transition into ediscovery success. TripleTree expects vendors to update supported file types in order to reach beyond email and unsecured file formats to gain traction, including content management features that can integrate with other front and back office applications like ERP, CRM, and Customer Service. These approaches will be most relevant as proactive ediscovery vendors begin to address broader enterprise compliance and content management needs. Evolving A Proactive ediscovery Approach. As enterprises further enmesh compliance disciplines into their workflows, the corresponding reliance on archiving and retention will also increase. While business unit executives, knowledge workers, and corporate counsels continue to share ediscovery responsibilities, highly litigious verticals like tobacco, energy, pharma, and financial services are still playing catch up to new data management approaches. These types of organizations will be the early adopters of in-house (or proactive) ediscovery deployments. Moreover, these investments will be justified by the simple avoidance of high risk and penalty-ridden failures to comply with legal precedents. PAGE 5
FINDING AN EXIT Partnering To Broaden EDRM Functionality Can Make Sense. Global content management, storage and archiving, or service provider partnerships can help emerging firms whose point solutions may require an anchor solution to enhance competitive credibility. As with any strategic alliance, performance objectives are critical and for domains like ediscovery, subject matter knowledge is paramount. Proactive ediscovery should be considered a strategy rather than an objective. For every well-aligned ediscovery vendor with strong partnerships there are two that don t understand how the ediscovery puzzle fits together and therefore cannot identify and secure beneficial partnerships. For emerging vendors, specialized knowledge of the ediscovery domain and workflows will be the key differentiator sought by global firms and will represent a good starting point for strategic partnering discussions. An advantage that emerging vendors have over global software providers is specialized knowledge of the ediscovery domain and workflows. As enterprises make the push to control ediscovery processes internally, global software providers will look to acquire specialist vendors with quality technology, strong features, a good reputation, and the ability to easily integrate with internal data workflows. As a counterpoint, global software providers have multiple levels of enterprise-wide relationships relationships that have likely been cultivated over a number of years. Because ediscovery solutions usually involve a number of buying influences within an enterprise (especially so for electronic document delivery), global vendor relationships will be quite beneficial for leadership and attracting specialist ediscovery vendors looking for partnering and growth opportunities. The ediscovery Leadership Race Is On. ediscovery exits are occurring with predictable frequency. Multiple enterprise categories are filling out gaps in their portfolios by targeting emerging vendors through M&A. Among the most attractive qualities of the ediscovery market is the intense interest from a wide array of buyers. These acquirers include vendors across pure-play ediscovery, enterprise compliance, content and storage, publishing, services and consulting. With market leadership still up for grabs, the 70- plus specialist vendors we are tracking will need to appreciate some of the trends and attributes of market comparables shown in Figures 3 and 4. PAGE 6
Figure 3: Total ediscovery M&A* (3 years) 16 14 12 TRANSACTIONS 10 8 6 4 2 0 Q2 Q3 Q4 2006 Q1 Q2 Q3 Q4 2007 Q1 Q2 Q3 Q4 2008 Q109 Q209 * Includes Storage & Archiving. Source: The 451 Group, Capital IQ and TripleTree. Figure 4: M&A is Increasing in ediscovery Select ediscovery M&A Transactions (in $ millions, except multiples) Date Buyer Target Description Enterprise Value (EV) Revenue EV / Revenue Apr-09 Unify Corp. AXS-ONE ediscovery $19.1 $13.4 1.4x Feb-09 Integreon Onsite3 ediscovery $28.0 Jan-09 Autonomy Interwoven ECM, WCM, ediscovery $770.0 $253.0 3.0x Jan-09 Continuum WW Focus Solutions ediscovery $7.9 Jul-08 Infonic (Corpora) Lexalytics 5.0 ediscovery $10.0 $2.0 5.0x Jul-08 Interwoven Discovery Mining ediscovery $36.0 $6.0 6.0x Jul-08 EED Daticon ediscovery Jun-08 Proofpoint Foritva Storage & Archiving Jun-08 FTI Consulting Attenex ediscovery $88.0 $25.0 3.5x Apr-08 HP Tower Software Record $100.0 $38.4 2.6x Mar-08 Stroz Friedberg Docuity ediscovery $84.0 Feb-08 Dell MessageOne ediscovery, Storage & Archiving $165.0 $25.0 6.6x Feb-08 Teracloud Estorian Corp ediscovery Feb-08 Atempo Lighthouse Global Tech. Storage & Archiving Dec-07 Seagate MetaLINCS ediscovery $74.0 $7.0 10.6x Oct-07 Iron Mountain Stratify ediscovery $158.0 $30.0 5.3x Jul-07 Autonomy ZANTAZ ediscovery, Storage & Archiving $375.0 $98.7 3.8x Jun-07 Xiotech DolphinSearch ediscovery Jun-07 Iron Mountain Accutrac Software Compliance Jun-07 Lexis Nexis Image Capture Engineering ediscovery Jun-07 Xerox Amici ediscovery $174.0 May-07 Anacomp CaseLogistix ediscovery Apr-07 TA Associates Intralinks ediscovery $400.0 $59.7 6.7x Mar-07 Merrill Corp. Lextranet ediscovery High $770.0 $253.0 10.6x Median $94.0 $27.5 5.0x Low $7.9 $2.0 1.4x * Includes Storage & Archiving. Source: The 451 Group, Capital IQ and TripleTree. PAGE 7
CONCLUSION The maturing ediscovery market is trending toward leadership by global software providers whose international reach, extensive sales force, and strong content and records management suites will match up with the increasingly complex data management needs of organizations. This proactive sales approach breaks traditional norms for ediscovery vendors and will emerge as an imperative for new market leaders. To address the opportunity white space in compliance and risk management, these firms will find a likely entry point through ediscovery, via acquisitions or partnerships with specialized ediscovery vendors. These best in class specialists are defined by unique ediscovery knowledge, IP and services. In addition: Compliance Is Top Of Mind For CFOs, CROs & CIOs. ediscovery is a segment of a broad landscape including IT Governance (ITG) and Governance, Risk and Compliance (GRC). The importance of these silos is garnering attention from organizations as they seek more holistic compliance solutions for enterprise-wide needs. Solutions With Process And Workflow-Centric Features Are Relevant. Key ediscovery features include the ability to support EDRM workflow and integrate with other compliance automation workflows like ITG and GRC. Other beneficial features include content search, filtering, tracking and notifications; as well as support for document retention, policy protocols, and repositories that acknowledge native document formats. As the market shifts to a proactive approach, enterprises will develop more stringent data and security requirements for their ediscovery providers. This means that the enterprise customer base may resist entrusting highly confidential legal data to small vendors who are susceptible to failure or breach. In addition: ediscovery Purchasing Decisions Will Remain Fragmented. ediscovery buyers in the enterprise are still being defined. General counsel and external counsel purchasing decisions may happen on a case-by-case basis, and the shift to a proactive ediscovery sales approach means decision making and financial support for ediscovery investments are inconsistent. Global software vendors will take advantage of these trends by leveraging long-standing client relationships and triangulation toward e-discovery decision makers. People Will Remain Vital To The ediscovery Process. The introduction of automated ediscovery solutions supports a faster, more consistent and increasingly reliable ediscovery process. However, many aspects of the ediscovery process are still people-intensive and global vendors may begin to position ediscovery solutions into their broader solution mix because they are best positioned to fold in the requisite specialty services and support. ediscovery vendors face a set of unique challenges. As ediscovery M&A consolidation accelerates, it is critical for emerging vendors to understand how value drivers affect their business. There is considerable variation across a variety of business metrics for the 70-plus vendors who comprise TripleTree s emerging ediscovery universe. TripleTree has developed a comprehensive 40-factor scoring methodology for indentifying where companies can build value and overcome potential challenges with an eye on future liquidity. PAGE 8
Below we ve listed a summary of factors for ediscovery vendors interested in a high-level peer-to-peer comparision:» Financial Quality and type of revenue; profitability; growth metrics; contract structure and terms.» Operational / Technical Scalability of solution; uniqueness of IP; technical architecture; delivery model and pricing.» Market Presence Proven sales model given diverse buyer universe for ediscovery solutions; cross-sell and up-sell applicability; brand momentum with one or more channels.» Feature Set Specialist or platform approach; EDRM workflow components; application programming interfaces (APIs); robustness of solution across TripleTree s Compliance Q-Diagram. As an investment bank and strategic advisor, TripleTree is committed to helping mid-market companies understand and take advantage of macro-trends like those in ediscovery. Looking ahead: The Appetite Of Private Equity Has Abated For Now. Lumpy revenue streams have stifled much of the PE interest around ediscovery, yet roll-up and platform opportunities remain. Valuation Disconnects Need To Align. Valuation disconnects persist between buyers and sellers. Buyers are seeking value at 2x revenue and sellers are seeking premiums far higher. Any savvy industry observer has seen similar scenarios play out before. Consolidation will occur and eventually innovators will be acquired and some valuation balance will be attained. Vendor Consolidation Will Continue. Fragmented markets cannot sustain themselves. As with most sectors, organizations are shrinking their list of trusted vendor/partners. For vendors who want to remain relevant, the points below warrant consideration: Align sales tactics to pinpoint a quick ediscovery ROI Create an open approach to strategic alliances Publish best practices for ediscovery deployments to reinforce the proactive sales approach TripleTree looks forward to learning more about your organization, the opportunities you re facing, and how we may be able to accelerate your success through a unique and insightful investment banking process. PAGE 9
ABOUT TRIPLE TREE TripleTree s investment banking and advisory practice is focused on the intersection of disruptive technology delivery models, business services, and vertical industry specialization. Our commitment since our founding in 1998 has been to provide best in class private businesses with independent perspectives, insight based on proprietary research, and candid advice regardless of popularity. TripleTree s principals bring decades of experience as former operators of technologybased businesses in healthcare, legal, financial services, professional services, telco and distribution. We have led over 125 sell-side M&A transactions totaling $5B in enterprise value with clients and buyers on three continents. Our recapitalization practice is growing quickly and since 2006 our team has concluded over a dozen financing transactions with an enterprise value in excess of $1B. Relevant TripleTree Research: TRIPLE TREE TRIPLE TREE TRIPLE TREE NEXT GENERATION COMPLIANCE SAAS PLATFORMS COLLABORATION 2009 2009 2009 PAGE 10
Relevant Compliance M&A and Recapitalization Activities: PAGE 11
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