e-discovery 2.0

Yesterday, I explained what I think Iron Mountain’s acquisition of Mimosa says about valuations in the archiving / e-discovery industry. Today, I will address the other questions that people commonly ask about the deal – why did Iron Mountain (Stratify) do it, and what does it mean for the electronic discovery industry?

In their letter to customers announcing the deal, Ramana Venkata (President of Iron Mountain Digital) and TM Ravi (CEO of Mimosa) point to two main benefits from combining the companies. On the archiving side, Iron Mountain can now offer Mimosa as an on-premise solution in addition to its existing hosted service. If it can integrate the two, then it can offer “location-independent” archiving which “will help you transparently and seamlessly move data between the on-premises data center and the cloud.” One additional benefit to Iron Mountain, which is not mentioned in the letter, is that it could even leverage Mimosa’s technology for its hosted offering, and replace Mimecast who it currently pays to provide this service.

On the e-discovery front, Iron Mountain now has a suite of 2 products and 1 service: Mimosa NearPoint for collection and preservation; the Stratify eVantage appliance for ECA (Early Case Assessment); and, Stratify Legal Discovery Services for review and production. This makes Iron Mountain a competitor to Autonomy, Clearwell, EMC/Kazeon, and everyone else listed in Gartner’s recent MarketScope covering e-discovery software companies. I’m sure the hope is that there’s synergy between the different products so that, for example, Mimosa’s experience in on-premise software will help Iron Mountain drive adoption of its new Stratify eVantage appliance behind the firewall.

Will the combination work? As Barry Murphy (a former Mimosa employee) points out in his excellent post on this topic, a lot depends on execution. But there are at least 2 reasons to be doubtful. First, the competition is far ahead, and will be hard to catch. As Barry, points out: “Iron Mountain will have a tough road ahead to compete with the likes of Autonomy, which bought successful archiving company Zantaz and has now had almost two years of development time for its hybrid on-premise/SaaS archiving offering.” The same is true on the e-discovery side, where companies like Clearwell have hundreds of corporate customers for on-premise ECA and review.

The second reason to doubt why the combined company will be any more successful than either were before the acquisition is that Mimosa and Iron Mountain Digital serve very different markets. Most of Mimosa’s customers are small to medium sized companies; most of Iron Mountain Digital (ie., Stratify)’s revenue comes from law firms. So it’s not obvious that by combining them you create a company well-suited to serving large corporations, which is the sweet spot for e-discovery and archiving.

It will be interesting to watch events unfold.

Learn More On Litigation Support Software & Electronic Discovery Litigation

On February 21, Iron Mountain Digital (formerly Stratify) announced it had acquired Mimosa Systems for $112 million. The deal was widely rumored at LegalTech New York last month, so it came as no surprise. I know several people closely connected with Mimosa and I’m happy for them that the company has found a good home.

From an industry perspective, there are two interesting questions about this deal, and I’ll cover the first of them in this post: what does the price suggest about the valuation of archiving/e-discovery companies?

To answer that question, you have to consider Mimosa’s history and financial performance. The company was founded in December 2003, and proceeded to raise $51.5 million in venture funding over 5 years from Clearstone Venture Partners, August Capital, JAFCO, Mayfield, and few others. Initially, it had great traction in the market and, at various industry events around Silicon Valley, I would often hear about how well it was doing. But then, as often happens with startup companies, Mimosa lost its way, and the growth slowed. I don’t know exactly why that happened; it could have been the recession, competition from Microsoft Exchange 2010’s new archiving features, or something completely different. But the signs were unmistakable: there were layoffs, pay cuts for the remaining staff, and (according to Venture Source) a series of 4 small debt financings totaling $10.4 million between May 2009 and January 2010.

The deal documents, which were sent out to all shareholders to approve the acquisition, reveal the financials. In 2009, Mimosa generated $20.6 million in revenue and $32.7 million in expenses, meaning it was burning about $1 million dollars every month.

So, to answer the question that many in the archiving / e-discovery community are asking, that means Iron Mountain Digital paid 6 times trailing revenue to acquire Mimosa. That’s about the same multiple it paid for Stratify in October 2007, about the same multiple Dell paid for MessageOne, and a lower multiple than EMC recently paid for Kazeon. It is reasonable to expect that the revenue multiple would have been much higher if Mimosa had been profitable, or growing more quickly.

Overall, I think this is a great outcome for Mimosa’s shareholders who must be delighted. My congratulations to them, and to the entire Mimosa team.

Over the past 4 years, I have had hundreds of conversations with corporate counsel and “legal IT”, meaning technical folks charged with supporting the legal team. More and more of them are looking to lower their costs by bringing e-discovery in-house. But as they work through that process, there’s one question that consistently comes up, even today – namely, “When [insert name of software company] says they “do” e-discovery, what exactly does that mean?”

There has been progress towards answering this question, thanks mainly to the analyst community. George Socha and Tom Gelbmann’s EDRM framework has been immensely helpful in breaking down electronic discovery into its component steps. Other analysts, like Debra Logan at Gartner, were quick to embrace the framework, prompting every software provider to follow suit. As a result, there is today a common language that everyone uses to describe the e-discovery process.

The Electronic Discovery Reference Model (EDRM) breaks down the e-discovery process into a series of steps. Companies looking to buy e-discovery software to lower costs typically map different software products to each of these steps, to make sure that they cover the entire process.

But having a universally-agreed framework is only half the answer. To eliminate customer confusion, there also needs to be agreement on how different software products fit into the framework. This is especially important since there is no single, end-to-end solution for e-discovery which covers all aspects of EDRM. So customers are forced to think about how different software solutions fit together. And that is where things begin to fall apart.

Many software vendors feel it is advantageous to claim that they do everything, even though they do not. Customers are rightly suspicious of those claims, and so press vendors to provide more detailed information – hence the question, “when you say you do e-discovery, what exactly does that mean?”

In light of that, how can litigation support teams, corporate counsel, or legal IT people figure out which e-discovery solution best meets their needs? From observing this decision-making process hundreds of times, I have found 3 simple steps are incredibly helpful.

Step 1: Read the analyst reports

Two reports in particular make for required reading. One is Gartner’s MarketScope Report, which is available for free at certain sites; the other is the 451Group’s recent e-discovery report, which is summarized in a publicly available presentation. The helpful thing about the 451 Group’s report is that it tells you which software companies do which parts of the EDRM process. You do have to buy the report to get the full picture (it’s well worth it!), but the publicly available presentation will give you a flavor for their analyis, and I have drawn from that presentation in the figure below:

Analyst firms like the 451 Group map software vendors to the EDRM framework according to what they actually do, which is often different from what software vendors claim they do.

The 451 Group’s analysis highlights several important points. First, it shows that there is no single end-to-end solution. Even the products of giants like EMC (SourceOne), HP (IAP), and IBM (CommonStore) only solve one piece of the puzzle, information management. Second, it shows that customers have choices at each stage of the EDRM process. For example, to solve the problem of identification, collection, and preservation of electronic information, customers can choose from solutions as diverse as Guidance EnCase (forensic collection), Index Engines (back-up tapes) and Mimosa NearPoint (email archive). Third, it provides an independent assessment of what vendors do, as opposed to what they may claim. For example, Kazeon claims analysis and review capabilities, whereas the report shows its product does identification, collection, and preservation; Recommind claims its Axcelerate eDiscovery and MindServer products do processing, whereas the report finds that they do not.

Step 2: Evaluate the products prior to purchase

Just as anyone would test-drive a car prior to purchase, it’s critical to test-drive e-discovery software. Any vendor should be willing to provide their software free of charge for an evaluation on-premise. The most effective evaluations are when the customer uses the product themselves, either on a live case or test data. This is far preferable to just sending the data to the vendor who then loads it into their system, as in that scenario there are too many opportunities for the vendor to hide their product’s shortcomings.

Step 3: Check references carefully

The trick with references is to insist on relevant references. It’s not good enough for the vendor to dredge up some random person who says nice things; or even a credible knowledgeable person who is using the product in a completely different way. For example, if a company is happy with Autonomy’s IDOL for enterprise search, that does not tell you much about what Autonomy might be like for e-discovery. What really counts are references from other customers who are using the product for the same application that you are.

All this can sound like a lot of work, but I have seen people go through the process in as little as a month, and be much happier for it. A little work up front can save a lot of time (and heart-ache!) later on.