On April 19th, 2011 Iron Mountain sent a little bit of a shock through the e-discovery market with the announcement that they were exploring strategic alternatives for their digital business. For those of you that missed it, this is what was said:
“Iron Mountain is exploring strategic alternatives for its digital business, including a potential sale of the Company’s digital archiving, e-discovery and online backup and recovery solutions.
Mr. Reese said, “We first entered the digital business 10 years ago as a natural extension of our core services to address a clear customer need. Recently however, our digital business has faced a number of challenges resulting from a rapidly changing environment. In light of these factors, our Board and management undertook a strategic review of the digital business beginning last fall and concluded that the Company could not continue investing in technology development and meet its return requirements and that exploring strategic alternatives for the digital business was in the best interest of Iron Mountain’s stockholders. As we move forward, Iron Mountain will continue to deliver technology services to solve our customers’ digital information management challenges through partnerships.”
In the ten days that followed the announcement they had already begun to shed employees from their digital business unit.
This week Autonomy, based in the UK, announced its decision to purchase the digital asset and archiving portion of Iron Mountain for $380 million. Given the high cost structure Iron Mountain suffered from in stitching together an e-discovery solution through acquisition, the multiple received was rather bleak. However, given the purchase price of Mimosa and Accutrac they got what many perceive as a fair price. Autonomy’s decision to purchase comes as no surprise as they were sitting on a $1 billion war chest. What was a bit of a surprise to me was no mention of “e-discovery” in remarks from Mike Lynch, the company’s CEO.
“This acquisition makes Autonomy the cloud platform of choice, processing and understanding 25 petabytes of customer information,” Lynch said, adding it places the group “at the centre of the changes in the analytics of unstructured data, processing in the cloud-based platforms and desktop virtualization.”
Is this a strategic play to own the portion of e-discovery that is cloud-based? Today’s reality is that portion is still very small, albeit a growing concern. We are left to wonder about staff acquired through the acquisition, but it is worth noting this purchase signifies the second sale of the Mimosa technology is a little over a year.
This acquisition is meaningful not so much for Autonomy’s purchase (analysts see it as low risk) but because of what it says about the e-discovery marketplace. Iron Mountain looked like it was ideally positioned to be a significant player in the e-discovery market. After all, a huge amount of litigation still involves paper and a huge percent of that paper seems to be held by Iron Mountain. Countless Mega-Corps rely on them to preserve physical copies of their critical business documents and when those documents are subject to discovery, it is again Iron Mountain that must fish them out. This puts them at a key nexus point between Mega-Corp USA and external counsel. In addition, they meaningfully entered the digital document backup space about a decade ago in an effort to offer a more comprehensive information management solution. With a dominant position in paper and a growing digital foot print, their entry into the e-discovery market with the purchase of Stratify in 2007 and the more recent acquisition of Mimosa in 2010 made a number of us take notice.
Here was a corporate goliath entering the e-discovery niche with the potential to truly alter the landscape. Now, only a few years later, the Iron Mountain experiment ends in a less than spectacular sale. So what went wrong and what does it tell us about the e-discovery market in general?
Of course all I can offer is my personal opinion but I believe the Iron Mountain experience tells us three key things about the e-discovery software market.
- Synergy: It simply isn’t as synergistic with information management as it might otherwise seem. Iron Mountain’s starting premise was simply that since they control the paper and paper is a key part of the e-discovery story, companies would be willing to look to them to solve their entire spectrum of e-discovery challenges. This is the same premise that information management companies bring to the table. The idea is that because they control a key piece of a company’s data, they are therefore well suited to address the company’s electronic document litigation challenges. EMC is an example of a company that used this logic in its acquisition of Kazeon with results that so far appear similar to Iron Mountain’s. The problem with this logic is it simply underestimates the complexities of even a generic e-discovery lifecycle. While none would argue that a mature information management program positively contributes to reducing the e-discovery burden, e-discovery is a litigation problem, so treating it simply like another form of data management just doesn’t work. A sound, reliable e-discovery solution must address all key aspects of the process including litigation hold, collection, ECA, production, and final review. It must also offer these technologies in a way that allows all the stakeholders involved in litigation: IT, general counsel, external counsel, and the opposing party to interact with the solution in a unique and individualized way. This is no small order and generally becomes a huge sticking point for large companies that want to view this market as one they can simply tack on to their existing portfolio.
- Market Size: If you ask a market analyst how big the e-discovery software space is they will tell you something like 500 gazillion dollars. As much as I would love that to be true, it is simply delusional. Sure, if you include outsourced review, legal fees and things like that it is a huge market but so much of that is well beyond the reach of an IT solution provider. When you focus your attention on the part of the market that is realistically addressable by a software company, it quickly becomes clear that it simply isn’t that large of an opportunity. This may have been the fatal blow, given the size of Iron Mountain. It simply means that no matter how appreciable the market seems, it will simply never move the needle of a fortune 500 company. The result for Iron Mountain was it clearly became more of a distraction than an asset and the investment (and expertise) required had become overly burdensome.
- Entry Point: I am consistently floored by the choices made by large companies when picking their entry point into the e-discovery market. Names like Metalincs (Seagate in 2007), Stratify (Iron Mountain in 2007), Kazeon (EMC in 2009), and PSS Atlas (IBM in 2010) strike me personally as second tier players at best and in some cases third tier. Why these large companies get into e-discovery so carelessly is something I will never totally understand. This is not to say due diligence was lacking, coming full circle with my initial point, but it probably lacked some depth in understanding what is necessary to truly address the e-discovery business problem. My best guess has always been that it must be a function of large VCs that are invested in these companies working through alliances and long term relationships they have with the financiers. Regardless of the reason, results of these acquisitions to date indicate e-discovery is just too specialized of a market to fanatically pick an acquisition based on market hype. Picking a comprehensive provider with depth and breadth is the only way for a larger entity to successfully become a legitimate player through acquisition.
It will be interesting to see what strategic alternatives Iron Mountain is able to execute upon in the coming months. What will be even more exciting to follow is whether Autonomy can legitimize itself as an e-discovery player in the US market. Gartner and other analysts seem to have an obsessive fascination with Autonomy, but the truth is we have only run into a handful of cases in the US market where Autonomy is actually being used in more than one or two niche areas to manage the flow of electronic documents for litigation. I won’t turn this into a diatribe on the weaknesses of using an indexing solution for e-discovery, as most large corporate clients already understand the basics, but it is clearly a major impediment for those that aren’t already trying to swallow the typically expensive and long term implementation of an Autonomy solution. Maybe they are planning to address that deficiency with the remaining $700 million still left in their coffers?