Will Kroll Ontrack Survive or Open the Market to Newer, Better and Less Expensive Solutions?

Earlier this week, Marsh & McLennan (M&M) announced the sale of Kroll, its computer forensics division which last year generated $678 million in revenue. Kroll is being acquired by Altegrity, an investigative services company which is owned by Providence Equity. Financed by Apollo Investment Services and Goldman Sachs, the acquisition price is $1.13 billion.

The shear size of the acquisition is news in and of itself as it lends credence to the potential of the eDiscovery, Governance, Risk and Compliance (GRC) and associated computer forensic markets. However, I am more interested in what it means to the technology side of the industry and how it will effect buying behavior within the Global 2000.

In a June 8th, 2010 blog post titled, “What’s Next for Kroll Ontrack,” Aafre Hilay from Clearwell explores whether Kroll should fix or sell Ontrack. And, more importantly, describes how early technology players in any industry normally ends up being a burden to their owners and eventually fade into the sunset. Thereby, enabling the next generation of technology platform to emerge and takeover the market.

“Just as Yahoo was an internet pioneer in the 1990s, Kroll Ontrack was the pioneer of electronic discovery services. Like all pioneers, as the first to market, Kroll had to build everything itself. So Kroll Ontrack invested not only in recruiting and training its staff of skilled consultants, the company also developed its own suite of e-discovery tools and software. It offered this integrated package of services and software to the market and, justifiably, charged a price premium. But as the industry matured, it disaggregated with more savvy customers and new companies focused on specific parts of the value chain. Customers became better educated and more confident making decisions, diminishing the value of Kroll’s “we-are-the-safe-choice” value proposition. These customers today have many more options for e-discovery than was the case in years gone by, primarily because of a generation of e-discovery software companies, such as Clearwell, Guidance, Exterro, and kCura/Relativity, which offer capabilities like collection, ECA (Early Case Assessment), litigation hold management, and linear review. These have been widely adopted by Kroll Ontrack’s competitors, negating Kroll’s technological advantage. Even worse, because Kroll Ontrack’s competitors do not need to invest in R&D, they have a substantially lower cost structure. As a result, they have undercut Kroll Ontrack on price, which has halted its growth and squeezed its margins,” states Mr. Hilay.

I believe, as I stated in a recent blog post titled, The Era of the Megalith in College Football and eDiscovery, “…with today’s agile development methodologies and rapidly evolving open source technology stacks, it is becoming more and more difficult for the Megalith development teams to compete long term. And at some point, your code base becomes so large and integrated in such strange ways that no one actually even knows how it works. I guess at that point you sell your maintenance stream to CA or IBM and go home.”

I suspect that Kroll Ontrack and the other early entrants into this market are at that point where the Clearwells and KCuras and Exterros of the world just have too much of an advantage and therefore my answer to Mr. Hilay’s question is that Altegrity needs to sell Ontrack before it drags them under.

The full text of Mr. Hilay's post is as follows:

Yesterday, Marsh & McLennan (M&M) announced the sale of Kroll, its investigative services division which last year generated $678 million in revenue. Kroll is being acquired by Altegrity, another investigative services company which is owned by Providence Equity. The acquisition price is $1.13 billion, below the $1.3 billion M&M was rumored to be asking, and the deal is financed by Apollo Investment Services and Goldman Sachs.

There are many aspects to this transaction, but I want to focus on just one: what does this mean for Kroll Ontrack, Kroll’s largest division with $250 million in revenue and a staggering 1,500 employees, making it by far the world’s largest e-discovery service provider?

To answer this question, I will first outline the strategic challenge facing Kroll Ontrack, before outlining two alternative strategies its new owners may adopt for addressing it.

Strategic Challenge: Kroll Ontrack Is The “Yahoo! Of E-Discovery”
Just as Yahoo was an internet pioneer in the 1990s, Kroll Ontrack was the pioneer of electronic discovery services. Like all pioneers, as the first to market, Kroll had to build everything itself. So Kroll Ontrack invested not only in recruiting and training its staff of skilled consultants, the company also developed its own suite of e-discovery tools and software. It offered this integrated package of services and software to the market and, justifiably, charged a price premium.

But as the industry matured, it disaggregated with more savvy customers and new companies focused on specific parts of the value chain. Customers became better educated and more confident making decisions, diminishing the value of Kroll’s “we-are-the-safe-choice” value proposition. These customers today have many more options for e-discovery than was the case in years gone by, primarily because of a generation of e-discovery software companies, such as Clearwell, Guidance, Exterro, and kCura/Relativity, which offer capabilities like collection, ECA (Early Case Assessment), litigation hold management, and linear review. These have been widely adopted by Kroll Ontrack’s competitors, negating Kroll’s technological advantage. Even worse, because Kroll Ontrack’s competitors do not need to invest in R&D, they have a substantially lower cost structure. As a result, they have undercut Kroll Ontrack on price, which has halted its growth and squeezed its margins.

In a directly analogous way, Yahoo! has seen its broad internet service to consumers eroded by a host of more focused competitors such as Google, Facebook, and Skype. Consumers today are much more familiar with the internet, and feel comfortable making separate choices for search, social networking, and messaging, without the need for an umbrella brand. That has left Yahoo! without a reason for being: even today, its CEO struggles to answer the fundamental question “what is Yahoo!?”

Solution: Sell It Or Fix It
As Kroll Ontrack’s new owner, Altegrity has a simple choice. It could sell Kroll Ontrack, making the strategic challenge someone else’s problem; or Altegrity could fix it, by adopting a fundamentally different strategy.

Let’s consider each in turn:

Sell It: Most sensible people would find it funny to think about selling something right after you bought it. But in this case, it could make a lot of sense. Altegrity is a leading provider of investigative services, not e-discovery, making the “non-Ontrack” part of Kroll’s business a much better fit. So why not sell Kroll Ontrack, pay down debt, and focus on the services business which it understands? This would be especially attractive if, as Vivian Tero at IDC suggests, there are willing buyers such as ECM or storage software companies which like Kroll Ontrack but do not want the services business.

Fix It: Mike Cherkasky, Altegrity’s CEO, is a former head of Kroll, and so is perhaps uniquely well placed to bring about a change in direction. To do so, he must decide what Kroll Ontrack wants to be. If its goal is to be the leading e-discovery service provider, then it should kill its internal software development efforts and focus on providing customers the absolute best service using industry leading tools. If it wants to be an e-discovery software company, which would be a much harder transition, then it needs to exit the services business and make its technology available every litigation support company.

Either way, it will take time and a lot of painful decisions for Kroll Ontrack to recover its momentum. But if any encouragement is needed, the Altegrity and the Kroll Ontrack teams need only look at what’s happening to Fios, another of the industry’s early pioneers. So far, Fios has refused to decide what it wants to be, abandoning its internal review platform for Relativity but keeping its proprietary processing software. The result? It’s had three different CEOs in the past 12 months, and competitors continue to steal market share.

Labels: Altegrity, Clearwell, Early Case Assessment, eDiscovery, Exterro, kCura, Kroll

posted by Charles Skamser @ 3:49 PM 0 Comments

The Era of the Megalith in College Football and eDiscovery

As a fanatic Boise State Football fan, I have had enough on my plate the past couple of days trying to sort out which of the new megalithic conferences that my beloved Boise State Football team is going to end up in. Looks like the new PAC 16 will take what they want from the Big 12, the Big 10 will expand and then the rest of the conferences will get the leftovers.

Now, with the announcement of the merger between CT Summation and AccessData (http://www.prnewswire.com/news-releases/accessdata-corporation-and-ct-summation-announce-merger-95979904.html), it looks like we are going to have to start shorting out the creation of Megaliths in eDiscovery.

As a long time proponent of single source solutions, I like the concept of what the combination of CT Summation and AccessData can bring to the table.

As the leader in in-house eDiscovery collection, processing and analysis, AccessData brings to the merger an unsurpassed technology portfolio, designed to enable the world's largest companies to take control of eDiscovery and dramatically reduce costs. Its AccessData eDiscovery software is currently the most comprehensive eDiscovery solution on the market, enabling organizations to address litigation hold, automated collection, processing, and analysis prior to attorney review.

CT Summation, the premier provider of litigation workflow and eDiscovery solutions to law firms and corporate legal departments, brings to the deal a comprehensive suite of software products that are the gold standard throughout the legal community. CT Summation's iBlaze, Enterprise, WebBlaze, CaseVault, CaseVantage and Discovery Cracker products have received more than 45 legal industry technology and "Reader's Choice" awards since 1997. CT Summation is part of Wolters Kluwer Corporate Legal Services, which operates under the CT brand. Wolters Kluwer will remain as a strategic investor in the new AccessData Group, LLC, with a minority stake in the company.

By combining these complementary workflow solutions, AccessData will be able to deliver the first, true end-to-end eDiscovery software solution for corporations and law firms that supports the litigation process from litigation hold through trial.

However, just like the thought of a PAC 16 super conference, is combining CT Summation and AccessData just too overwhelming and too much? I suspect that that answer is both yes and no depending upon who you ask. For me, the thought of a super conference would be fine as long as Boise State was one of the teams. I am not sure how that relates to eDiscovery and therefore I am going to drop the analogy at this point.

Over the past 5 years, Autonomy has had somewhat of a lock on single source solutions in the eDiscovery space (no disrespect meant to the other players trying to do this). And, they (Autonomy), overall, provides a pretty good solution. However, they do not provide the best solution at every step along the EDRM. Therefore, some users would prefer to have the option to choose their own “best-in-class” components and integrate them together. And, over the past couple of years, some very good independent and individual component technologies are emerged such as Clearwell and Relativity. Neither of these vendors address the entire EDRM. However, they both do an excellent job at their piece and both seem to be trying to expand their capabilities to support more of the EDRM. However, at this point, the integration of these best-in-class players is still the big trick. Therefore, the value of an Autonomy or now a CT Summation / AccessData (are they going to call it AccessData?) is the fact that it is all integrated together, there is a common workflow of shorts and it comes from one vendor (i.e. you only have one phone call to make when something doesn’t work). So, the enterprise has to decide if they want the single-source Megalith solution or if the would prefer to chose individual best-in-class components and then integrate them together. Obviously, there is some big money chasing the Megalith path.

On another note and actually the topic of a future post is the concept of an open API (that’s always a matter of perspective), plug-and-play workflow management platform that would enable end-users to choose the best-in-class route and magically integrate them all together into a very productive eDiscovery / GRC workflow. Exterro has just such a solution and I believe that combined with the right best-in-class components will make a very compelling argument against the Megalith. As indicated, I plan to cover the workflow platform in great detail over the next couple of weeks. However, to provide some insight into my thinking, with the right workflow management platform, best-in-class solutions provided a tremendous amount of long term flexibility for users and place a tremendous burden on the Megalithic providers to keep pace with the steady stream of innovation that is inevitable in any market. This is not a new phenomenon.

But, with today’s agile development methodologies and rapidly evolving open source technology stacks, it is becoming more and more difficult for the Megalith development teams to compete long term. And at some point, your code base becomes so large and integrated in such strange ways that no one actually even knows how it works. I guess at that point you sell your maintenance stream to CA or IBM and go home.

So, in summary, given the ongoing the economic condition throughout the world and the buying shifts that are occurring in the user base, there just isn’t enough room in the vendor community for as many player and therefore there is going to be consolidation through mergers and acquisitions. Whether or not this leaves the market with a few Megaliths (Super Conferences) to choose from is anyone’s guess. But, just like the shack up that is occurring in college football, this is all very exciting to watch.

Labels: AccessData, Autonomy, Clearwell, CT Summation, ESI, Exterro, IBM, kCura, Kroll, Relativity

posted by Charles Skamser @ 4:57 PM 1 Comments

Is the Enterprise Market Eluding the Legacy Litigation Technology Providers?

Gartner foresees that worldwide eDiscovery software revenues will reach $1.2 billion in 2010, an increase of 23% over 2009. Further, according to Gartner, U.S. companies alone will spend $29.8B on GRC activities in 2010, up 3.9% from 2009.  And, just about every analyst in the world is predicting that a large percentage of these revenues will come from the enterprise.   However, I haven’t seen the legacy litigation technology providers taking advantage of this opportunity.  I believe that there are several reasons.

First of all, it wasn’t that long ago that many of these organizations were still trying to  figure out how to move from selling paper processing services to eDiscovery services and the associated technology.  It is possible that it just too soon or too much to ask them to make another paradigm shift to selling into the enterprise.

The second and biggest reason is that these legacy providers do not have sales and marketing organizations that understand how to sell into the legal and IT departments of the corporation.  And, there is a big difference between the sales cycle of selling to paralegals and litigation service groups within law firms and the complex sales cycle of an enterprise.  Where Friday donuts and a few happy hours did the trick for the law firms, the enterprise requires value propositions, ROI analysis, competitive analysis and an understanding of how the procurement process works.

The third reason is the lack of understanding of what actually goes on within the enterprise IT department and why they buy stuff.  Law firms are very much case based and/or expense based buyers as they want to pass on all cost to their clients.   Enterprises, on the other hand, are more into capital expenditures, total cost of ownership and amortizing costs over multiple cost centers for long periods of time.   Law firms have partners that can make quick buying decisions (especially if they have a big case and/or a big insurance company that is paying the bills).  Enterprises, on the other hand,  make decisions through multiple stakeholders that sit on multi-divisional committees that have to negotiate budget commitments and coordinate budget cycles.

Finally, at least for the purposes of this Blog post, law firms for the most part are comfortable with independent technology platforms with little or no integration.   In fact, there is an argument to be made that some law firms actually like technology solutions that require manual intervention that enables increased billable hours.  Enterprises, on the other hand are much more interested in integrated enterprise wide solutions that automate entire business processes.

In the end, the legacy litigation technology providers that survive will probably be absorbed into technology vendors that are providers a much broader base of Governance, Risk and Compliance (GRC) processing and analytics.  In the meantime, the current players in the litigation technology market better figure out how to sell to the buyers that are actually buying technology.

Labels: eDiscovery, eDiscovery Market, eDiscovery Software Sales, GRC, Total Cost of Ownership

posted by Charles Skamser @ 9:12 PM 1 Comments