At the time of Autonomy’s Q2 results last week, a fair few commentators said an acquisition of Open Text was imminent. We know that a large deal is imminent and the enterprise value of Open Text (OTEX) is in Autonomy’s ball park. Plus OTEX – itself a roll-up machine somewhat akin to Autonomy –  isn’t exactly in the rudest of health right now.

On the earnings calls CEO Mike Lynch said Autonomy’s next major acquisition would not be done to buy growth (we have already expressed our thoughts on that), nor would it be done simply because the price is right. It would have to be a strategic move, a game-changer. Well, OTEX isn’t that, in our mind at least. So what would such a deal give Autonomy?

Sure, it would give it practically all the document management business in the legal sector. But so what? Autonomy already has a lot of that via its Interwoven acquisition. It would also bring with it yet more overlapping content management products and a collaboration business being eaten by SharePoint. On the plus side, it would roughly triple Autonomy’s customer base to about 65,000 organizations.

Of course, I could be completely wrong and August 18 could be the date on which that is proved, as it’s OTEX’s Q4 results announcement. That is, if SAP hasn’t got there first.

Still, Tibco or Informatica make far more sense to us as truly strategic acquisitions for Autonomy. But of course, in order to buy something you have to find a willing seller, and we’re not so certain those sorts of companies relish the prospect of ending up inside Autonomy as much as a company that has few other choices might do.

Clients of 451 will have seen our report yesterday on Autonomy’s Q2 and 1H10 results. I won’t repeat it all here but in it we looked at the some of the more puzzling aspects of the company’s numbers. These include:

• Organic growth:  “IDOL product” revenue of $62m this time was in contrast to $47m in Q1. It said at the time of the Q1 results on April 21 that it had $10m of hardware inventory, which most understood to be its Arcpliance archiving and ECA appliance. It said it had already sold most of that in Q2. That is a new product, so if that $10m is removed from the $62m (since it’s recognized as up-front license revenue), and a little bit more is taken off for sales to federal government via the recently-acquired MicroLink (Autonomy trumpeted a multimillion dollar federal deal in Q2), then you get very close to the $47m figure from Q1, and thus, next to no organic growth. That compares to the company’s claim of 19% organic growth for IDOL in the quarter and 13% across all products and services.
• Cloud & SaaS & hosting: Autonomy gives out some seemingly helpful but often confusing metrics in terms of its product breakdowns. It said  SaaS-based revenue accounted for more than one-quarter of the company’s revenue in the first half. fair enough, and pretty interesting. But it also attributed revenues of $47m (out of $211.6M in total) to what it calls “IDOL cloud.” That’s 22%. However that isn’t one of the terms used in the way Autonomy packages its products so it’s hard to tell what it is. For instance, how much of ‘IDOL cloud’ is Zantaz’s hosted archiving product isn’t clear.
• Services: It puzzles me how a company selling a product that is powerful, but complex to implement, as Autonomy is, can make do with next to no professional services, instead relying almost solely on partners. This tends to leave customers – especially those spending less than $1m with the company – with a lot of integration work on their hands. It also puzzles us when it goes and picks up a service firm like MicroLink, paying $55m for assets it says are worth $1m with the rest being goodwill (as it disclosed in Q2’s results).
• OEM: The company said that OEM is its fastest growing revenue stream. It should also be noted that Autonomy sells two main products via its OEM channel. One is IDOL, the core search and categorization engine. The other is KeyView, the set of file filters it got with its acquisition of Verity almost five years ago. The former costs a lot more than the latter, and once the customer has implemented it, the former is a lot harder to replace than the latter. Nevertheless, when Autonomy announces a new OEM customer or a renewal, it usually doesn’t differentiate between these two. Incidentally it made a bold claim on the call yesterday, namely that almost all the major archiving vendors are OEM customers of Autonomy, which means all its main competitors in that space as it’s very much an archiving vendor too. In cases like that it’s quite important to distinguish between OEMing IDOL and OEMing KeyView as the former is much more of a differentiator than the latter.

There’s more in the report but mainly in the form of other things that puzzle me about these numbers, rather than a list of answers. Still, another acquisition is sure to come along soon  and change the picture again.

I got the chance to attend several sessions at the New York IQPC e-discovery event this week for some interesting perspectives on bringing e-discovery to the enterprise.

Recommind’s Craig Carpenter hosted a panel on Information Governance featuring Scott McVeigh, Director of RM at Aramark and Dawson Horn, Senior Litigation Counsel of Tyco, focusing on the benefits of litigation preparedness and getting organizational support from management and stakeholders. This issue came up more than once during the conference – the challenge of obtaining executive approval and participation from IT, legal, HR, compliance, procurement, RM and other stakeholders in planning, designing and deploying comprehensive information systems. McVeigh encouraged users to be vocal about the need for change, (over the course of several years if necessary), and to invoke C-level names to achieve organizational buy-in.

Autonomy’s Deborah Baron interviewed Karla Wehbe, Senior Information Resources Manager at Bechtel, for a case study of how the company is promoting document re-use by collaborating with outside counsel on a new methodology for ediscovery review. After parting ways with its prior law firm and losing access to previously reviewed documents, Bechtel established an information-centric approach to the process, facilitating re-use of reviewed documents through additional coding from outside counsel. The company claims that 5-75% of reviewed documents are now reusable.

Benefits include better control of document categorization and retention policy, as well as the ability for the company to “tell a story” with its evidence that can be communicated across cases. Wehbe acknowledged an initial “identity crisis” from outside counsel as the corporation established more control, but claims that they are now advocates of the process, and it has built trust and cooperation between them. An interesting example of the changing nature of the attorney-client relationship in corporate law. I am curious as to what their billing arrangement is.

Ian Campbell of iConect was joined by Kurt Michel of Content Analyst, VP of litigation for Phillips North America Timm Miller and Morgan Lewis Associate Denise Backhouse for a discussion of collecting ESI internationally, including EU data privacy regulations, the Hague evidence convention, blocking statutes, and the precedent set by the 1987 Supreme Court case Aerospatiale v. United States for requiring discovery even in defiance of blocking statutes from the jurisdiction of the data.

The difference in global collection philosophy is staggering (at least to this provincial American). Backhouse was asked (facetiously we hope) if it wasn’t enough for both parties just to agree “not to tell” about breaking regulations during discovery, and responded that that would violate the fundamental human right to privacy – literally a foreign concept to those of us accustomed to living under the Patriot Act. Not only could a company not access or even put a litigation hold on employee email in many EU countries, according to Backhouse even board meeting notes would be forbidden since they would identify attendees, potentially revealing where they were employed at the time.

The panel concluded that international e-discovery is not a checklist, but a carefully-negotiated balance between compliance and avoiding sanctions. We continue to follow this with interest, particularly the pending updates from the UK Civil Procedure Rules Committee, as Nick reported from the Thomson Reuters E-disclosure Conference in London.

Unfortunately I missed the judges’ panel, but the sessions I did attend were informative and underscored some of the trends we’ve been seeing in the market. Namely: the rise of Information Governance, the shifting of roles between e-discovery vendors, service providers, general counsel and law firms as technology moves in-house, and the increasingly (complicated) global nature of e-discovery.

We’re now hard at work on our 2010 long-form report on E-discovery and E-disclosure, featuring 25+ vendor profiles and comprehensive coverage of this fast-paced market – publication is slated for late Q1 2010, after Legal Tech. Stay tuned.

In one of those Autonomy announcements that seemingly appear out of nowhere, the company has declared its intention to “transform” the relational database market by applying its text analysis technology to content stored within database. The tool is called IDOL Structured Probabilistic Engine (SPE), as it uses the same Bayesian-based probabilistic inferencing technology that IDOL uses on unstructured information.

The quote from CEO Mike Lynch grandly proclaims this to be Autonomy’s “second fundamental technology” – IDOL itself being the first. That’s quite a claim and we’re endeavoring to find out more and will report back as to exactly how it works and what it can do.

Overall though this is part of a push by companies like Autonomy, but also Attivio, Endeca, Exalead and some others into the search-based application market. The underlying premise of that market is database offloading; the idea of using a search engine rather than a relational database to sort and query information. It holds great promise, partly because it is the bridge between enterprise search and business intelligence but also because of the prospect of cost savings for customers as they can either freeze their investments in relational database licenses, reduce them, or even eliminate them.

Of course if the enterprise search licenses then get so expensive as to nullify the cost benefit, then customers will reject the idea, which is something of which search vendors need to be wary.

Users can apply to joint the beta program at a very non-Autonomy looking website.

451 clients will have seen my report of Autonomy’s Q2 results last night, so I’m not talking too much out of school here, but one of the more interesting things for the longer term from its conference call was the identification of three phases of evolution from basic eDiscovery through information governance.

The spot in the call where this was examined was given over to COO Andrew Kanter, who is a lawyer. He didn’t elaborate on it as we has clearly reading from a script (so much so that he said “click,” at the end of each slide ;)), but nevertheless I though it was interesting to note and pass on.

The three phases, which the company believes will encompass roughly five years at most large organizations are:

1. Archiving and basic e-discovery as companies deal with litigation or are not in compliance
2. Legal hold and early case assessment – part of what it calls advanced e-discovery – when companies come to the conclusion that manual methods of legal hold – sending emails out to the employees saying not to delete things – don’t work.
3. The third phase is information governance, i.e. the policies and technologies meant to dictate and manage what corporate information is retained, where and for how long. 
   

At the moment, the company is seeing ongoing work in phase one and the start of work in phase two. It has one unnamed client doing phase-two work – a Wall Street institution – with 70,000 desktops and 490TB of data to manage across six geographies. Autonomy says the number of potential deals in its pipeline for phase two has increased in the last quarter, but its timelines are still a bit fuzzy. But it seems like Autonomy is not seeing any phase three, i.e. full-on, enterprise-wide information governance work at the moment.

We have seen this movement from e-discovery to information governance in our own research, but we’ve also noticed how early we are in that process. In fact Kathleen Reidy is about to publish our report on information governance that picks up directly from where our December 2008 report on e-Discovery and e-Disclosure left off. In this new report we will examine various approaches to information governance and how it will impact the market for archiving, content management, search and e-Discovery going forward. Kathleen or I can provide more detail should you require it.

Just wanted to make a quick addition to Nick’s post about Interwoven search.

The Interwoven name is not lost entirely, it is just being removed from the WorkSite, RecordsManager and Universal Search products in favor of reviving the iManage brand.  I’m not sure why Autonomy wants to bring more brands into the mix, when there is already Autonomy Zantaz, Autonomy Meridio and so forth; the overall info governance story might seem stronger if the individual components weren’t all still branded separately.

In any event, we have Autonomy Interwoven Web Solutions now, which does make sense since WCM is what the Interwoven brand has always been most strongly associated with, despite its success in the legal market.

And it appears there’s been some IDOL magic with Interwoven TeamSite, similar to what Nick described with Universal Search.  Autonomy announced today that:

Autonomy’s core infrastructure software, the Intelligent Data Operating Layer (IDOL), is now the underlying technology for TeamSite in version 6.7.2.

We haven’t been briefed yet on what exactly this means but again, as Nick noted, the speed of these integrations leaves us scratching our heads, unless this is the fruition of some work that was started prior to the acquisition.  The press release does also note:

A series of new modules leveraging additional capabilities IDOL brings to TeamSite will be released over the coming months.

We’ll be getting all the details in the coming weeks and will provide more comprehensive analysis at that point.

So Autonomy has closed the acquisition of Interwoven and released a few details of its product plans. We’ll be hearing more in detail from senior management in the next couple of weeks, but a couple of things jump out at you when  you peruse that document.

Firstly the usual, magical IDOL integration has happened again. What Autonomy is calling iManage Universal Search, is of course very similar in name to Interwoven’s Universal Search, which was powered by Interwoven’s agreement with Vivisimo.  Now, just like that! – Vivisimo has been swapped out for IDOL. That’s not surprising of course, as everything Autonomy does is based on IDOL.

But the speed of integration seems unlike anything else we see in the industry and leaves us scratching our heads as to how this can actually happen so quickly, especially as we don’t believe IDOL to be a very lightweight, REST-like interface or anything like that.

Secondly, it looks as if the various product names within Interwoven – iManage, Discovery Mining, TeamSite and so on will be retained, while the company name disappears.

But, as I say, we’ll hear more soon and will report back in the form of a research update on Autonomy.

I commented in late January that there seem to be two schools of thought at the moment on spending in ECM — in that post, I was talking about downturns in ECM spending overall versus serious investment in information governance-related technologies, like archiving, records management and eDiscovery.

The same dichotomy seems to exist in specifically WCM at the moment as well, though for different reasons.

On one side of the WCM coin, we have Vignette, which turned in an ugly Q4, with revenue down 29.4% year over year and license revenue totalling just $7.3m or 19.5% of revenue.   And we have the Autonomy acquisition of Interwoven, which was not primarily driven by Autonomy’s desire to be in the WCM business (here’s Nick’s take on Autonomy’s drivers).  We’re not saying Autonomy won’t invest in WCM, it’s too early to make any kind of judgement on that.  But nobody is pretending Autonomy would have bought Interwoven if it didn’t have the WorkSite and Discovery Mining businesses and expertise in the legal industry.

On the other side of the coin, we have FatWire, which yesterday announced 40% year-over-year revenue growth in 2008 taking it to $44m.  This is the first time FatWire has publicly announced a revenue number, clearly it thought it had something worth bragging about (I was pegging FatWire’s 2008 revenue at about $40m, so it beat my not-entirely-informed estimate).

Obviously FatWire is a good deal smaller than Interwoven and Vignette and is growing from a smaller base.  Still, it reports an overall strength in the market domestically and internationally that is intriguing.  And it’s not alone in noting strength in the sector — Sitecore made a similar announcement back in November.

Is WCM a strategic investment you have to make when IT budgets are tight?   More and more business is certainly done on the Web, customers spend more time researching buying decisions on the web, a lot of Web sites are in need of update, it’s a less expensive marketing channel, and so many companies can’t afford not to invest.

The counter argument to this was articulated, ironically, by Open Text CEO John Shackleton on the quarterly earnings call when he was asked about the Interwoven transaction.  He said:

…one of the concern areas would be in the web content management where like most managers if someone came to me and said our website is looking a little old. We need to spend $1 million to clean it up. I wouldn’t see that as a must-have. So what we’re seeing is it’s not critical, people are putting off those decisions to upgrade their websites. I would see that Interwoven like our web content products is seeing some softness in the market.

That from a vendor with WCM in its portfolio, though it’s hardly the company’s focus.

So what do you think?  Is FatWire simply absorbing some of the business that would have gone to Vignette and that’s enough to support the growth it needs as a smaller company?  Or does WCM have some legs in a tough 2009?

By way of follow-up, I wanted to answer the questions that I didn’t get to here, so that everyone can share. I haven’t answered absolutely every one here – I don’t have a figure for market growth rate, for example.

Q: Do law firms, enterprises, etc prefer choosing a service that is on-premise vs. SaaS? Why?

I answered this on the call, but it obviously varies depending on the size of the company involved, the amount of times they’ve done eDiscovery, whether they’re a law firm or not. Bear in mind that the early days of eDiscovery were dominated and to some extent still are – by services companies like Fios and Kroll Ontrack that provide outsources data processing. So the common FUD tactic used by on-premise vendors to knock SaaS, i.e. that customers won’t like their data leaving their premises and ending up on someone else’s server, doesn’t- or at least shouldn’t – really apply here. Sensitive data has been removed from organizations for eDiscovery purposes for more than a decade like that already.

The larger companies will, on the whole, still prefer eDiscovery to be handled in house in terms of the software they use, though you should remember they almost always engage outside counsel, and the two of them need to be working with compatible systems, so large organizations are starting to have purchasing influence over the technology used by law firms.

One key thing for vendors to remember is that if they’re selling their eDiscovery as something to be used in a reactive eDiscovery process which almost all of them are to one extent or another – it’s hard to sell a reactive product to the enterprise if it isn’t quick to deploy — and that’s where SaaS and appliance have an advantage.

Q: You mentioned IT organization not be capable of pulling together different apps…do you see this a benefiting ECM vendors re: single repository play or is a federation across the data stores more likely?

If ECM vendors can solve a problem of both the legal and IT department simultaneously then it obviously should be good for them. How they do that could be either way. Some of the larger vendors will go all out tp optimize their own repositories so that the full benefits of their particular eDiscovery offering can only be had by putting all the content in their repositories. But others are proving successful with ‘manage in place’ federation architectures too. It’s not a case of one or the other winning overall, we don’t think.

Q: The sector seems quite fragmented do you envision a lot of consolidation? Which vendors do you think could possibly be acquired and how should a buyer consider picking the right vendor?

A: We envisage some consolidation certainly, though a lot has already happened. I’m not going to name names on the blog, beyond what I said on the call, that among acquirers we would expect HP and Symantec to feature, though there are others mentioned in the report. There are also segments and companies mentioned as potential targets in the report too.

As for how a purchaser should pick a vendor – I’m assuming the questioner means in the light of potential consolidation – then you need to do some homework on the stage the company is at, the amount of investment its taken on and has left, profitability or otherwise, the history of the management and so on. At the end of the day, if it gets bought, it then depends which company it gets bought by; if it’s one that just grabs the customers, I’m sure competitors will be offering favorable deals to switch before the ink is dry on the deal.

Q: One of the companies I noticed was not mentioned in the presentation was H5? Is this a company that you follow? How is the business model of this firm different?

Yes, H5 is in the report. It does have a slightly different model from other software or service providers we’ve looked at in that it offers a combination of consulting services and automated review as an alternative to outside attorney review. Plus, it offers up-front scope model, rather than billable hours.

Q: How does eDiscovery tie into other Security tech like Log Managements, or storage of Emails, IM etc? Should eDiscovery be the central control point for Enterprise security?

This is a very interesting question. And one that I’ll deal with in a separate post soon. Watch this space.

Q: How important do you feel legal holds solutions are?

They’re an important part of the preservation stage of the EDRM, but technically not that hard ti implement. Autonomy and Recommind are two vendors that have recently introduced such a function into their eDiscovery offerings.

Q: How do you think demand for eDiscovery solutions will be impacted in tight IT spending environment?

There will be tension between eDiscovery as capital expenditure versus operational expenditure, as there always is, but obviously large scale cap ex spending is something all organizations are trying to avoid right now. It’s hard to see however how in highly litigious industries eDiscovery can be anything other than non-discretionary spending. There will be pricing pressure on some vendors and companies will do whatever they possible can to reduce data volumes if they’re still being charged by the gigabyte. That model will also be called into question by the largest customers.

Q: Could you comment on the kind of data that is fair game in a discovery process? for example, what about IMs or even data that is stored in the cloud like salesforce.com transactions?

A: Anything stored electronically is fair game in an eDiscovery process. With something like data in a Salesforce.com database that’s obviously a lot easier to extract than if some instant messaging systems, And if your organization relies on one of the free pubic IM tools, like AIM, then you could have great difficulty  retrieving it, unless the logs are stored locally on desktops, as it can be quite easily, with iChat on Macs, for example.

Q: Where can I get access to this presentation and report?

The report information is here and the presentation will be emailed to you – drop us a note at this address. The webinar will be available for download very soon too. I’ll put a link up here as soon as I have it.

Q: Why can’t I hear anything?

A: We got this question a few times. So I’d like to apologize and say thanks to all of your that persevered with our audio problems – we couldn’t get he webinar tool’s audio channel to work, despite it having worked perfectly in two prior run-throughs. I have much more sympathy than before now for vendors doing live demos – I feel your pain

There seem to be two schools of thoughts at the moment on how ECM vendors will fare the tightening of IT budgets.

On the one hand, few doubt there is increased legislation and regulation headed our way on a global basis, particularly in financial services and government, and this could be a boon for ECM vendors that sell document and records management systems for compliance purposes — IBM, Open Text, EMC, HP to name a few.  Litigation related to events of the past four or five months is also likely, making the need for eDiscovery tools that can help organizations more cost effectively deal with discovery requests for electronic information more dire.  The vendors listed above, along with a host of others, certainly see growth opportunities in eDiscovery (this was a big part of Autonomy’s rationale in picking up Interwoven last week).

But on the other hand, IT spending is taking some big cuts and ECM vendors aren’t going to be immune to this.  In October, we noted data from our survey partner ChangeWave that forecast declines in ECM spending in Q4 and we’re watching some of those results come in now.

EMC’s Q4 revenue for its content management and archiving (CMA) division declined 12% year-over-year, with license revenue down 30% in the quarter.  For 2008 as a whole, EMC’s CMA division did grow 2%.  Interwoven’s Q4 revenue held up ok, with 11% revenue growth and 6% license growth; about half of this is typically Web content management revenue though, a different market from the traditional ECM and compliance-related stuff discussed above.  (There’s no way to break out IBM and Oracle’s ECM-related revenue, unfortunately).

Open Text announced its fiscal ’09 Q2 earnings yesterday, with revenue up 14% year over year to $207.7m and license revenue up 18%.  Open Text has been beating the compliance drum for awhile now (it was perhaps pushed here earlier as its initial strength was more in the realm of collaborative document management, SharePoint’s target market), and may be benefiting from that most now.  (With ongoing success in this range and high interest in compliance-related markets, we continue to ask if/when Open Text will be open to a deal itself).

Compliance/records management/eDiscovery hasn’t necessarily been the number one sales driver for most ECM vendors (except for Open Text which has tied 70% of license to “compliance” in recent quarters).  Growth in these areas will have to make up for potential shortfalls in other tried-and-trued areas of ECM — the transactional content apps for things like loan originations, account enrollment, claims processing, drug approvals and myriad other types of business-specific apps for which organizations use ECM.

These vendors are also still figuring out how to deal with SharePoint in the market.  While most have a more realistic view of what SharePoint is and isn’t in the market at this point (it is increasingly a standard layer for basic content services but it’s not full ECM for compliance or transactional apps, at least not yet) and have developed some nuanced strategies for co-opetition with Microsoft, there’s still little doubt Microsoft has taken some ECM business that previously went to bigger, more sophisticated document management products simply because there weren’t other alternatives.  A new version of SharePoint expected as part of Office 14 late this year / early next could also see a lot of customers pushing off decisions in this difficult 2009 to “wait and see” what SharePoint.next has to offer.

If you missed it, there was an article from CNNMoney earlier this week on Open Text and spending in this sector.