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One of the persistent puzzles surrounding mergers and acquisitions (“M&A”) activity is its propensity for failure. In fact, hundreds of studies suggest that fifty to eighty percent ofmergers and acquisitions are failures. Thus, while the goal of an M&A deal is that the whole is worth more than the party, the converse is frequently true. An important determinant of any M&A transaction’s post integration success is data due diligence. In today’s M&A environment, where transaction experience substantial scrutiny and technology plays a crucial role, data due diligence is tantamount.

Nonetheless, merging or acquiring companies often fail to perform adequate data due diligence and fail to consider the electronically stored information (“ESI”) and data storage systems of the target company or merging counterpart. This oversight presents substantial risks and can cause substantial post-integration problem and, in turn, increase the likelihood of M&A failure.

Creating an E-Discovery Checklist

One of the crucial ways that in-house and outside counsel can fail to conduct proper data due diligence is by ignoring potential eDiscovery issues as part of the M&A deal.

Why is this important?

eDiscovery issues may well affect the value of the company being acquired, the cost and difficulty of merging the two companies, or heighten litigation risk going forward. Corporations and law firms have fine-tuned due diligence checklists to account for various traditional business risks such as legal, contractual, regulatory, securities, financial and undisclosed liabilities, yet eDiscovery is noticeably absent.

This failure of counsel to conduct data due diligence on a target company’s e-discovery issues, e.g. preservation and cost obligations regarding its ESI, can cause substantial losses for the acquiring company, impacting the expected return.

An e-discovery checklist could have many elements and would vary with respect to the industry and company, but regardless, it should account for:

  1. The state of the target company’s ESI, ensuring that it has been thoroughly identified, categorized, and sourced;
  2. Existing preservation and litigation holds;
  3. The cost of preserving data for existing or anticipated legal holds;
  4. and Both structured and unstructured data

I would like to hear your comments on this checklist, including additions. More thoughts on M&A coming in future posts.

For years there has been a dialog about turning data into information and the usual reaction is the slight tilt of the head and a glassy gaze from the listener that is akin to a dog’s reaction to a high-pitched whistle.  We then go into the definitions of data and information discussing the differences between the two. 

EMC is one of the leading storage vendors and they have a smart and pithy tagline – “Where Information Lives”.  Information does live within storage systems and they house information, protect it and make it accessible to users and applications.  However, storage systems do not make the information useful to the front-line businesses that own them. 

Many storage system folks will respond, ” That isn’t true.  We have CAS and NAS solutions that make use of information.”  This might be true on a limited basis but overall we have failed to bridge the gap between storage infrastructure and information.  Once we had high hopes that this would occur, but it is yet to be realized on a mass scale. 

The reason we have not achieved this is because it is the job of applications to deal with the use of information.  Therefore, information lives on storage systems but the greater use of that information is via applications. 

The problem with applications is that there are so many of them and they each generate information that is proprietary.  There is no correlation of information.  There is no single pool of information.  All of our information is stovepiped.  As such, we limit the use because our information is bounded and boxed. 

I submit that we need information applications that have a universal or federated view of all the information within a company.  The information application (IA) would provide users the ability to access data regardless of what application created it.  At the heart of the IA would be search and indexing – consider it middleware or the engine – that sits between the IA and the company’s storage.  The IA would allow for analysis and cross correlation of information.  The IA would provide tools to re-use of data.

Search already is an application providing tools and use of information.  However, I am also talking about using search and indexing for deeper integration within existing applications and as an engine for new applications.  There will be applications that use the concept of IA as a component and pure IA applications. 

This is a new idea and like so many new ideas it will be met with some misunderstanding (we can already do that), with lots of questions (how much will this cost and whose budget does it come out of?), and with hopefully inspiration to take it further (we can build it).  Information applications will turn the Information Age into the Useful Information Age.

As many of you may know Microsoft acquired FAST Search and Transfer in 2008 for a sizable sum of money ($1.2 billion).   For those of you that aren’t familiar with FAST, there were a fairly successful search and indexing company that was used by Enterprise end user companies.  From the onset there seemed to be a real desire to marry FAST with Microsoft SharePoint and after some twists and turns that is still the strategy – see this Beyond Search blog entry for more insights.

Certainly it makes sense for Microsoft to integrate FAST with SharePoint but what about the rest of the Enterprise?  Yes, Microsoft wants to have all unstructured content be stored in SharePoint but since that hasn’t happened yet and it may never be a fully realized goal – it is important to have Enterprise search be heterogeneous. 

One thing that many readers may not know is that FAST did a great job partnering with storage vendors including EMC and HDS – just to name two of the biggest.  It is uncertain what is going to happen with these relationships based on the fact that Microsoft seems to be focused on making FAST work only with Microsoft products.

It appears that Microsoft still really doesn’t know what to do with its consumer or Enterprise search strategy.  They have a ton of smart people, lots of resources at their finger tips, etc, etc.  However, search software seems to be a perpetual stumbling block.

In March of this year, a court noted that a corporation’s failure to adopt appropriation information polices can results in potentially costly legal sanctions. While sanctions themselves may or may not be substantial, the legal fees leading up to the sanctions will likely to be weighty. See, Phillip M. Adams & Assoc. L.L.C. v. Dell, Inc., 2009 U.S. Dist. LEXIS 26964 (N.D. Utah. Mar. 27, 2009). This decision and other recent holdings serve notice that it is in technologist’s best interest to bring potentially sub-standard retention policies or irresponsible data retention practices that may result in loss of data to the attention of their legal and business archiving/eDiscovery counterparts. The courts, by holding corporations responsible, are certainly acting within the dictates of logic. A corporation deploying a solution that seamlessly allows for additional search, preservation, or production burdens without imposing additional burdens individual employees may be in a stronger position to assert that they fall within the ambit of safe harbor.

Technologists who knowingly withhold such information from their legal and business counterparts, place their employers and their employment at risk. While many grey areas exist as to what constitutes a failure of policies/practices to synchronize with systems, there seems to be clarity on one thing: when policies and practices are in-place, but the systems fail to retain data, a potentially sizable legal problem may arise for the entity.

Technologists are not policy or legal experts, but it is arguably within their domain of expertise to inform the legal and business creators of these policies about the technological feasibility. Moreover, it is evident that a company’s position around discovery is a great deal stronger when a particular employee is responsible for the execution of the preservation, search, and production of information. However, the reality is that placing additional burdens on already overworked employees is a fiction and the information is not likely to be preserved. In addition, companies that elect to place the burden for implementing data retention or preservation orders on their employees–effectively placing the operational execution of preservation, search and production at the mercy of an individual employee’s practice–are making a potentially bad decision.

The extent of personal liability for an individual responsible for ensuring that the corporation policies, practice, and systems operate to some standard is still yet to be established. Irrespective of the legal finding, it can potentially impact your attractiveness to an employer.

Trial lawyers of America, via the American College of Trial Lawyers, recognized that the trial system of America is too expensive and that resolving matters takes too much time.  Trial lawyers also recognize that expense exceeds the actual value in all but the most important matters.  Several organizations, including the ACTL and the Sedona, propagate to reformulate the litigator mindset from combative to cooperative.

The great trial litigators need to resist the temptation to “out cost” their opponents. However, the courts deliver the message via the application of the construct of “techno-legal proportionality”.  The axiom rests on the precept that the value of the information sought exceeds the cost of extraction, respective to the issue in dispute, accounting for the societal benefit catch all.  The success of this requires that attorneys and Judges be more informed about the technological side, so that informed common sense can be applied.

The electronic discovery problem is exacerbated by the high costs of identifying, collecting, preserving and reviewing information.  The questions are, “Why do organizations today have so much information?” and “Why shouldn’t an organization that preserves less information be rewarded?” Companies might be generating more information than ever before, but should the cost abdicate them from responsible and effective enterprise information management principles? It seems that the problem of electronic discovery might actually be a symptom of a larger problem of digital information responsibility.

Shouldn’t companies that have high discovery costs be forced to ante up? If they did, economics would dictate the evolution of new technologies and the adoption of a smarter information management infrastructure.    No lawyer enjoys mindless document review.  The money earned from review is nothing to sneeze at, but increased job satisfaction on the part of lawyers and substantially lower legal bills for clients might be compelling enough to drive lawyers to forgo the additional revenue.

Finally, it seems to me that companies adopting technologies that allow them to effectively manage their information so that there is less retained and that which is retained can be seamlessly collected, preserved, and reviewed would save millions and millions in legal and technology fees. Of course, selecting the right solution and synchronizing the solution with a company’s policies is critical, but it is certainly feasible that most lawsuit-prone organizations would show a fast ROI by selecting the right technology tools.

Storage and Search

I was an industry analysts for many years. I focused heavily on storage systems and was convinced that search and storage would eventually be like peanut butter and jelly. Although we have not seen the realization of this yet – I am still convinced that it needs to and will ultimately occur. However, like all things in the data center, it just takes time.

There are practical reasons why storage and search aren’t more bounded together. For one, search solutions haven’t been scalable or intelligent enough to provide the value that IT professionals are looking for. Second, most search solutions have been associated with specific storage systems and not the entire storage complex. That is very limiting. We need Enterprise search solutions that can access all storage within an organization. The third big issue is that storage adminstrators haven’t figured out why they need it. There are some applications and use cases that are a priority – such as eDiscovery. But storage admins have not found the killer app that gives them that “aha” moment where they just need to have it and are willing to invest time and money.

What is the killer app for search and storage? I believe one killer app is using a universal search application as a tool to give Enterprise end users greater access to the company’s data. We create so much content, using any number of applications, and instead of looking for data via the various application interfaces, having a single pane of glass, to get to any and all content in the Enterprise, would provide huge increases in productivity and efficiency.

This concept should not be a leap for most people , but since no one is complaining about it or demanding it, it isn’t a priorty. However, if you think about the power of being able to easily access content – data – information – we all know that mountains can be moved when this ability is provided. This is where storage admins have to transcend their nuts-and-bolts view of the world and think about the business and how they can apply technology to elevate the companies they work for. It is “right brain” thinking (creative) versus the typical “left brain” logical and rational thinking that is typically needed in the data center. Only by combining the creative and the logical can real leaps forward be made.

Recently I attended an IQPC conference where John Muldoon, from EMI Capital, and I were co-presenters, speaking about the Legal Business Marketplace and how rapidly it is growing

One question that was raised during our presentation was, “Is the EDRM model outdated, based on the technology toolsets currently available?” This question inspires another question, “Is the EDRM model, so heavily relied on, hampering the evolution and delivery of the techno-legal solutions that enable the market to evolve?”

edrm1
Depicted above is the traditional eDiscovery model that a great number of vendors use to position their products in the marketplace. The IQPC attendees suggested that perhaps In-house counsel , the people on the front lines, can use technologies that collapse the identification, preservation, collection, and first pass review into a single step enabling “early case assessment” and allowing them to achieve substantial cost savings.

While my personal position on this question is still evolving, I certainly feel that the attendees raised valid points. It is beyond refute that organizations that acquire the ability to seamlessly identify, preserve, collect, and review when seeking to establish the specific facts relating to a particular issue potentially place themselves in a stronger legal position.

Irrespective of the legal benefit, it is clear to me that if In-house legal departments could achieve visibility into the “creation-to-court” cost of information it would be easy to measure the effectiveness and cost-benefit of e-Discovery technologies. In addition to the business benefits, the same information could be presented to the court to support cost shifting arguments. With this information, the courts could make more informed findings on shifting costs.

I welcome comments and thoughts about the legal process and technology–especially thoughts related to the questions, “Has technology evolved beyond the confines of the EDRM model?” and “Is there monetary and/or legal value in having email creation- to-court cost breakdowns?” and “Can this cost be calculated?”