The Great ESI Sales Exodus

The yearning of business development professionals eager to sell offerings beyond the highly commoditized ESI (Electronically Stored Information) play coupled with the rapid consolidation of e-discovery vendors has caused the beginning of an exodus of business development talent from the industry. While ESI practitioners remain temporally challenged to quickly reinvent themselves professionally, sales executives are immediately hoarding toward areas of tertiary opportunity, specifically cybersecurity. The cybersecurity market has not matured yet in the same way as e-discovery, making it a seemingly ripe vertical for transitioning legacy client relationships as well as making new ones. Furthermore, the unique overlap of shared decision makers, data-driven sales consulting and social awareness of services has further encouraged the matriculation of e-discovery sales executives to information protection and security providers.

While the biblical Exodus is rich with themes of salvation and creation of covenant, e-discovery sales representatives who are accustomed to closing big deals, carrying big books and making big bucks may find their transition to cybersecurity more challenging than anticipated. In order to understand how to transition successfully, or why a cybersecurity provider might want to hire an ESI sales representative, it is essential to understand why there is an ESI sales exodus, who stands to gain from this trend and what the cyber sales landscape looks like currently in comparison to the world of e-discovery.

Why Leave ESI?

The three primary reasons e-discovery sales representatives are leaving the space are money, lack of options and boredom. The last is less complex to explain than the former two. Those who have been selling ESI services or software for decades are simply uninspired by pushing offerings difficult to differentiate from their competitors. The lack of broad adoption of more innovative approaches to separate one service provider from another mixed with Relativity’s broad dominance in the space, as both software and the third-party channel solution of choice for most of the market, makes current e-discovery business development pros feel like the only thing that distinguishes them from the pack is personal relationships. Simply put, ESI sales professionals, many of whom are lawyers, are bored with hocking discovery solutions. They are craving more complex challenges, the opportunity to learn new things and meet new people, and are motivated by these desires to find an area with greater intellectual growth potential than what e-discovery can currently offer. It may shock employers to discover that something other than money is driving the career choices of business development staff, but this is the case for one out of every two sales executives who has spoken to TRU Staffing Partners in 2017 interested in exploring job opportunities.

For the other 50% of applicants, money—in one form or another—remains the primary motivator for seeking employment outside of e-discovery. Shifting price points, shrinking compensation potential for some and the growing adoption of managed service contracts all contribute to the dissatisfaction of ESI sales pros. Most e-discovery sales professionals who are overachieving are responsible for generating $5MM/year or more in revenue. Keep in mind, however, that most e-discovery sales professionals who carry this size revenue stream attribute some or most of their top-line revenue to document or managed review services. The margins on these services is extremely low for most, hovering anywhere from 10-35% gross revenue. More and more, vendors are commissioning sales talent on gross margin, not top-line revenue.

Additionally, the aggressive adoption of managed service packages has now eaten away at the once healthy margins vendors commanded on their processing, hosting and project management fees. In order to annualize revenue into exclusive subscription-based models, vendors are taking a haircut on margin for predictability and short-term perpetuity. These decelerators on margin have made it increasingly difficult for successful veterans and new entrants to ESI to make the commissions they are accustomed to or were promised.

Finally, the consolidation of vendors in e-discovery means that each year there are fewer and fewer options for places of employment than the year before. The gap between the larger players doing the acquiring and everyone else has become wildly polarized over the last three years. There is essentially no longer a “middle market” for ESI service providers. There are generally $100MM/year players or bigger, and then everyone under $40MM/year is struggling to grow organically. This means the quality of ESI sales reps has polarized as well. No middle market means no middle class of sales representatives. There are now those who make tremendous amounts of money, those who barely make quota and no longer much in-between. With fewer big employer options for the big sales players and with smaller providers unable to afford high-end sales talent, ESI business development professionals are looking outside the space entirely for their next career move.

Why Stay in ESI?

For ESI sales reps with a proven track record selling around or north of $5MM/year in services, the ability to monetize your experience and network is now perhaps the only reason to stay in the space. In 2015 and 2016, TRU Staffing Partners generated approximately the same amount of revenue staffing ESI sales execs year over year. However, the number of placements in 2016 was almost half that of 2015. TRU, as well as most recruitment professionals, receives a percentage of the base salary as a fee for services rendered. That means TRU placed almost half the headcount in ESI sales in 2016 of 2015. So vendors are paying nearly double the base salary from one year to the next to attract and hire top talent away from the competition. With over half of 2017 expired, TRU’s analytics point to this trend repeating itself again from 2016 to 2017. In 2015, the average salary for a new ESI sales hire was $115,000 base compensation. In 2016, the average base compensation jumped to $175,000. In 2017, with even fewer hires made across the industry, the average base salary for a new hire is hovering at $195,000. Yes, there are outliers who still pay the old average of $100,000 to $125,000 in base compensation, but there are also now outliers who are paying one million dollars or more in salary for the exceptionally proven legal technology sales executive. Now is an important time to consider a career move if you plan to stay exclusively in e-discovery sales.

This shift in compensation has been a positive market reaction for successful individual contributors in e-discovery but has made growth and mobility nearly impossible for representatives consistently driving less than $1.5MM/year. These sales professionals have struggled to command more than lateral moves financially to join other organizations, and with the aforementioned compression of pricing and earning potential due to marginalization and lack of competitive differentiation, these lower-performing ESI sales representatives are also looking outside of ESI for the future of their career. As sales mediocrity evacuates from the discovery space, potentially with no replacement, those still standing could gobble up the client base of the departed. As in any exodus, those left behind may inherit the earth, unless of course those precious revenue-generating accounts are redistributed to “the house” instead of existing sales reps.

Vacancies Go to the House

A new and notable trend among ESI service providers is to assign accounts vacated by departing sales reps not to another rep, but instead to “the house.” House accounts is a term used to describe active clients that are maintained and run by the existing company employees without a new or additional business development professional assigned to growing and earning commission on those accounts. This practice helps the company retain slightly better margins while simultaneously giving operations and project management staff an opportunity to shine by stabilizing and even expanding these house accounts.

Project and account managers are often given additional compensation or bonuses for their ability to maintain existing revenue streams; however, these pale in comparison to what was previously being paid out in commission to the full-time sales exec who once owned the account. For the company, profitability increases, operational retention increases by means of additional financial incentive and, ideally, client retention is maintained as well. For these reasons, large ESI vendors are assigning more accounts to the house than ever before.

Furthermore, e-discovery companies have grown less concerned about the immediate portability of departing sales executives’ books of business since noncompetes are strictly enforced (except in California) and so few people have had visible success quickly moving their clients and their data from company to company in the past several years.

Not all vendors follow these house account principles. Some still reassign account ownership to new or existing sales executives under the company employ.

Why Is Transitioning Easy?

With legal advising on more of the decision-making, ESI sales representatives with relationships and influence in legal could become powerful assets for cyber service and software sellers. In order to own the revenue downstream at times of litigation, e-discovery providers want to get stickier with their corporate clients earlier in their information creation and governance cycles. This means sales talent is swimming upstream prior to discovery requests to collect, host, process and review documents and now participating in technology inventory, vulnerability and risk assessment, governance and compliance policy, cloud migration, breach prevention planning and cyberinsurance consultation.

The stakeholders within corporate procurement groups are often the same buyers for both ESI and information security. Within corporate America, the C-suite and the general counsel’s office as well as outside counsel are getting involved in the purchasing recommendations and decisions related to cybersecurity and discovery, largely due to the enormous costs and risks associated with both for failure to comply with regulatory standards. Having tremendous influence and history with legal stakeholders across the Fortune 1000 and Am Law 200, e-discovery sales professionals are forcing their way out of traditional “litigation sales” roles and aiming to control all the revenue associated with managing corporate risk and data. This will make them invaluable client access points and assets to cybersecurity, risk management and compliance third-party providers.

Why Is Transitioning Hard?

Making the shift from ESI to cybersecurity has been difficult for sales executives for a variety of reasons.

First, there is still a steep learning curve to move from being a consultative e-discovery sales executive to being a cybersecurity one. Many ESI reps think their relationships are enough to bridge the gap and make themselves enticing and appealing to cyber CEOs. This is not the case. Cybersecurity, though often a relationship sell like e-discovery, still requires a significant amount of substantive knowledge to open doors and close business. Cybersecurity may be the greener pasture for many, but switching disciplines still requires working the terrain and knowing how to attract potential clients with credibility.

Another key challenge is compensation expectations. Since cybersecurity is far less consolidated and commoditized than ESI, salaries and guarantees upon hire are rarer and far below the ESI industry averages articulated above. Consider that cybersecurity is still a highly fractured marketplace with regard to the volume and diversity of service providers and software available for consumption. Unlike ESI companies like Epiq, KrolLDiscovery and Consilio, or Relativity, Nuix and Ipro on the software-side, specific brand names do not have the same broad market dominance in security. Cybersecurity Ventures heads the list of the top 500 cyber vendors with only a few currently considered household brand names. There remains a lack of consolidation in cyber software and services, making dominance difficult, acquisitions inevitable and individual sales earning potential limited and relative to both – for now.

Another key reason for infrequency of wildly lucrative salaries and guarantees for cyber sales pros stems from, and is illuminated by, an examination of ownership within the Cyber 500. For many cyber companies, CEOs are owners and often practitioners, whereas in e-discovery, private equity and venture capital are driving the decisions and vision of the large vendors. Many of the founders of these cyber companies are still running their companies and making the decisions on hiring and firing talent to grow their business. Part of the reason for the aggressive increases in ESI sales talent salaries is the heavy insurgence of VC/PE into controlling decision-making authority at vendors. This means spending more money to make money versus a privately funded owner who will have far higher risk aversion to shelling out extreme base compensation plans and guaranteed commission without similar guardrails on guaranteed revenue and net new business attribution. It is not uncommon to find some CEOs expecting even their SOC engineers in leadership roles to “carry a bag!” (Carry a bag is a term used to describe the responsibility of an individual to bring in revenue as part of job expectations and performance evaluations.)

Ramp Time and Deal Size

Though an unpopular reality, it generally takes 9 to 18 months for any ESI sales rep, proven or otherwise, to hit a run rate on target to quota. Larger companies generally have better odds of shortening the timeline of new hire to on-target-to-quota. Smaller companies paying smaller salaries (and often charging less for services) are required to be more patient of their new hires’ ability to get on target to quota.

Cyber is no different. In fact it may take twice that long for an ESI rep to hit the same fiscal targets in gross revenue in the cyber space. This is because, from a top-line revenue perspective, deal sizes are much smaller in cyber compared to ESI. This is slowly changing with the adoption of TAR/CAR/legal analytics, which are driving review team sizes and cost down for those who obtain those services; however, the cost of a document review far exceeds the cost of a pen test 90% of the time. Just because an ESI rep has done $10MM/year in discovery-related services does not mean that rep will do the same amount in cybersecurity, though what is sold in cyber may be more profitable despite being lower in gross revenue from past positions.

One Certainty

Whether you are an ESI sales exec looking to move to cyber, a cyber company looking to hire, a cyber-sales rep worried about competition or an e-discovery vendor retooling your sales force, one thing is certain: There is no lack of demand for talent to sell cybersecurity in the Cyber 500. TRU has tracked over 1,000 openings across North America alone in 2017, many of which remain unfilled to this day. The question becomes whether or not cyber employers see opportunistic investment in ESI sales reps and/or ESI sales reps become more willing to lower their salary expectations in order to facilitate a transition. Both will likely ring true in 2018.

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