The evolution of regulatory and legal discovery requirements -- combined with an ever-growing volume of electronic records (especially email) -- may be putting a bigger dent in your IT, legal and compliance budgets than you know.

With records management inextricably entwined with transparency, accountability and good governance, records management that is ineffective or incomplete can be damaging more than just your bottom line. Today's financial executives must proactively contain costs and protect their enterprises by investing in appropriate, comprehensive records management solutions before an audit or the next e-discovery request.

Financial, accounting and compliance professionals must understand the core components and benefits of successful electronic records management and archiving solutions. Following is an overview.

Compliance and Cost Control

The days of doing business in a paper-based world are long past: More than 85 percent of all business communication and transactions are now done electronically. Email is clearly the most prevalent of our corporate communication tools -- 183 billion emails are sent daily.

However, your employees are probably also communicating with your customers and business partners via instant messaging and text messaging. They're also creating endless content (word processing documents, spreadsheets, presentations) on their desktops in addition to the data, reports and output generated by your business applications. The advent of Web 2.0 applications and technologies like blogs and wikis are only adding to the sheer volume of electronic content we generate on a daily basis.

In the paper world, our records management policies were relatively simple. A copy of our correspondence was filed: initially in our administrator's filing cabinet, then moved to the "filing" room somewhere in the office. Eventually, the document was moved offsite to a data storage facility, where it remained for a certain number of years before being destroyed. Producing a historical record prior to its destruction was therefore equally simple.

Few corporations appear to have applied the same rigor to electronic records. Recent research by Gartner Group, a leading IT analyst firm, shows only 10 to 15 percent of organizations have applied some form of data retention strategy to their electronic records -- the rest have nothing, except most likely a data backup system.

Those who lack appropriate records management solutions should understand three points.

First, as many high-profile litigation cases have indicated, backup systems, while being the fastest way to restore your system in the event of a disaster, are the slowest and least efficient way to retain, review and restore records required for audits or e-discovery requests. In addition, backup tapes are not a cost-effective archiving solution -- the cost of processing a single backup tape for e-discovery can exceed $3,500.

Second, each company must make decisions on what constitutes a corporate record and how long each record should be retained. As mentioned earlier, SOX is only the beginning when it comes to records retention obligations -- analysts and consultants suggest that there are some 15,000 regulations worldwide mandating the retention of electronic records. Developing retention schedules will require collaboration with your colleagues from the IT and legal departments, as well as business users, outside counsel and probably your executive management. Of course, financial executives should remember that IT workers who are asked to formulate retention policies are qualified on the basis of technical skills alone. Assuming you don't work for the 15 percent of today's companies actively managing their electronic records, then your records retention is probably not being managed.

Third, the financial executive that is hesitant about records management costs should consider the alternative of ad hoc solutions -- especially in today's increasingly litigious environment. Fulbright & Jaworski recently reported that companies that are not compliant with the new Federal Rules of Civil Procedure are projected to pay 70 percent of their legal budgets toward litigation. In recent years, companies like Morgan Stanley and Qualcomm have been forced to settle multi-million dollar claims after misplacing data crucial to e-discovery procedures.

Any financial executive with an eye toward controlling records management costs should understand the following facts and fundamentals:

• Email is your biggest risk -- fix it! Email should be the first candidate when it comes to managing information risk. It is subpoenaed in 75 percent of cases. Ensure the IT and legal departments (at a minimum) work together to establish records retention policies that reflect your regulatory obligations, business continuity needs and litigation risks. Make that your policy and stick to it. A retention policy is pointless unless it's uniformly enforced. And remember that "backup and restore" is no substitute for policy-based records retention and archiving.
  
  
• Email is only the beginning! We no longer exclusively communicate through email. We're using IM, texting, blogs, wikis, desktop documents etc. Ensure your retention policies apply uniformly to all forms of electronic records, not just email. 
  
  
• Act now! Start to take preventative measures now so that, if faced with an investigation or litigation, you're acting from a position of strength (versus scrambling to find an email). Remember, if you and your team are asked to produce records and you can't, you either look incompetent -- or worse -- fraudulent.

Developing an effective electronics records management policy -- partly because so many functional departments are now involved -- is no easy task. But departmental coordination cannot be an excuse to avoid the issue; delays in implementation can mean a huge potential liability. A company needs to come up with a basic policy first, implement it, and refine it later as needed to help significantly reduce the level of risk exposure.

New Responsibilities for Financial Professionals

Because electronic records (and the requirements to manage them) are changing the corporate paradigm, the role of financial professionals has been altered -- forcing them to play a role in compliance and risk management-related decisions. Many companies have learned the importance of preparedness for e-discovery procedures the hard way -- by paying large fines and high litigation costs for failing to implement proper policy-based management and archiving of disparate electronic records. Proper records management also has a growing impact on risk management, share price, corporate governance, compliance and HR issues (e.g., personnel disputes and lawsuits) -- topics of fundamental importance to financial executives.

The year 2008, thus far, has been a year where the outsourcing of hosting and archiving solutions has become a trend on the corporate landscape. This is further evidence that today's smart financial executives are taking a new look at records management solutions and taking decisive action. Importantly, they understand that the basic economics of "operational archiving ROI" revolve around five key areas:

1. Online storage
2. Offsite tape archives
3. Employee email management
4. Litigation support expense
5. IT support resources for general data retrieval

Coming Soon: I will explain each operational savings component in detail to help readers understand the ROI-related implications of comprehensive records management and how to assess them in their respective organizations.

BILL LYONS is the Chairman and CEO of AXS-One of Rutherford, NJ. He has served as chief executive in several high-growth software companies for large enterprise markets. In his last assignment, he served as president and CEO of Caminus Corporation, a publicly traded software company providing mid- and back-office software applications. Previously, Mr. Lyons served as CEO of numerous software companies in both the public and private marketplace including Ashton-Tate, ParcPlace Systems, Finjan Software and NeuVis. Prior to his software executive positions, Lyons spent 18 years at IBM in various sales and marketing roles, including vice president of software and general manager of PC merchandising.