By Stephanie N. Mehta
October 22, 2009

Legal departments turn to technology to handle an onslaught of regulatory requests

By Aaref Hilaly , president and CEO, Clearwell Systems

Have some sympathy for your corporate legal department – it’s facing the perfect storm.

Like everyone else this year, the legal department is required to cut its budget, in some cases by 20% or more. But unlike other departments, legal faces a greatly increased workload. It’s not so much because of litigation, although there continues to be no shortage of that. Rather, it’s because of a regulatory crackdown that goes far beyond the financial services industry.

The increase in regulatory activity has come in three broad areas. First, many of our public company clients are seeing far more regulatory inquiries than in prior years. These cause havoc for legal departments because the information requests are often broad and with very tight deadlines. For example, one of our technology clients recently received a request from the Security and Exchange Commission for “all information pertaining to executive compensation since 1992” – and was given five days to provide it.

The second area of increased regulatory activity is around the Foreign Corrupt Practices Act. This has been on the books for a long time, but enforcement has stepped considerably under Mark Mendolsohn, deputy chief of the fraud division at the Department of Justice. This year alone there have been more than 100 enforcement actions, compared to only 38 two years ago, including cases against Sun Microsystems, Shell Oil and one that may result in jail time for the founder of accessories firm, Dooney & Bourke.

For those found guilty, the sanctions have been unforgiving: in the first few months of this year, ABB took an $800 million accounting reserve for issues related to the Foreign Corrupt Practices Act; Halliburton got fined $177 million, KBR $502 million, and the KBR CEO, Albert Stanley, was sentenced to seven years in jail to go along with his $11 million personal fine.

Your most demanding customer: the federal government?

Finally, the federal government has become a more demanding customer, with the Office of Inspector General at each government agency investigating more and more transactions in search of wrongdoing. That impacts every company that does business with the federal government, which has been the one big spender during the economic downturn. We have seen every agency — from Health and Human Services to the General Services Administration to the Veterans Administration — step up its scrutiny of government contracts.

To cope with this increasing workload at a time of shrinking budgets, legal departments are doing what other areas like sales, finance and human resources did long ago: namely, leveraging technology. Previously they may have relied on service providers offering expensive white-glove service, now they are buying software to automate the electronic discovery process so that they can respond to government inquiries quickly and efficiently.

There are two main areas where technology can help.

One is with the collection and preservation of email, attachments and files, so that companies can be sure that nothing gets deleted inadvertently.

The other is with the analysis and review process whereby companies sift through all that information to figure out what they need to provide to regulators.

The savings can be substantial. For example, in a recent exchange on Twitter, an executive at Delta Airlines bragged that his investment in e-discovery software had “paid for itself in the first 45 days.”  (Full disclosure, he was talking about Clearwell – but other products have their fans, too.)

Legal departments are not typically known as hotbeds of innovation within most companies. But that’s changing, as the best ones embrace technology. It’s the only way to weather the perfect storm of shrinking budgets and increased regulatory activity.

Hilaly is president and CEO of Clearwell Systems, a provider of software that helps companies perform electronic discovery in response to litigation, regulatory inquiries, and corporate investigations.

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