The feds want your email-and that could mean trouble. Just ask the CEOs of Deutsche Bank Securities, Goldman Sachs, Morgan Stanley, Salomon Smith Barney and U.S. Bancorp Piper Jaffray. In December 2002, federal regulators slapped the five firms with fines of $1.65 million each for failing to preserve internal email.
The prosecutor leading the email charge is, of course, New York Attorney General Eliot Spitzer. As Citigroup and Merrill Lynch discovered to their chagrin, Spitzer is a staunch enforcer of the Securities and Exchange Commission regulation 17a-4, which requires trading firms to save copies of all email for three years and keep them in a readily accessible place for two years.
In this new environment, Wall Street brokerage firms, which may have 10 million emails zipping across their networks each day, have to archive the traffic and must keep a hefty percentage of them at their fingertips. CEOs of nonfinancial companies also realize they’re going to have to do a better job of maintaining access to emails, as prosecutors and plaintiffs’ attorneys take a page from Spitzer’s playbook and demand “electronic discovery” of email.
All of this provides a boon for Pleasanton, Calif.-based Zantaz, which offers centralized hosting, standard archiving and indexing, and restoration of email and other documents that many firms now store on tape. “Enron, WorldCom and the controversies on Wall Street have really highlighted the importance of what we do,” says Zantaz CEO Steve King, who jokes that he should send Spitzer a Christmas basket to show his appreciation. “There’s a recognition among our clients, and Corporate America in general, that we can’t live without email. But it can be a double-edged sword.”
Zantaz, which King says was one of the “poster boys” of excess during the dot-com bubble, created buzz over its supposed ability to help companies archive and manage their data better than anyone else. But in the post-bubble era, it has had the challenge of creating real and lasting meaning for itself. Under King’s leadership, that has meant a sharp focus on easing the email quandary by persuading companies to outsource the problem. Zantaz takes emails and documents off a customer’s tapes or disks and puts them online, where they are instantly available. For customers, the service is less a cost-saving proposition than it is “a peace-of-mind purchase” to appease concerns about regulatory requirements, says IDC analyst Doug Chandler. “The archiving firm can take the worry out of this situation.”
But the real potential cost savings for brokerages and other customers come during a lawsuit or audit. Larger companies are being asked to conduct two or three document “investigations” a day in response to audits, inquiries or lawsuits, says Pete Delle Donne, president of enterprise solutions at Iron Mountain, a Boston-based competitor of Zantaz. It costs a company that hasn’t archived its email in an organized way about $2,500 to search one tape, which stores about 40,000 emails. Costs can quickly mount for a company with 400 tapes in storage. However, iff a Zantaz or Iron Mountain can archive and index the information stored on those tapes, then employees can easily search for the record by keyword.
ShareBuilder Securities, an online trading firm, turned email archiving over to Zantaz for two reasons: to comply with SEC regulations and to control costs. The SEC mandates that broker-dealers have a third party that can independently access their electronic records, to protect customers and respond to regulatory inquires or audits. Outsourcing also relieved the company of what it would have had to pay to develop, run and maintain an extensive digital record-keeping system.
Chief Technical Officer William Bankert and Chief Financial Officer Randy Gausman founded Zantaz.com in 1996. At that time, the SEC had not yet issued its ruling requiring brokerages to archive all email related to financial transactions. Back in 1934, the year the SEC was founded, the agency mandated that exchange members, brokers and dealers preserve paper business records. By 2000, new rules that applied to computer technology and electronic storage were in place, but companies weren’t exactly scrambling to comply. Nonetheless, there was much hype surrounding the issue, coupled with the dot-com market fervor. More than a dozen venture firms were throwing money at Zantaz, which raised $35 million in its fourth funding round.
Today, Zantaz, which has 110 employees, is defined by the button-down but amiable personality of CEO King. The company charges customers a monthly subscription rate based on the amount of email volume. It also generates fees from services and software licensing. Expected to turn a profit by year’s end on sales of more than $100 million, Zantaz is still private and does not have plans to go public in the current environment.
One of the first things King did when he arrived two- and-a-half years ago was to drop the dot-com from the company’s name. “We changed it pretty quickly, considering by no means are we a dot-com,” King says. (Zantaz itself is a made-up name, which the CEO jokingly acknowledges sounds like a heartburn medication.) Shortly after King joined, Gausman left the company and Bankert retired.
Michael Rolnick, a partner at ComVentures, which partly funds Zantaz, says he wanted King in the CEO’s seat because of his strong operational skills and knowledge of the financial regulatory environment. A native of eastern Washington state and the son of a nuclear engineer, King had worked with Rolnick at E*Trade. After four years at E*Trade, King took over as interim CEO at E*Offering, the company’s online investment bank.
When King arrived at Zantaz, he says employees were frustrated that the company wasn’t growing faster or meeting its sales targets. Operating costs had become bloated by dot-com excess. Rolnick knew King would tighten the purse strings. “He has a cost-containment focus,” he says. The company was also selling to too wide a spectrum of companies, from Coca-Cola to Boeing. King quickly moved to home in on Wall Street. He now spends about half his time visiting clients, which include most big brokerages and E*Trade.
King made a hard decision last year to spin off the company’s R&D unit, which had become too expensive. “We were trying to be a service company and a technology company,” he says. So 22 engineers and developers left Zantaz and formed Persist Technologies. King, who sits on Persist’s board, said the decision was controversial, but insists it was necessary to avoid layoffs. Zantaz also picked up some clout last year through an alliance with IBM Global Services. IBM uses Zantaz’s email archiving service and sells Zantaz’s services to its clients. “We’re a teeny little company trying to sell to Wall Street,” said Mike Myers, the company’s vice president of strategic partnerships. “[IBM’s support] really helps the selling process a great deal. We sell this as partners.”
While King emphasizes execution, he leaves the technology to his company’s experts, rarely setting foot in the Zantaz data center, which the company runs like an ultra-protected vault. Data archiving isn’t as easy as it looks. “No information technology department wants to deal with [this problem],” King says. “If you want to elicit a strong reaction from the IT department, ask for a copy of an email you sent a year ago.” Many of them can’t do it-at least, not easily. Of the five Wall Street firms fined in December, several relied on employees to save copies of email on their computer hard drives, but had no policies to enforce this. The firms also discarded or overwrote their backup tapes, which led to the fines.
While Zantaz focuses mainly on email management, rival Iron Mountain’s legacy is marrying paper document management with other services, including digital archiving. The 52-year-old, $1.3 billion company made the shift to digital archiving in November 2001, but the company casts a wider net, archiving email, images, electronic statements and audio, among other information.
Zantaz is now in the process of restoring 20,000 backup tapes for a government client over a period of six months. After restoring the tapes, the data supervisor indexes and archives the data on special servers. Reducing the overall number of duplicate emails stored cuts by 90 percent the space that companies typically need for backups, King says. Security is critical to the company. The data center is seismically reinforced to withstand huge earthquakes. The backgrounds of all Zantaz employees are checked and the doors at the Pleasanton site can be accessed only via biometrics.
While analysts say the archiving market is still small, it is expected to grow quickly, with highly regulated health care and pharmaceutical companies the next obvious targets. The Food and Drug Administration, for example, requires that all electronic records be preserved. And the Health Insurance Portability and Accountability Act defines how individual health records must be kept secure and private.
For King, the job is about building the company one step at a time. Although Zantaz is much smaller than either Amazon or eBay, it appears it will be one of a tiny number of dot-com-born companies to survive. One key was bringing in a no-nonsense CEO who could focus the company on a specific market and a specific strategy.
But Zantaz also got lucky-the explosion of email, combined with the abrupt shift in the legal and regulatory climate, mean that Zantaz has a real reason to exist. Companies simply have to know what emails lurk within their IT systems and be able to produce them. As King puts it: “It’s better to know what’s there than to see your name on the front page of the Wall Street Journal.“
|How Zantaz Does What It Does|