So if open relay are bad, then what is the proper way to have things setup?
For the most part there are two different ways that email server are setup to be closed relays.
First off most email servers can easily be configured to only accept email from client software from specific IP addresses. This allows the email server to accept anything from any IP address on the Internal network, while rejecting anything from the outside world. When receiving email from another email server the receiving server should only accept email for a list of known email domains. This is usually a pretty short list.
The second way is to have the email user authenticate themselves before the email will be sent. This is a handy thing to do if you have users with laptops outside of your office that will be sending email as though they were inside you office. This is also nearly mandatory for anyone who is considering implementing SPF on their server and domain.