Risk Management in a Law Firm
Anthony E. Davis is a partner with Hinshaw & Culbertson, LLP, a U.S-national law firm with approximately 500 attorneys and offices in over 20 cities across the country. Anthony is a distinguished member of the firm’s Lawyers for the Profession practice group that sees itself as “lawyers for lawyers”. He focuses on advising attorneys and law firms on legal professional and ethics issues, law firm creation, merger and dissolution, and, more than anything else, Anthony is known for his consultancy in risk management issues for law firms. In this capacity he is also often called on as an expert witness in court, and as a consultant for underwriters of liability insurance for lawyers. Anthony is recognized as one of the leading authors on risk management in law firms. He also serves as an adjunct professor on legal profession topics at Columbia University Law School. Anthony was interviewed by Leo Staub.
Anthony, in one of your books* you stress the point, that risk management is absolutely essential for law firms in order to sustainably conduct their business. Do lawyers feel inclined to listen to you? Are they not rather concerned on how to make money?
Well, that is exactly what we help them to do! When we talk to law firms about risk management we want them to be more profitable. Look at all these recent cases where law firms paid huge sums of money to clients who sued them, or to regulatory bodies who fined them on the grounds that the law firm violated duties to clients or the governing professional rules! Some of these firms even went out of business! If there had been a proper risk management in place, they could have managed the risks and possibly avoided the negative outcomes they suffered. Moreover, law firms with effective risk management in place serve their clients better, understand risk better, keep access to liability insurance for a reasonable price, and therefore make more money.
I would guess that lawyers usually are very confident when you approach them with the question concerning the adequacy of their risk management measures?
Of course they are! It is not easy for lawyers to understand that knowing the law does not necessarily mean being able to conduct business within reasonable boundaries of risk. The critical word in the phrase "risk management" is “management”. However, lawyers are not educated to be managers. So, when looking at the risk landscape of our clients, first, we always ask about the firm’s governance. Is there a management structure in place that is qualified and empowered to direct partners, associates, and administration staff to obey appropriate procedures designated to avoid or minimize risk? Does the firm have a General Counsel and/or an ethics committee people can turn to when they see risks in the course of working on cases? Generally firms with lock-step compensation systems have a more risk averse culture than in eat-what-you-kill firms.
What are the most important issues when you work with the firms on their risk management?
As I said, we first discuss the firm’s governance. We then go into the matter of client selection. Here too, the incentive to avoid working with dubious clients is, generally speaking, more likely to be accepted in a lock-step environment. As we have learned from many professional liability cases, picking the right clients is the key to “low-risk-lawyering”! Increasingly important in managing risk are the procedures governing fees and billing, which are often the cause of serious trouble between law firms and their clients. Of great importance today is the effective management of technology, and especially communication technology. But, returning to the first issue we identified, most important of all are the people in leadership positions. If the tone from the top does not call for and fully support a risk management culture firms can never succeed in establishing the appropriate behaviors in their professional and administrative staff. Next, poorly articulated or inadequately managed financial controls in law firms facilitate fraudulent activity against either clients, or the firm itself – or both. So, firms need to examine these systems as part of their risk management efforts. Firms also need to ensure that they have in place procedures to ensure disaster recovery when external risks (such as weather related damage to infrastructure, or fires) have interrupted the firm's ability to operate.
So, how do you approach law firms when they turn to you asking for advice?
In most cases a good entry point is training for the lawyers, explaining what risk management is all about and how it will benefit their business. Lawyers who participated in such training sessions usually do see the benefits for their business at once. Alternatively, sometimes we are asked to perform an audit on the firm’s exposure to various risks. In the process of conducting the audit we talk to leaders as well as to the „workers“. Juxtaposing the two perspectives invariably provides a good picture of the current risk profile. As soon as we are in a position to explain the state of their own risk management profile, we can move on to help them to enhance their operations by reviewing the risk policies, the risk management processes, and the systems the firm has in place. That process usually results in a customized manual for the firm’s risk management procedures and structures. In addition to that we are often asked to act as external „hot-line-providers“ in order to provide advice and support when actual crisis situations arise.