Are you protected? Risk management for law firms

With the advancing recession as well as recent disasters, both manmade and natural, devastating many businesses, is your law firm prepared for the worst? Anthony E. Davis, one of the co-authors of "Risk Management: Survival Tools for Law Firms, Second Edition," discusses the threats facing today’s law firms and how to effectively address them.

What does risk management entail in the context of law firms, and why is it important?

The words "risk management" are very negative to lawyers because, by definition, lawyers are risk averse. And if there's anything that lawyers are more hostile to than risk, it’s management. Therefore, when I talk to lawyers in firms about risk management, I show them that it’s actually about positive values.

First, it’s about serving clients better. It’s also about making one's practice, whether one's a solo or a member of 1,000-lawyer firm, more profitable.

Risk management is also about aiding a lawyer’s access to malpractice insurance. Insurers are increasingly sophisticated about the difference between a well-managed and not-so-well-managed law firm. And they're very attuned to whether law firms are operating under appropriate policies and procedures. The degree to which insurers believe that law firms are doing so affects not only the price they’re offered, but also the scope of coverage, the limits that firms will be able to buy in the marketplace, the amount of their deductible and the terms of coverage.

Finally, risk management is essentially about avoidance of risk. Of course you can’t avoid all risk—you do your best to manage, reduce and control it. And in that regard, I define risk extraordinarily broadly. It’s not just about malpractice insurance. An example is fee disputes. Fee disputes are risks in a variety of different ways. Every minute that a lawyer spends dealing with a fee dispute is a wasted minute not spent practicing law. So, by definition it’s a lost opportunity.

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How can a law firm begin forming a risk management strategy?

Risk management generally involves looking at seven different areas, the first four being the most substantive. First, client intake management—who you take on as clients, and on what terms, and who you reject—is a key part of risk management. The second, in the broader sense of the term, is fees—fee arrangements, billing systems and collections.

Third is the management and use of technology, such as the protection of confidentiality, protection of client secrets and records in an era of electronic communication and data storage. Equally vital in law firms is the whole issue of calendaring, documenting and managing deadlines and utilizing the technology appropriately to accomplish those tasks.

The fourth one is human resource management. Legal services are still, in large part, personal services delivered by human beings. When you're managing the quality of work, you’re not just looking at the work, you’re looking at how you are managing the people who are doing the work.

And then there are three subordinate areas: Do we have in place appropriate polices and procedures for dealing with things when they go wrong, as they invariably will?

There’s also the issue of business recovery planning—disaster planning—and that’s not just having a back-up data plan but it’s all of the issues that go into what happens if your office was rendered inaccessible for a period of days or months, and how you would go about giving seamless service to clients.

The final item is financial controls. Law firms, unfortunately, have a fairly high rate of people stealing from them including, occasionally, lawyers in the form of improper expense requests or stealing of firm money or client money.

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Now that we’ve looked at those seven areas, can you give us an idea of some risk management strategies within law firms?

I like to describe risk management services a bit like a tiered wedding cake. The biggest area of risk management services is training and education, given in the form of continuing education, information, manuals, and online policies and procedures—however a firm disseminates information and trains everyone in what is expected of them.

The second area—What can lawyers do? They can do an audit. Firms can do their own audit, or they can have an independent audit. The purpose of an audit is similar to an MRI in the medical context: it’s a diagnostic tool. It’s finding out what policies and procedures people are actually following, as opposed to what law firms think they need in terms of risks that our practice is likely to face.

The next layer up, after you’ve done the audit is, "What are we going to do to fix it?" And that relates to writing policies and procedures, more training, developing client intake systems or identifying and putting into place appropriate calendaring function software. It’s whatever will help accomplish those first two goals of serving clients better and becoming more profitable.

At the top end, it’s about resolving problems when they come in. I call it the hotline service—whether it’s an outside service or in-house general counsel. It’s about making sure that there’s someone there to answer questions.

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Who is an appropriate person to actually head up those efforts?

Internally, a firm of any size these days needs a general counsel—and the number of lawyers in the firm will determine whether it should be a full-time position, a part-time position, or even a full team of lawyers in an Office of General Counsel. GC’s are responsible for looking over all of the areas we talked about and establishing policies and ensuring that they're being complied with.

In the area of human resources, the general counsel will work with human resources staff; in the area of IT, he or she will work with IT personnel to develop policies to choose software and see how it’s used. But overall, risk management in all its manifestations should be the general counsel's responsibility.

In the past several years, going back to 9/11, we’ve seen many disasters, both natural and manmade—the California wildfires, acts of terrorism, Hurricane Katrina. Can you offer specific tips to help ensure firms can continue to serve its clients should such an event occur?

What every firm needs to do is to develop a plan that is particular to its own needs. There are materials out there, including another ABA book that Professor Gary Munneke and I wrote, The Essential Form Book: Comprehensive Management Tools for Lawyers, which has a full segment on disaster and recovery planning.

Law firms must answer the questions: "What are the essential elements of operating this law firm?" and “What would happen if one of those elements went down?” Technology is one consideration, but law firms also need to look at how employees would operate, how they would communicate with each other; and whether everyone knows what the plan is.

Other questions include—for example, in the instance of a hurricane that closes down a firm because of flooding: "If our computers aren”t accessible, how are we going to access the back-up data?" "Can people work from home?" "Have we developed the right system so that the server will keep running even if we”re all working remotely?" "What happens to files, and how can we recreate them?" A number of firms, especially in hurricane-prone areas, have taken this a step further, developing plans to keep people working during a disaster. There”s a huge array of issues that can, in a very formal way, be reviewed as a check list.

The fundamental question that each firm needs to address is, "How will we continue to provide seamless service to our clients “if,” and each firm needs to come up with its own set of "ifs."

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Can you speak a bit further about keeping a disaster recovery plan fresh and how to make it a priority?

Risk management is a process, not an event, and it’s got to be something that management buys into, supports and continuously reinforces. It’s no good if you go to a firm and ask the chief administrator or executive if the firm has a plan, and the only place it exists is in his or her office.

Once a plan is in place, you have to keep going through it, testing it and making sure that it works, and you have to educate people regularly.

But clearly you’re not going to treat it as a priority unless you understand that the better you do at risk management, the better you’ll do with respect to client service and firm profitability.

Do you have any other tips for law firms, especially in light of the economic recession?

In hard economic times, there are a number of areas that require a lawyer’s particular attention. In particular and number one, it’s the selection of clients. It’s especially important in hard economic times that the clients you take on are appropriate in every way—their cases involve matters you know how to service, you have the expertise, and you can provide the service in a price-appropriate way so that the clients are satisfied and are willing to pay for the service. You also need to be more diligent than usual to avoid conflicts of interest. Client intake management is key to success in good times and in bad. But it’s also an area in which corners are often cut in hard economic times and that can lead to even more trouble.

Similarly, fees—fee arrangements, billing and collection—is another area of concern. It’s important to have in place good engagement letters so that clients are able to pay you and understand the limits of the relationship, how you bill and when payment collected.

More generally, in recent years, where there are very large claims, there are often the same things going on. First, very often you have a bad client. In addition, we often find very little management and oversight within a firm of the actual law practice by its lawyers—nobody actually knew what was being done until it was too late. On the other hand, last year we saw the demise of a major firm, Jenkins and Gilchrist, which faced a risk that they actually did know about, but chose to ignore. That related to the issuance of tax opinions that the IRS said was improper, costing the firm more than $90 million and forcing the closure of the firm.

However, that’s rare; more often it’s one or two lawyers who are engaged in what we call, "a frolic of their own." If the firm had known what they were doing, it would have required them to stop.

How well we manage the practice of law and how well we manage the delivery of services is of key importance to avoiding unexpected messy claims—and gets us back to those two core principles of serving clients and ensuring profitability.

Listen to a podcast interview with author Anthony Davis here.

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