20 November 2006
The past decade has seen a sea change in attitudes across the risk management industry. Increasing regulation, combined with a series of major incidents, from the tragedy of 9/11 to the collapse of Enron, have forced all businesses to re-evaluate how they consider risk.
In the corporate world risk directors have been part of the establishment for a long time, but in the past few years law firms have been catching up. The latter would argue that they have been making dramatic alterations to the way they operate without the helping hand of regulation. Instead, they claim, change has come from internal recognition of the need for ever-improving standards.
Indeed, the past decade has certainly seen changes for the better from a risk perspective. Most of the large law firms, and many smaller operators, have full-time risk managers or individuals within the firm with responsibility for risk. Many of them come from outside the legal profession and the majority have wide-ranging roles that encompass all aspects of the business.
One of the historical blocks was that law firms tended to look for tangible fee earnings from their staff, not realising risk management was ultimately about saving money. The recent change in attitude has encouraged the recruitment of professional risk managers with full support teams.
Risk managers have become risk directors, earning their places on management boards and so bieng able to bring the issues of risk into play from the top to the bottom of any firm.
But the approach varies from firm to firm, much depending on the partners' willingness to embrace the concept of risk and their recognition of the way in which it can help shape the structure of the firm.
Some firms still limit risk managers to looking after professional indemnity issues, while others will make sure it is included in all aspects of the business. DLA Piper, for example, has appointed Julia Graham as chief risk officer. Graham acknowledges that the demands on a risk officer vary hugely, depending on whether they work for a large international practice or a smaller national firm. She sums up the changes of the past few years by saying: "There's an increase in the number of people coming in who aren't lawyers but who are professional risk managers."
They are also being employed full time, with a team to support them. And the nature of the work they do has broadened and now includes advising on everything from recruitment to money laundering, as well as managing client intakes and international jurisdictional issues.
Risk groupsLaw firms are becoming more corporate in their approach to risk management. This is evidenced by the Association of Insurers and Risk Managers' decision to establish a special interest group for law firms.
Law firms cannot afford to merely pay lip service to risk management. Issues need to be raised and solutions developed if the businesses are to be driven forward. For example, risk manager Philip Fry at Clarke Willmott is an advocate of an inclusive approach towards risk management. He believes that, if someone raises an issue of concern, it is often the very same person who can identify the solution.
Within Clarke Willmott, the partners take weekends away to concentrate on reviewing the firm's business plan. As part of that, they are all asked to consider the risks and to quantify any potential impact. Fry says, by doing this, "ownership of the process becomes quite different. It's a hearts and minds thing."
He adds: "You really need someone in the role of risk manager who'll weave the thread into the fabric of the firm."
Using a professional risk manager rather than a lawyer also helps in identifying risks, not least because the manager is much better placed to take a step back and offer a slightly more impartial view.
For smaller firms there is often no capacity to employ a full-time risk professional. But the concept of risk management can still be embraced. If the partners, or even the sole practitioner, can take time out to evaluate their business, it will pay dividends in the long term.
Robert Chapman, chairman of the risk group at Eversheds, says insurers want to understand the business that they are taking on and also to hear first-hand of the efforts made to reduce the risk of claims. By having a risk group in place the firm is well equipped to answer those questions and, ultimately, reduce its costs on insurance.
"You can call it risk, or you can call it quality," says Chapman. "You should look at it as a positive thing that will improve the quality of your operation.
"It's all about making sure the right systems are in place and that there's an understanding that supervision is a top priority. For example, you need to make sure documentation is in the best possible condition when it's sent out, giving confidence to your client."
This is all about raising the quality, he says, as well as reducing the risk, which is why his firm appointed its first quality director a few years back. Hazel Ryan reports directly to the Eversheds executive and is empowered to bring about any necessary changes.
Growing trendLaw firms face some major changes in the next few years, not least from the impending Legal Services Bill in the UK. The impact of that legislation may not be felt immediately, but there is potential for greater competition for legal services, particularly at the lower end of the scale.
For international firms, growth into emerging markets brings plenty of challenges and a huge responsibility in ensuring that all parts of the partnership, however far-flung geographically, are working as one.
Risk management should be about building the right structure for the future and ensuring the firm is in the best possible position to not merely survive, but to flourish.
In the past 10 years we have seen massive changes in perception: instead of risk managers we are seeing chief risk officers; instead of having the role of risk manager as an adjunct to another job, it is the job; and instead of being viewed as a cost, risk managers are now considered an important part of the business.
But this is not the moment to stand still. Law firms have to remember that every opportunity presents a risk - but by reducing those risks, there is an opportunity to really develop and grow.
Nicholas Gilbert and Giles Bentley are directors in the professional risks team at Aon