Firm footing

Insurance costs and other considerations are now prompting firms to employ individuals purely to oversee risk and efficiency. John Verry asks: should you appoint a risk manager?

Risk management is like that scary 'mental block' file at the back of the cabinet – often thought about, much discussed, but rarely if ever progressed.
Until the demise of the Solicitors Indemnity Fund, the legal profession tended to treat risk management as a 'why bother' subject. Since then, however, the smarter firms have not only acknowledged the need to talk about risk management, but actually aim to do something about it. This has resulted in some of the more progressive commercial firms appointing their own risk manager whose ultimate task is to ensure that the client's work is carried out as quickly and efficiently as possible with minimum exposure to the risk of something going wrong.
One consequence should be a claims history that will be more attractive to a commercial insurer. This will become ever more important as insurance rates rise and as some insurers exit the professional indemnity market altogether. Firms will inevitably look for ways to keep premiums to a minimum. Of course, another way of doing this is to increase the firm's excess, but this means increasing the firm's financial exposure to claims, making the need for effective risk management even more pressing.
Another benefit of hiring a risk manager is the boost it gives to client satisfaction. This in turn enhances the firm's reputation. A reputation for a solid, reliable and efficient service is something that all suppliers strive to achieve.
Setting and monitoring service standards
How does the legal profession compare with other businesses in the sphere of service delivery? For example, any company involved in a manufacturing process will have defined systems or procedures for taking orders, producing the goods and delivering them to the client as quickly and efficiently as possible. Those systems and procedures are often overseen by quality controllers and risk managers. In many cases, the processes will have to comply with direct and indirect legislation such as health and safety, environmental regulations and competition law.
By contrast, many of the law firms that advise these companies have no such controls or standards, let alone a nominated individual to monitor them and ensure compliance. Just how impressed would the corporate client be if it knew what really went on in its solicitor's office? It might conclude that the reason its case has not resulted in a negligence claim is down to luck rather than judgement.

One consequence of appointing a risk manager should be a claims history that will be more attractive to a commercial insurer

It is not only operational risk that needs to be monitored. In many cases, the risk manager's duties will extend to strategic risk and disaster risk. Who is responsible for carrying out the due diligence investigation of a target firm in a takeover or merger? What contingency plans are in place in the event of the firm's premises being extensively damaged or destroyed by fire? What contingency plans does the firm have to deal with a recession?
Under-regulation and over-regulation
Many firms are reluctant to invest time and money in risk management. This is understandable. There is a natural aversion to regulation on the part of many solicitors; after all, this is an entrepreneurial profession and solicitors need to adapt quickly to the needs and requirements of the client. The danger with imposing rigid internal regulation is that too much time is spent addressing potential problems and complying with procedures, thus preventing the firm from meeting the client's real expectations for quick, high-quality advice.
No organisation wishes to stifle individual talent, but this must be weighed against the need for effective systems and procedures to be in place, adhered to and monitored to reduce the risk of an error being made. The actual systems and procedures will depend upon the firm. Certain basic causes of claims must be addressed, for example time limits (diary systems), delay (file review systems) and supervision (file audits).
Where to start? Remember that the objective is to complete the client's work as quickly and efficiently as possible, with the minimum exposure to risk. What is the core duty of a solicitor? To gather all relevant information to advise the client, so that the client may make an informed decision as to what they want to do. The relationship between the solicitor and the client will centre on the file. A good starting point would therefore be to link your risk management strategy to the life cycle of the file. There should be procedures relating to opening the file, undertaking and discharging the client's instructions in accordance with your duty of care, and closing the file.
This sounds like a simple task, but the process of drawing up procedures needs to be kept under control. A room full of lawyers discussing the procedures for opening a file could produce a document of gargantuan proportions in a matter of minutes.
Opening the file
It is absolutely crucial that the firm has a process of client vetting that covers critical factors, such as:
Who is the client and who is giving the instructions?
Conflict check.
Money laundering check.
Has the firm acted for the client before? If so, were there any problems?
Can the client pay?
Is the firm able to act? (Does it have the time, expertise and resources to deal efficiently with the client's affairs?)
What particular risks attach to this client? (Publicity, reputation, type of work etc.)
This will help you to select the client safe in the knowledge that you will be able to perform your core function, which will hopefully result in a satisfied client that pays its bill.
Undertaking and discharging the client's instructions
The most important procedure here is effective communication with the client. You should:
Identify and understand the client's expectations. If necessary, manage these expectations – remain in control.
Make absolutely sure that you have defined the relationship with the client in a retainer letter, setting out what you will and will not be doing on its behalf.
Identify what you need from the client and when you need it.
Make sure you have complied with your professional requirements (such as Rule 15).
Record advice given to the client in a letter or attendance note and make sure you maintain effective lines of communication with the client throughout the retainer.
Closing the file
Make sure that you have dealt with all outstanding matters:
Have all the client's instructions been incorporated into the final document?
Has the client been billed?
What, if any, tasks need to be dealt with in the future (eg rent reviews and exercise of options)? Is the client expecting you to deal with them? If so, have you diarised the relevant dates?
Do you send a client satisfaction questionnaire? If not, how do you know if the client was happy with the service provided and how do you identify areas for improvement? Is it necessary to terminate the retainer formally, for example by coming off the record in a litigious matter?
Consider the need for a dedicated risk manager. They should be the focal point for risk management within the firm and will be accountable for risk. Their duties will be to identify and manage risk to acceptable levels. This will assist you in providing a quality service to a satisfied client and will make you more attractive as a risk to the commercial market. n
John Verry is risk management practice leader at St Paul International Insurance