Legal risk: more “new law” than “big law”?

By Matthew Whalley

This summer I set out to confirm the current state of legal risk management practices in-house. I suspected understanding was patchy and that in-house counsel and risk managers were struggling with the concept and the reality of quantifying and mitigating their legal risks. I designed a short survey – just seven questions about legal risk – to confirm (or disprove) my suspicions. This short blog shares one of the core conclusions from the survey responses and begins to outline what law firms can (and should) do to help their clients manage this important risk area.

First, the survey itself. I rustled up nearly 100 responses – good for a niche subject like this – from North America, Africa, Asia Pacific, the Middle East and Europe. Respondents roles included CEO, Director, General Counsel, Chief Risk Officer, Compliance Officer and In-house Counsel. As well as people from the academic community academics.

Seeing responses from Brazil, Hong Kong, South Africa and Zambia (to name a few) has brought home to me that legal risk is now a truly international issue and has an impact on a wide range of roles within the organisation, not just General Counsel.

The survey consisted of seven questions about legal risk, designed to test understanding of both the concept of “legal risks” and the organisational capability to identify manage them. Respondents were asked to agree/disagree with six statements about legal risk. And at the end of the survey to list their top legal risk priorities.

Despite my suspicions, some of the results were surprising even to me (you can download them for yourself by clicking through for the full legal risk benchmarking report).

The two questions I want to focus on here were designed to test respondents’ confidence in managing legal risks:

3. I am confident in my organisation’s ability to identify and mitigate against emerging legal risks, or “unknown unknowns”.

5. Material legal risks are likely to arise from my organisation’s current daily, operational, business-as-usual activities.

Although I expected to uncover a lack of confidence to identify emerging legal risks (scenario planning and forward looking risk management are difficult even when you have time to spare, 9 to 5) I wasn’t expecting such a strong response.

Only 2 in 10 respondents were confident in their ability to identify emerging legal risks. 

What does this mean for law firms? Well, clients rely on us, to a large extent, to bring emerging legal issues to their attention. We do this in a variety of ways – through bulletins, training or telephone. And yet only 20% of clients are confident in their ability to identify emerging risk issues. There is most certainly room for us to do more to help clients pick-up on and communicate emerging legal issues that could have a negative effect on their business. Rating the potential impact of certain legal developments would be a good place to start.

The real surprise to me, however, was in the severity of the response to the statement about business-as-usual legal risks.

8 out of 10 respondents stated that their organisation would be likely to suffer material legal risks as a result of “business-as-usual” activities.

As much as there is more we can do in the emerging risk area, rating the potential impacts for particular clients, there is surely something more that law firms can do to help clients with their business-as-usual risks. My own experience certainly tells me this is the case.

In-house counsel is given three priorities, in addition to advising on transactions:

  1. Identify and manage legal risk.
  2. Reduce overall legal spend.
  3. Become trusted advisers to their business.

It seems obvious, but law firms already have a lot to offer clients to deliver these priorities. We can manage risk incidents and investigate issues across a gamut of clients. Identifying trends and carrying out root-cause analysis is a simple step that will be highly valued by clients.

Identifying the root cause of legal risks will reduce overall legal spend; because it will reduce the reliance on external counsel. Fewer incidents means fewer messes to clean up. And by achieving the first two objectives, in-house counsel will step more easily into the “trusted adviser” role, be more able to communicate their value to the business in terms they understand.

What clients really need is advisers who can help to set-up controls, quantify legal risks being managed (as well as those that aren’t) and advise more generally on the systems and controls to manage legal risks at a macro-level.

This is a non-traditional role for a firm. Perhaps more “new law” than” “big law”. But the opportunities – and the solutions – are definitely out there.

Filed Under: Practice of Law

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