Legal risk: the threat to law firms

By Matt Whalley

The two drivers of change in the legal market today are cost and risk. A lot has been written about the effects on the legal market of client pressure to reduce cost. Unbundling, process improvement, disaggregation and alternative sourcing are the buzz-words of today. Opinions differ as to whether or not the change will be dramatic or long drawn-out. But what everyone seems to agree on is that law firms will surely look different in the future.

It is to my mind indisputable that on-going cost pressures will have a permanent effect on law firms. I can easily imagine a world where we have a small number of super firms (AOCC, anyone?) moderate numbers of large firms with near shore, north shore or offshore legal processing centres (Addleshaws, Irwin Mitchell, and Eversheds spring to mind) and a large number of small boutique service firms, newly created with different operating models.

These will be supported by increasing numbers of freelance lawyers (Lawyers on Demand, Axiom, et al), specialist legal technology and back-office providers (Integreon, for example).

The fact that (apart from the super firm) these names trip easily off the tongue, shows quite clearly that when we're talking about the effects of cost pressure on the market, the future is now.

But while the effect of cost is well commented, and you will have heard much the same opinions before, far less has been said about legal risk. Legal risk will have an equally fundamental change on the legal market, remodelling a large proportion of the work that lawyers do.

In-house counsel is asked to identify and manage legal risk for two reasons:

• their boards want better certainty and control of legal budgets; and
• their organisations want to avoid the kind of costly mistakes that led to the banking crisis, operating clearly and demonstrably within the bounds of the letter and the spirit of the law.

There are three specific ways that legal risk helps achieve these goals:

• Free up capital and give your organisation better resilience. By taking a forward looking approach to risk identification, you can manage out the extreme risk scenarios and avoid expensive regulatory and customer action.
• Reduce future demand for legal services. If you identify and eliminate legal risk, you will need to seek legal advice less often in the future. This quite naturally reduces your legal budget over the long-term.
• Identify which risks are worth taking. Quite apart from the cost management benefits, legal risk management enables organisations to get a good, clear picture of the legal risk landscape and act with confidence when the risk-reward balance is in their favour.

On the face of it, legal risk represents just as great a threat to law firms as direct pressures on cost. The approach to reduce future demand for legal services is less immediate, but no less inevitable and in my opinion more sustainable. Firms that take a long-term view will work with clients to help them achieve the objective outlined above. They will be proactive in identifying root cause of issues that are so costly to industry – but generate lots of fees. And they will innovate new ways of adding value to clients that maintain their profitability in the years to come.

There will always be a need for lawyers, but that doesn't mean that lawyers must always do the same thing.