Risk management: the strategic, sustainable way to reduce long-term legal costs

By Matt Whalley

The legal services model is under pressure on two fronts. Already creaking in the face of interminable cost pressure, law firms are also facing a slow but steady migration of talent away from the partnership track. Seemingly on the cusp of a tidal-wave of change, law firms need to be better prepared to cope with a changing legal model.

Over the last three years, alternative legal-service providers, like BLP's Lawyers On Demand, have seen large numbers of lawyers move into freelance assignments, gaining greater control over their work-life balance and doing interesting work for many different clients. At the same time, great lawyers continue to move to permanent in-house roles. These lawyers aren't moving into 9-5 desk jobs. They are moving into roles with significant variety and responsibility.

When they move in-house, lawyers are at the coal-face of legal service delivery. Their challenge is to deliver a great service within an agreed budget, and to deliver value within a reasonable time-scale. They do this for large organisations, and are expected to act on matters outside their previous areas of expertise.

Highly educated, highly motivated, driven to succeed, in-house counsel have learnt to answer this challenge. They are changing the model, unrestricted by hourly billing targets or gearing ratios, and with the resources of large corporate machines to help them deliver.

In-house legal departments have moved away from the classic law firm structure. Where previously they were a mirror of the law firm practice group structure, more-and-more legal departments are re-structuring to align themselves with their business, often co-located. They live and breathe the client environment, fully committed to facilitating business, and fully committed to managing legal risk.

Businesses want more than good advice and a cool head in a crisis, businesses want to prevent crises altogether.

To use an old analogy (but the old ones are often the best): if the car drives off the edge off the cliff, you have an expensive accident to clean-up. In-house counsel is first to the scene, providing vital first aid and triage. Private practice is the privately contracted ambulance, helping clean-up the worst of the mess.

For a relatively small investment, a good fence or better signage could have prevented that accident from happening. The principle that prevention is better than cure is what drives in-house counsel to implement good legal risk management. Businesses want their lawyers to move away from tactical, reactive service provision: they want fence-builders. Strategic, proactive, trusted advisers to their business.

That's because in-house legal teams have a role to play in managing legal risks that could result in large financial losses, and cause major reputational damage, to their company. They identify the serious risks, advise on effective controls, and put in place metrics that measure the value of their work to the business.

This is classic demand suppression that can potentially save huge sums. The PPI scandal and more recently swaps mis-selling scandal are two headline examples that show how a material legal risk –that could have been identified and managed – can cause significant financial and reputational damage. In their case, the total cost to UK high-street banks could top-out at £22bn.

For private practice, the challenge is in the dichotomy. We have to help in-house counsel identify common risks and put in place controls that will reduce future demand for our time. We then need to find new ways of our own to deliver value to our clients.

Tim Bratton, General Counsel (GC) of the Financial Times, wrote in a recent blog that it's up to GCs to use their budgets to drive change in the market. GCs will become even more demanding of their law firms, and ask them to work in new and interesting ways. You can be sure that legal risk management will be a central theme. The path has been laid out. It’s up to law firms now to step on it.

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Filed Under: Practice of Law

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