Effective Risk Management Strategies Lower Costs and Boost Efficiency for Law Firms | PCIA

Effective Risk Management Strategies Lower Costs and Boost Efficiency for Law Firms

As technology, law, and business issues evolve, law firms are seeing shifts in the roles and strategies associated with risk management. For example, the general counsel is a common role that did not typically require participation in higher-level risk management practices in the past. Currently, more general counsel roles involve aggregation of firm-specific risks, identifying risks, and monitoring risks.[1]

No matter how big or small the firm may be, staff members should work to identify risks and develop strategies to address them. More importantly, firms must also review and modify strategies as trends shift or emerge. Adapting to an ever-changing industry is the only way to survive. Without an effective strategy and the ability to adapt, you risk losing money and possibly hurting your public image. These are some of the crucial ways that effective risk management strategies cut costs and improve efficiency.

Better Task Organization

A better task organization is an integral part of improving efficiency in your firm. More benefits come from a risk management plan that has a centralized structure.[2] If your firm is not ready to create a role that is dedicated to risk management, you can build a task force instead. It’s especially beneficial to have a task force that represents multiple departments or levels of authority within the firm.

The task force should address integration, lateral onboarding, contract lawyer hires, analysis of guideline adherence, and other relevant tasks.[2] By regularly meeting to discuss and analyze trends, your firm’s task force can ensure that carrying out essential duties, that roles are understood, and communication is optimized. Their contributions will lead to improved efficiency and help save money by finding and addressing some risks before they become problems.

Reduced Malpractice Risks

You can mitigate the risk of a malpractice lawsuit with the right strategies. Additionally, insurance costs for malpractice can be lower with a risk management plan that includes required components. Some insurance companies will refuse applications from law firms that do not have the necessary provisions in place. However, some offer premium discounts to law firms that utilize continuing education classes to have docket control measures, use conflict of interest avoidance waivers, or take other actions. The discounts vary from one provider to another.

With a risk management plan in place, it’s easier to deal with negligence or issues that may contribute to negligence. There is an increasing number of malpractice lawsuits in recent years. Many of them are upheld in favor of the plaintiff when firms show any signs of negligence. Although there is an assumption of risk and contributory negligence defenses available in malpractice cases, rarely are they upheld in favor of law firms.[3] If contributory negligence applies, one of the reasons is because there is weak evidence or no evidence. With a thorough risk management plan in place, your law firm can form strategies to preserve any evidence of potential client fault or negligence for the use of the law firm’s benefit if sued.

Improved Job Satisfaction

In recent job satisfaction surveys, business lawyers often rank among the unhappiest.[4] Many of those who have reported being most dissatisfied are associates. Although lofty expectations may be to blame in some instances, several other issues contribute to job dissatisfaction among lawyers. Purpose, autonomy, and mastery as a mindset are a few strong contributors. Unfortunately, continuing education alone will not suffice to reach satisfaction goals.[4]

A good risk management plan encompasses the aspect of job satisfaction among lawyers and support staff. In some cases, a plan involves using feedback loops at different intervals of a project or at different times of the year. By collecting data and looking for ways to improve job satisfaction, law firms can both attract and retain top talent more effectively.

A feeling of purpose, continual engagement, and being valued are important to staff, and these feelings help reduce turnover.[5] With reduced turnover, your firm’s teams have the opportunity to grow and learn together. Risk management plans include strategies to promote growth and teamwork. If attorneys and support staff stay longer, the firm does not have the expenses of onboarding as many new staff members or paying for mistakes due to lack of staff training. Staff turnover is extremely costly for law firms.  Sometimes the cost can be upwards or more of several hundred thousand dollars.

Increased Work Output

When risk management includes the satisfaction and well-being of workers, the plan addresses their physical and mental health as well. Occupational hazards for attorneys include long work hours, high-stress levels, long periods of being sedentary and inadequate nutrition.[6]

A good health plan, adequate sick time, access to mental health resources, and nutritional assistance all have an essential relationship with a risk management plan. That’s why some firms provide fresh foods at work and free gym memberships to their associate attorneys and support staff. When you add health incentives, this can reduce the number of sick days used. It may also help reduce risks for developing chronic health problems.

The workplace culture in your law firm is an integral part of risk management. If the culture is toxic, workers may quarrel, not communicate well, or reduce their work output. Communication problems lead to inefficiencies. Part of boosting communication is making positive, productive, and professional communication a crucial part of your law firm’s workplace culture.[7] Also, long-term teams work more efficiently, and higher productivity rates are great for the law firm’s bottom line.

Today, there are software programs that help firms allocate human capital more efficiently. For example, one support worker may perform poorly on Mondays but excellent on Saturdays, and another person may be the opposite. This information is valuable in scheduling. Using the right tools to improve the quality and quantity of work output is an excellent way to maximize efficiency.

Improved Security

The Harvard Law School Forum on Corporate Governance strongly encourages directors not to be directly involved in day-to-day cybersecurity matters.[8] Instead, they are encouraged to handle oversight of risk management policies to ensure compliance with digital security measures. For a security component of a risk management plan to be effective, third-party security providers must work with the law firm to generate data and reports. A good plan should include regular assessments of risk tolerance, existing and potential risks, an accountability structure, a review of existing procedures, a review of assumptions, and other relevant topics.[8]

With a plan like this in place, your firm will mitigate data-related risks. A data security component is especially important because of the potential savings. One data breach can cost your law firm hundreds of thousands of dollars. If you face a business interruption because of the breach, it can be a financial burden even with insurance. For example, public news of the breach and an investigation would negatively impact your public image.

Improved Client Retention

A challenge in risk management is balancing the ability to be financially prepared for risks while maintaining a steady profit. With economic uncertainty, law firms often struggle to charge fees that are fair to clients, will cover costs, and can keep staff happy with their compensation. Some firms must increase their fees, often met with resistance from clients. In a survey, 90% of responding law firms said that they felt pressure from clients regarding their fees.[9]

When other firms offer attractive price structures, staying competitive may be a battle for you. If you maximize your use of the previous points, your law firm should be in a better position to boost profits from efficient operations. The efficiency of operations opens the consideration of fee changes or restructuring. While some law firms might be able to alter their fees, others may not. Today, many firms are shifting toward alternative fee arrangements as part of a risk management strategy to attract and keep clients. Although there is mixed information about the success of AFAs, the ABA Journal suggests that the key to success is proactive instead of reactive.[10] Proactive firms in the ABA Journal study had a 32% success rate, while reactive firms only had a 9% success rate.

Putting Your Strategies Into Practice

When your firm designs a risk management plan, it is helpful to focus more on the quality of each component instead of specific outcomes. While outcomes are important, quality measures produce results and beneficial change. For example, focusing more on the quality of client relationships can reveal more insights and boost the outcome naturally. However, focusing mostly on the outcome instead could lead to overlooking essential and beneficial steps.

As the world continues evolving, the uncertainties that create risks in the legal field will produce new challenges for leaders to address. When combined with the right protection strategies, these points can be useful now and in the future for your law firm’s growth.

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References:

[1] http://ilta.personifycloud.com/webfiles/productfiles/699777/info14-handout4.pdf
[2] https://www.lawtechnologytoday.org/2016/12/risk-management-in-law-firms/
[3] https://uknowledge.uky.edu/cgi/viewcontent.cgi?article=1403&context=law_facpub
[4] https://www.americanbar.org/groups/business_law/publications/blt/2016/07/13_may/
[5] https://www.shrm.org/hr-today/news/all-things-work/pages/to-have-and-to-hold.aspx
[6] https://www.vsb.org/docs/VSB_wellness_report.pdf
[7] https://www.lawpracticetoday.org/article/millennial-attorneys-good-communication-fosters-law-firm-workplace-success/
[8] https://corpgov.law.harvard.edu/2018/03/20/risk-management-and-the-board-of-directors-5/
[9] https://www.thomsonreuters.com/en/press-releases/2019/november/law-firms-bullish-on-growth-prospects-reluctant-to-embrace-radical-changes-to-business-models.html
[10] https://www.abajournal.com/lawscribbler/article/how_profitable_are_alternative_fee_arrangements_in_practice