Taken from El confidencial
Risk management in legal matters or projects is an essential component to ensure profitability, minimize non-billable losses and strengthen the client’s confidence in the firm. Legal services are not exempt from risks in their development. In this article we analyze how to identify, evaluate and mitigate risks in legal matters, with special attention to how proper risk management improves the financial performance and profitability of each of the matters.
In all matters and projects handled by law firms there are, as in any human work, more or less serious external impacts that have little to do with legal matters or quaestio iuris. These risks are related to the reality of the courts, the types of clients, internal day-to-day issues, stumbles, mistakes and other externalities, aggravated by the inherent randomness and uncertainty of professional services. These non-legal or non-strictly legal risks must be carefully managed.
These issues have a hidden impact on the profitability of matters, often more so than the outcome or success of the case itself. Because they have a silent impact and are perceived as imponderables, they are often neglected by the firm’s management. However, these risks are manageable, and their proper management can bring benefits in many areas.
The central element in risk management is anticipation. Identifying potential risks from the outset of the matter – financial, temporal, reputational, counterparty, client information and regulatory risks, among others – makes it possible to plan effective strategies to mitigate them.
Risk identification consists of determining what risks may occur, how they will affect the project and documenting their characteristics. This identification should be done on a regular basis, as the matter progresses, considering both internal and external risks. Internal risks are controllable elements within the team, such as staff allocation or time estimation. External risks, on the other hand, are beyond your control, such as market changes or administrative regulations.
The most common risks have an impact on time (delays) or people (departure of participants). For the latter, internal communication and knowledge management are essential.
In law firms, the risk of lawyers and team members leaving is recurrent. This can be mitigated by knowledge management tools, which ensure that project knowledge remains in the firm, even if someone leaves the team. Also, uncertainties in legal proceedings should be treated as risks and addressed with preventive measures.
Once risks have been identified, it is essential to rank and prioritize them according to their impact and likelihood. Tools such as an “impact and probability matrix” make it possible to visualize and prioritize critical risks. For complex projects, a more detailed “quantitative and qualitative analysis” may be necessary.
Risk mitigation strategies are grouped into four categories: 1) Avoidance: Modify the scope or methodology to eliminate the risk. For example, renegotiating deadlines to avoid delays. 2) Transfer: Delegate the risk to third parties, such as insurers or expert collaborators. 3) Mitigation: Reduce impact or probability by implementing quality reviews. 4) Acceptance: Assume certain risks and prepare contingency plans.
Common tactics include: 1) assigning clear roles in the team; 2) communicating risks to the team and the client; 3) designing specific responses to identified risks; and 4) documenting and tracking risks and their impacts.
Although these tasks may seem time-consuming, by integrating them from the beginning, they have minimal impact on planning and allow the case to be budgeted correctly. In addition, they bring together the firm’s implicit knowledge, which facilitates their implementation.
Risk management is key to profitability because anticipating problems improves cost forecasting and reduces unbillable losses. Many matters suffer significant variances when faced with unforeseen problems, resulting in unbillable tasks that directly affect margin.
With a risk strategy, firms can structure budgets that cover direct costs and contingencies, avoiding affecting client and profitability. This also improves client relationships and trust, as it avoids cost overruns and projects control and organization, especially in complex projects.
Minimizing non-billable tasks maximizes profitability and allows more resources to be devoted to higher value-added tasks. Thus, lawyers can concentrate on critical aspects of the case, optimizing their performance and the value delivered to the client.
In short, risk management is an investment in the long-term stability and sustainability of firms, preventing problems, strengthening client relationships and protecting profitability.
José Luis Pérez Benítez, Partner at BlackSwan