Legal Risk Assessment – A Necessary Practice

Legal Risk Assessment—A Necessary Practice

Traveling during Christmas week in a blinding snowstorm, Socrates, the first locomotive of Pacific Express No. 5, crossed the Ashtabula River at 7:28 P.M..  Seconds later the iron bridge collapsed, killing 98 people in the deadliest bridge failure in U.S. history. Although this accident occurred 135 years ago, according to the American Society of Civil Engineers, more than 500 bridge failures occurred in the United States between 1989 and 2000. While most failures were caused by natural disasters and collisions, nearly 30 percent were the result of poor design, shoddy construction or maintenance neglect. While local, state and federal government may continue to postpone the inevitable, risk assessment elements usually enter into their cost-benefit analysis.

Assessing risk between professions varies widely. Civil engineers who manage risk for structural failure will ask tough questions regarding bridge replacement costs versus increased inspection costs. Doctors regularly manage medical risks by assessing their personal and practice risks in today’s litigious environment. But how do lawyers conduct risk assessment?

Corporate legal departments by their very nature are managers of law risk. Law differs from other professions due to uncertain outcomes that arise from legal transactions and dispute resolution, including litigation, according to law risk management theorist Howard Miller, President and CEO, Brickstone Venture Partners, and former Professor of Law, University of Southern California.

Varying terms and unpredictable costs, often related to hourly billing, create a complex risk assessment business model. Yet legal industry risk can be compared to risk faced by other sectors of the commercial market, including credit companies, insurance companies or virtually any other business that assesses risk.

So what keeps general counsel up at night? What should they be worried about and how likely is it to happen? And what is the impact if it does happen? In a recent issue of Legal Strategy Review, from a survey of general counsel, two of the largest challenges facing corporate counsel are regulatory compliance and cost control.

Increased Regulatory Scrutiny

According to Paul Braithwaite, Senior Managing Director, FTI Consulting Inc., “Compliance with regulations is embedded within the fabric of enterprise policies and processes. In order to more effectively achieve compliance, counsel must understand and be proactively involved in helping form those policies and processes.”

With billion dollar settlements such as U.S. v. Siemens, and legislation including the UK Bribery  Act and the Dodd-Frank whistleblower protection program, regulations are increasingly impacting company policies. For the last three years, the Fulbright & Jaworski Litigation Trends Survey cited year-over-year increases in bribery and corruption investigations. In a recent blog post, Thomas Fox, attorney and author of Risk Assessments: FCPA and UK Bribery Act Best Practices, cites the consultative guide to the UK Bribery Act stating, “Risk Assessment—the commercial organization regularly and comprehensively assesses the nature and extent of the risks relating to bribery to which it is exposed.”

According to Fox, some of the key risks include understanding employee knowledge of their company business relating to corruption, knowing the risk associated with business partners in other countries, and realizing the risks relating to conducting simple transactions including charitable or political contributions, obtaining permits or licenses and public procurement.

By conducting these types of risk assessments, companies can develop best practices that frame risk management policies. Fox further explains, “The key point is that a risk assessment is absolutely mandatory and must be used as a basis for design of an effective compliance policy, whether under the Foreign Corrupt Practices Act or the UK Bribery Act. If a risk assessment is not used, it might be well nigh impossible to argue that your compliance program meets even the basic standards.”Today, legal staff’s compliance workload is more difficult in an era of reduced budgets, increased workloads and increased regulatory scrutiny. Once the regulatory risk has been assessed, how do you effectively manage the risk? According to Tommy Helsby, Chairman of Europe, Middle East and Africa Region for Kroll Risk Consulting, “Start with a review of all of your business processes against the list of regulated activity in the countries where you are active. From that point, you can assess your regulatory footprint.” He further explains that strong compliance programs cannot be developed to prevent all potential disasters due to cost. Rather, he suggests developing contingency plans that include effective decision making. Cost Control Predictability—Lowering Legal CostsIn the past 40 years, legal costs as a percentage of GDP has tripled from .5 percent to 1.5 percent and have had a dramatic impact on doing business. A recent government analysis determined that legal costs amounted to an $87 billion drag on the U.S. economy and equates to 1.3 percent tax on consumption or a 2.1 percent tax on wages, according to the U.S. Council of Economic Advisors, An Economic Analysis of the U.S. Tort Liability System.To adequately assess and ultimately manage risk, general counsel strive to create high-certainty low-risk transactions and contain costs for uncertain dispute resolution and litigation matters, according to an article in the Pennsylvania Lawyer by William Dickerson. The objective is to provide a predictable legal environment for the company, reducing risk. There are a number of areas that can be developed to increase predictability and reduce risk in the practice of law.

Adding Value

To reduce uncertainty and improve predictability, attorneys have to establish a value in their legal work, identify the cost and then manage it appropriately so that the outcome is aligned to that value.  In a recent article appearing in the Legal Strategy Review, Susan Hackett, Vice President and General Counsel for the Association of Corporate Counsel explains that although attorneys feel each matter is unique, in actuality much of the transactional work is template driven and easily repeated. Depositions are a good example of where companies can average the yearly number outsourced and per unit costs to determine a budget, thus insuring predictability.

Litigation Budgets

As litigation costs recur, firms use budgets to not only financially manage the bottom line, but also to project manage litigation matters to control costs, according to Eric Bensen, co-author of the book, “Bensen and Myers on Litigation Management.” Bensen states that effective budgets should be detailed and include line items such as the number of expected motions to be filed, how many witnesses will appear at trial and the number of depositions to be taken. This type of detail will help set financial expectations and also serve to start an exchange between in-house and outside counsel relating to resources needed for success and to potential issues they could confront.

Controlling e-Discovery Costs

According to Wendy Shapss, Senior Managing Director, FTI Consulting, Inc., “E-discovery is one of the largest cost components of the litigation lifecycle, which includes: identify relevant potential evidence; hold and preserve; collect; process; review and analyze; produce and present.

Controlling those costs depends heavily on being prepared and achieving a large measure of predictability.”
So how do you prepare for e-discovery? According to Shapss, you start by understanding the sources of electronically stored information (ESI), including the custodians of ESI. Once you know where information is stored and who “owns” that information, you should put in place policies and procedures to ensure that legal holds are enacted and enforced when there is a potential for an action, such as an inquiry, investigation or litigation. 

In addition, it is important to have in place an information management program, including records management, and the technology tools that help you manage various tasks within the e-discovery lifecycle, including case management and reporting.

Using Project Management Techniques

In the commercial sector, manufacturing and marketing regularly require project management. In the legal industry, often projects are not defined nor managed. A simple phone call can start a matter that leads to months of legal wrangling between in-house staff and outside counsel with no set expectations or business oversight. When the bill arrives, disputes often arise. With project management, tasks are identified and appropriate personnel are assigned. Risk is evaluated not only from the project creation, but in the event of costly delays.

Providing Value Billing

The most common method of legal billing today, the billable hour, was widely adopted in 1958 and recommended by the American Bar Association. Over the years, however, abuse and the change in the practice of law has lead to alternative billing arrangements. Today’s technology provides the legal profession a wide array of productivity enhancing tools. Unfortunately, hourly billing discourages productivity. The longer it takes to resolve a matter, the more hours billed, and the higher the revenues. Ultimately, fees charged may not correspond to the benefit or value received by legal staff, especially if the lawsuit is lost.

With value billing, predictable rates are applied to the subject matter and task. In this way value based on experience and the type of task performed is billed. This method provides predictability, encourages efficient use of technology and prevents over-billing and fraud.

According to Brickstone’s Howard Miller, assessing legal risk and managing it effectively is the responsibility of the general counsel and their client. Legal risk principals can be applied to any type of legal transaction whether it is employment contracts, mergers and acquisitions, real estate deals or other types of complex commercial transactions. In addition, he explains that during dispute resolution it is preferable to apply the principals early with the help of industry experts, and mediators. Applying risk principals throughout the legal process will enhance decision making during a crisis, streamline business processes in matter management, improve predictability lowering costs and provide for better compliance.