Law firms and other service oriented organizations are just beginning to realize that risk management concepts apply to them as well as manufacturing based organizations. Lately, consultants are advising law firms to implement project control methods, look at legal processes from a six sigma point of view and even apply the basics of marketing 101 or sales 101 to increase business from potential clients. As the legal industry continues to shift from the old “charge per hour” model, law firms are beginning to realize that not only do marketing concepts apply to the “business and management of law” but risk management concepts apply as well including loss control.

Risk management should be viewed as an essential part of everyday management, including legal management. Managing a company’s risks is not only important but vital. Until recently, lawyers have been trained to think reactively- i.e. to react to a threat or risks. But given the recent changes in the global business environment, as well as changes in how law firms manage themselves, attorneys and support staff must now learn to manage risks. Such proactive management encompasses a large area of not only pure legal risks but also business risks that could lead to legal threats and issues. In essence, lawyers must now learn to proactively manage risks by minimizing risk, mitigating risks, transferring risks and eliminating risks. All are in a sense a proactive response to a risk rather than a purely reactive response. This of course includes minimizing costs and using processes or tools to minimize costs and risk.

Loss control is a tool that a law firm or other service related organization can utilize or should use to minimize or reduce risk. If properly used, loss control can reduce losses and decrease exposure associated with such losses. Loss control can of course be simply defined as “efforts that reduce expected losses”. But of course it is more than that as it encompasses management of efforts that reduce expected losses – or in other words processes that can prevent, reduce, or mitigate losses. Loss control processes, in other words, if properly used, can mitigate and reduce risk. Normally, loss control processes can be very effective in reducing costs and expenses faced by any organization, especially a manufacturing company that manufactures products. But it can also be applied to service organizations such as law firms or accounting firms.

The traditional definition or concept of loss control relates to loss prevention or loss reduction that is associated with products or monies related or associated with products. Loss control processes are normally divided into two main categories—loss prevention and loss reduction and are defined as follows:

Loss prevention: activities that reduce expected losses of inventory or monies associated with inventory by proactively reducing the frequency of losses

Loss reduction: activities that reduce expected losses of inventory or monies associated with inventory by decreasing the size of the loss, which is a reactive and not a proactive process

Applying these concepts to a law firm or service related organization we can see how six sigma and other concepts such as project management can be utilized as a loss control process. After all the main goal of six sigma as well as and project management would be to improve efficiencies and minimize waste or the costs associated with waste. Law firms tend to over analyze and over process matters. How much cost can be saved if documents are no longer over processed or over analyzed? How much time can be saved for more productive matters? From a loss control standpoint, what processes can a law firm or law department implement that reduces cost and monies associated with cost? What efficiencies will be gained once project management processes are implemented?

Six Sigma and Loss Control

Six Sigma has been championed by companies such as GE, Motorola, Samsung, IBM and others. Originally promoted as a process to improve profitability it is really about reducing expenses, waste, and loss as well as adding value and efficiency. Consider using six sigma when reviewing processes that involve:

(i) Client expenses
(ii) Office expenses such as mail
(iii) Over review of documents
(iv) Use of software

Project Management

Project management has become another Legal Risk Management tool or process that has become more popular amongst law firms lately. Firms are realizing that once they get away with the old “charge per hour” paradigm and start focusing on alternative fee arrangements there is really a need to manage the matter on a project by project basis to contain and reduce costs.

Parts of a project management process

(i) Initiation of the matter- this includes the scope of the matter, the desires of the client and the goals of the client and law firm.

(ii) Planning of the project- just like an architect plans the design and building of a house or a building, the planning portion of legal project management covers the key decisions in achieving the desired outcome.

(iii) Implementation- this is when the firm of the staff conducts the work to implement the plan.

(iv) Monitoring of the project- is the budget being followed? Are the expenditures reasonable for the work being performed?

The concepts of loss control (and really risk management) can be applied to the legal industry as well as other service industries. Just because the original concepts were applied to the manufacturing industry doesn’t mean these concepts can’t be applied to service related organizations as well. Remember, for law firms it’s all about effectively and efficiently representing clients in a manner that not only achieves the goals and objectives of the client but does so at minimal cost and expenses. The more efficient a law firm becomes at handling matters at minimal cost, the more value the firm adds to the client’s business. The will usually equate to a higher client retention rate.

As 2020 comes to a close, it is time for many organizations to analyze its risk management processes and how well the processes managed the risk events that has recently occurred. For many companies, Covid-19 was a catastrophic or near catastrophic event. Those companies that were prepared to handle the pandemic (such as those that had business continuity plans in place, etc.) were able to handle the risks presented by Covid 19. Those that were not prepared had a harder time. What successful companies know is that in order for a company to succeed it not only has to a sustainable business model but it has to constantly review its risk processes. After all, what happens when the current business model does not work anymore? What happens when the risks outweigh the benefits of continued standard corporate operations? So, maybe it’s time to re-examine your risk management processes. Do they really work?

When talking to your staff or to other departments, how often have you heard the phrase “That the way we have always done things.” Just because corporate processes have been done one way doesn’t mean that the best way or even in todays’ fast changing world- the right way. Even after 2008 many companies continued to use the failed metrics that got them into trouble in the first place. Even the credit markets haven’t changed as much as you would think after 2008. And of course, some companies have not changed processes during Covid. But why?
I truly believe that once processes are created in a corporate or bureaucratic environment, it is as if the processes have been set in stone. They are very hard to change. Even if the world around the company has changed. It is human nature to accept what has been done in the past. Few people want to “rock the boat” even if the proverbial boat is actually sinking. Companies get into real trouble because of this. What happens if the company’s business model is out of date or its business plan is no longer viable? Just because it worked in the past doesn’t mean it will work in the future.

I therefore caution everyone not to blindly accept the current risk management processes in place. Risk managers as well as in house counsel and other managers should be challenging risk management metrics on a regular basis. Counsel should be auditing departments on a regular basis. Does that compliance program really work? Does the business continuity plan really work? Maybe it did 5 years ago. But what about today?

What about re-examining the areas of risk management responsibility? The areas should include the purpose and policy of the RMD in the organization, the functions and execution points of the RMD (who does what, when, how, reporting lines, etc.) as well as a detailed outline of the procedures and processes of the RMD. Procedures and processes can include:

-conducting risk assessments of the organizations’ divisions and departments
-developing solutions for the various risk management issues
-developing business continuity plans
-coordination with various departments to assist with compliance issues
-oversee loss control concerns
-develop training for the organization’s employees covering various risk related areas of concern such as product safety, etc.

Remember, if local or national laws have changed maybe the current processes are out of date. If your organization was not prepared for the Covid 19 pandemic, maybe the current processes are out of date. If the products that your company manufactures or the services it provides have changed maybe the internal processes surrounding the review of those products and services are out of date. What about the current geo-political environment? When reviewing your current product liability review processes have you factored in the new risks created by the Internet of all Things? These risks are real. Are you ready for them? Does your current business model still work or is it outdated? What about data privacy laws? What about business continuity plans?

It is a fundamental truth that all things change. Of course, some things change faster than others. Regardless, don’t rely on your old or standard risk management processes to continue to provide the same level of comfort they did in the past. Continue to review and to modify them if necessary. And don’t think that just because “that the way things are done” your company should continue to operate as usual.

So if you haven’t re-examined your risk management processes- now is the time to do so.

In the past I have commented on crisis management and the tools needed to handle crisis in today’s business environment. It is clear however, that an international crisis, such as the COVID 19 virus or even a geo-political crisis is harder to deal with than a domestic crisis. Because of international considerations, an international crisis is normally harder to manage than a domestic crisis. As it is more complex, companies caught up in an international crisis have to pay more attention to international, cultural, and communication issues than they would in a purely domestic scenario.

Crisis communications has become very important. Therefore, an international crisis requires a number of steps, including:

• Planning for an international crisis
• Appointing a crisis manager
• Establishment of a Crisis Management Team
• Establishment of a Media Crisis Team to handle international communications

The principle focus of any crisis management strategy, especially in an international contest, is communications. All crisis management plans call for effective crisis communications, which many times are not always executed. Inadequate or failed communications lead to bad publicity, unhappy stakeholders, and potential disaster. An effective crisis communication strategy is necessary for any international crisis. A number of companies and even governments have failed to defuse international crisis because of poor communications.
An effective crisis communication strategy is necessary when dealing with an international crisis. It also requires the establishment of an effective Media Crisis Team that can respond to potential media issues. Who should be on the team? At least 6 people from the following areas or departments:

1. Legal- someone from the GC’s or CLO’s Office
2. HR- HR should designate a staff member capable of handling crisis related issues
3. Outside legal- in the case of most companies, the primary outside law firm should also be on the team
4. PR- if the company has a PR department, someone from PR should be on the team
5. Outside PR- it is a good idea for most companies to retain an outside PR firm if possible
6. QA or Service, etc.- depending on the product or services the company provides, perhaps someone from the Service Department of Quality Control Department should also be on the media crisis team.

A number of processes need to implemented and issues addresses to create an effective Media Crisis Team. Such processes and issues include the following:

• Creation of the Media Crisis Team.

• Identify a key spokesperson or spokespersons on the Media Crisis Team who will speak for the organization. Who are they? What are their roles?

• Training on cultural issues, if the crisis involves other cultures.

• Establishment of communication procedures and protocols for the Media Crisis Team. Who communicates to whom and why? Can the Media Crisis Team members communicate to each other directly?

• The main messages that should be communicated to key stakeholders should be thought through.

• A budget for the Media Crisis Team, should be approved and set up.

• The facts surrounding the crisis should be established as well as the major talking points.

• How will the Media Crisis Team handle the Press? Processes?

• Has a communications war room been set up for the Media Crisis Team in order to meet and handle communications?

• Has a hotline been set up?

Though companies try and resolve the crisis at hand and spend significant sums of money to do so, if they fail to properly communicate to the media and the public, they in effect have lost and can expect outrage and consumer dissatisfaction to such an extent that the very existence of the company can be threatened. So remember, a company doing business internationally has to plan for eventual crisis. If it fails to handle communications properly during a crisis, it faces not only a potential loss of business but a negative impact on its brand. Therefore, I recommend to all companies that now is the best time to create a Media Crisis Team.

At the beginning of litigation and selection of the law firm that will handle the case, the in-house lawyer must assess the case—the strengths, weaknesses, costs, etc., involved. Case evaluation is very important. Evaluation can be made through an early evaluation by outside counsel, knowledge of potential costs, use of employee interviews, and formulation of a plan/budget. When a company has a good idea of the chances of winning, as well as the potential costs, it is in a better position to determine whether to proceed to trial. Therefore, at the beginning of litigation, the company or organization should obtain a thorough evaluation of the case and use internal risk management tools to assess the cost of a trial. Is the cost of litigation worth it?

Risk analysis of litigation can be a useful tool in evaluating a case. One such tool that is often utilized is the decision tree. A decision tree analysis can be used to evaluate the probability of outcome of certain events during trial. Each event can then be analyzed in the context of the probability of the entire outcome. A decision tree risk analysis provides a systematic method of analyzing cases from the beginning

Besides the use of a decision tree, a properly formatted litigation budget should address the fees and costs of going to trial. Using a budget helps to establish a realistic framework for litigation as it should cover expected fees and costs. Remember however, a law firm’s fees at trial could skyrocket for a number of reasons, including:

-The number of lawyers involved.

-Time: Most trial lawyers will work long hours during a trial, so fees will add up.
This especially true if the trial is a complex one involving patent disputes or
Competition/ Anti-trust claims.

-The cost of expert witnesses.

One of the major issues facing in-house counsel is justification of the legal function. In-house lawyers in fact are like a small to medium size law firm depending on the size of the company and therefore are not cheap. On the other hand, in-house lawyers play a vital function within an organization as they manage legal issues and risks on behalf of the company. Litigation management as well as legal risk management are very important functions of a company's law department. However, most organizations are profit driven. Investors look at the bottom line. Hence, management for the most part normally looks at its divisions in one of two ways- is it a profit center or is it a cost center? Profit centers get resources of course. Cost centers may not. Therefore, in order to obtain the resources needed to function in a corporate setting- Legal must justify itself. One way to justify the existence of the Law Department, is for Legal to quantify the company’s legal exposure. Once quantified, Legal can then justify its existence to Management.

Quantifying potential legal exposure is fairly easy. One can look at historical legal costs, expenses, and related jury verdicts, fines, etc., to determine a base line for future legal costs and expenses. If an historical record of legal costs does not exist, numerous reports and surveys exist on how to average legal costs and expenses via a particular industry. Your insurance broker may have summaries of legal costs for your industry. At least it should have a historical summary of insurance related claims.

Once one has enough empirical data to show potential exposure, it is easy to show potential legal costs. In fact, a number of companies in the legal industry have issues benchmarking reports breaking down the average legal costs and expenses in particular industries. This can be a great tool to use when showing management what costs and expenses are normally incurred by companies of a similar size and in a similar industry.

The CFO of any organization is numbers driven. If you can provide, in effect, “the bottom line” to the CFO, he will be inclined to approve a budget for Legal. Be prepared to have all the facts and figures ready.

Effective litigation management during a trial depends on the company’s attitude toward litigation as well as its controls over the law firm that handles the litigation on behalf of the company. Trials, especially in the United States are quite expensive and could involve the future existence of the companies involved. In the US and elsewhere, trials by their very nature are costly. Especially in the US. Normally, lawsuits settle prior to trial, as both sides know that juries can be fickle. Some companies will, therefore, never want to go to trial (or try to settle during trial), and some will decide to fight and go to trial anyway depending on their risk appetite. Many times, it is more advantageous for parties in litigation to settle prior to trial, as trials have become extremely expensive.

Disadvantages of trials include:

• High transaction costs
• Length of proceedings
• Negative publicity
• Business interruption
• Unpredictability of juries
• Lack of finality—the loser will always appeal

If a company decides to go to trial, it must control the outside law firm, manage the litigation process, and understand the potential dangers (including costs and expenses) it faces. Prior to trial, a company’s in-house lawyer should ask trial counsel a number of questions, including:

• What is the true evaluation of the case?
• What is the approximate cost of trial?
• What are the chances of settlement before trial?
• What are the main strategies of litigating the case?
• What witnesses and experts will be needed?
• How long will the trial last?
• What are the chances of winning?

If a company knows it only has a 30 to 40 percent chance of winning at trial, is the dispute worth going to trial for, or is settlement a better option? Remember, when managing litigation you should ask yourself if it is worth it. Consider the costs.