Oregon State Bar Bulletin — APRIL 2004

Managing Your Practice
BEYOND THE BLACK LETTER
The art and science of risk management
By Peter R. Jarvis and David J. Elkanich

Risk is an inevitable part of our professional as well as personal lives. It simply is not possible to avoid all risk at all times. What is possible, and highly desirable, is to be aware of the risk inherent in a particular course of conduct, to be aware of means by which that risk may be controlled or reduced and to take only calculated and rational risks.

Risk management is the name given to this process of identifying, quantifying and evaluating both risk and techniques for its minimization. It is not a process that is unique to lawyers or to our times. It has, for example, existed for at least as long as human beings have considered storing extra food in good years for consumption in lean ones.1

As applied to contemporary lawyers, law firms and legal departments, however, risk management is a complex and sometimes counter-intuitive process. It can also be as much 'art' as 'science.'

What follows is a brief overview of several issues confronted by contemporary lawyer-risk managers and some of the techniques used to address those issues. This article is only intended, however, as a starting point for discussion rather than as a complete analysis.

Visible and Invisible Risk
Some risk is clearly visible. Every lawyer knows, for example, that missing a critical filing deadline or statute of limitations can have dire consequences. On the other hand, some risk is less visible or almost entirely invisible.

Consider, for example, an intellectual property lawyer with a thriving domestic practice who is asked to help a client with a foreign intellectual property matter. Unless the intellectual property lawyer has a great deal of knowledge about the laws and procedures of this foreign question — or can at least employ or associate someone who has this knowledge — the intellectual property lawyer may well expose himself and his client to unseen and unnecessary risk.

Or consider a firm management committee that, in aid of improving the firm’s bottom line, actively encourages all firm lawyers to maximize their billable hours or even sets mandatory quotas. Some of the risks that this can create — an incentive to 'fudge' on time entries or to overwork matters beyond what the client may really need — are fairly obvious. Others, — for example, the risk that some of the most creative lawyers may leave for less stressful environments, or that high hourly requirements may cause lawyers who are concerned about keeping their plates full to hoard work that should and would be better done by others — are less obvious.

Or consider a firm with 'loose' conflict of interest policies. The firm may see and understand the risk that it may be disqualified from litigation that it would like to handle if a conflict actually arises. On the other hand, the firm may not understand the risk that it may have to disgorge years’ worth of fees or the risk of being sued for breach of fiduciary duty due to unwaived or undisclosed conflicts.

Of course, common awareness of some risks can change over time. Traditionally, for example, firms almost automatically promoted their top billers or most effective rainmakers to key administrative positions. Many firms now appear to understand, however, that the qualities that make a good attorney as perceived from a client’s point of view and the qualities that make a good attorney-law firm administrator are different and that these different roles are best played by different individuals with different skills.

In short, the modern lawyer-risk manager must consider both the risk that is seen and the risk that is unseen. Murphy’s Law and the Law of Unforeseen Consequences must both be kept in mind.

Legal Egos
Few law firms are truly well oiled machines and, as is often noted, the management of lawyers often seems about as easy as herding cats. Lawyers who, by training, earn their living giving instructions or advice to ostensibly grateful clients can be very poor when it comes to receiving instructions or advice. And in a world in which more for one often seems in the short run to mean less for others, it can be very difficult to get lawyers to focus on how to make the pie bigger rather than on the relative size of each person ’s slice.

Law firm risk management must take these considerations into account. Consider, for example, the need for clear, enforceable and enforced conflicts rules. When it comes to seeking conflicts waivers, some lawyers are happy to cooperate for the overall good of the firm, but others are extremely territorial and are reluctant to do anything that they perceive may adversely affect their own interests. In short, the devil is in the details. While the conflicts rules do not inherently favor one lawyer or practice group over another, their application within a particular firm can have dire consequences.

Similar problems can exist when it comes to associate training: the firm as a whole will probably benefit if associates are better trained, but it may or may not be in the direct personal or economic interest of busy senior or mid-level lawyers to do the training.

At the end of the day, then, many if not most lawyer-risk management problems are political as well as practical problems. If politics is the art of the possible, the successful risk manager who would like to get from point A to point B must take into account the existing organizational structures and personalities in a firm or legal department before fixing upon either a destination or a route. One size will not fit all.

Beliefs in Immortality and Innate Perfection
Consider a hypothetical firm that has experienced relatively few, if any, serious adverse claims and that has never lost a key client due to mismanagement or other missteps. Convincing this firm that it is not immortal — that lightning can strike them just as it strikes others — can be extremely difficult. As has been said in other contexts, denial is not just a river in Egypt.

Another closely related problem is well known to anyone who has raised children. When advised or instructed that they must change a particular way of doing something, many lawyers will reply with something like, 'But the other firms let their lawyers do what they want; why can’t I do it too?' Nor do lawyers readily accept the typical parental comeback of, 'If the X firm allowed its lawyers to jump off a bridge, would you want to jump off a bridge too?'

The difficulty here can be more than just a matter of personalities. Sometimes the cause lies in the structure of the firm itself. At many firms, lawyers are under great pressure to take on new business whenever they can find it. On many occasions, this kind of pressure has led lawyers to take on clients who present serious risks of nonpayment, of suing the firm or of getting the firm sued by others. In this context, the problem is that individuals have more incentive to look heavily at their own short-term upside potential than at the longer term downside potential to the firm as a whole.

When faced with these kinds of denial ('everybody-does-it' or imbedded structural problems), lawyer-risk managers must look for ways to identify not only the harm that can accrue if corrective action is not taken, but also the benefits that can accrue from doing so. For example, a firm with significant write-offs might be advised that more careful client screening up front will reduce the portion of the year that each lawyer spends working for free and will therefore enable the lawyers to earn more or to take more vacation time. Similarly, a firm with a million dollar deductible might benefit from an explanation of just how much time must be worked, billed and collected as a part of gross revenue in order to pay off a single claim that hits the bottom line.

Conclusion
Being a successful lawyer means knowing and doing much more than just having the legally 'right' answer. Whether we always realize it or not, successful lawyering typically requires the use of a full range of personal and intellectual skills and intuitions that go far beyond the black letter. The same is true of lawyer-risk management: lawyers are human beings who must and do interact with other human beings (e.g., partners, associates, non-lawyer staff, opposing counsel and opposing parties) to try to address the needs of still other human beings (e.g., clients and their representatives) in addressing and hopefully resolving problems created by human institutions and actions. If we fail to use all of the human tools available to us, we are likely to accomplish less than all that we can.

Endnote

1. See, e.g., Exodus 41 (King James Version) (Joseph interprets Pharaoh’s dreams about seven good years followed by seven lean ones).

ABOUT THE AUTHORs
Peter Jarvis is a partner at Hinshaw & Culbertson, whose practice emphasizes professional responsibility and risk management issues. He is a member of the California, Oregon, Washington and Alaska bars. He can be reached at pjarvis @hinshawlaw.com or by calling (503) 243-3243. David Elkanich is an associate at Hinshaw & Culbertson. Previously, his practice emphasized criminal defense work. He can be reached at delkanich@ hinshawlaw.com..

© 2004 Peter R. Jarvis and David J. Elkanich


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