Why Risk Management Should be a Top Priority at Your Firmaderantuser
If you ask a lawyer today what is meant by “risk management”, he or she will likely talk about regulatory compliance, conflict checks, AML policies, risk assessments and client confidentiality. With cybercrime on the increase, you may also hear about the need to comply with information security requirements. These requirements are increasingly taking the form of demands for ISO 27001 accreditation, a standard now being demanded by many financial institutions and government bodies.
This view of risk management, however, is rather narrow and fails to acknowledge the commercial pressures and changes taking place in the legal sector today. The recent global economic downturn gave clients a heightened awareness of their purchasing power, and accordingly client demands for Alternative Fee Arrangements (AFAs), financial transparency and flexibility in delivery are now common. De-regulation in the UK legal sector is also causing increased competition in the form of Alternative Business Structures with new commercial practises and pricing structures.
In this transitional market some firms have recognised that there are great opportunities for growth if they can successfully identify, manage and mitigate their risks. It is not that there are more risks in this market, just that there are new ones that need to be fully understood and managed for firms to be successful.
The need for a broader definition of risk management becomes apparent when we examine the range of responses that law firms are taking to the recent changes. Some firms are looking to grow through mergers and alliances or, conversely, to focus on their specialisms. Firms are also working to lock-in clients by providing value-add services, long-term partnerships and retainers. In this increasingly price sensitive market, many firms are also looking to differentiate on price and are increasingly leading with alternative pricing proposals rather than waiting to be taken there by their clients. These new pricing strategies are often accompanied by lower-cost resourcing to help drive profitability.
At Aderant, we see many of our clients driving growth by adopting one or more of these strategies. To ensure ultimate success, however, it is imperative that these firms have a culture and platform for effective risk management. Firms looking to differentiate on price, for example, need to ensure that they have a solid grasp of the level of cost associated with a piece of work before they can confidently offer a creative pricing solution.
Furthermore, proactive matter management is required to stay within the agreed budget and manage the commercial expectations of the client. The Altman Weil 2013 Survey found that firms are twice as likely to be profitable if they proactively offer AFAs. The inference is that firms leading with AFAs have also developed tools and strategies to help them measure and manage their pricing proposals. They are therefore able to successfully win business by differentiating on price while delivering their services more profitably than their competitors – a double whammy!
For firms to effectively manage the risks presented by today’s changing market and turn them into an opportunity for growth, they need to implement processes and solutions that allow them to quickly identify and respond to commercial risks and opportunities. This will require firms to have a global risk management platform that overcomes the limitations of disparate silos of data, and more importantly, to have a high level focus on risk management from the firm’s leadership team.
Regulatory changes in the UK now mean that the role of Risk Officer must be held by a practising lawyer and partner. This change, coupled with the significance of industry changes outlined above, is quickly driving risk management higher up the agenda in UK law firms. We are seeing this same trend globally as firms in every country look to prosper in today’s increasingly competitive market.