Survival v extinction

Solicitors are good at estimating risk when it comes to their clients' affairs, but generally bad at the analysis necessary to judge the risks that arise out of the operation of their own businesses.

Newly qualified solicitors do not embark on their careers with the view that they are entering into a risky business - but the insurance industry might take a different view.

Operational risk arrives on the doorstep of firms in a variety of forms.

A useful typography is to divide risk into fours areas: clients, work, staff and processes.

- First and foremost, there is the risk from clients themselves.

Will they pay for the service? Are they going to bring problems with them such as potential money laundering or damage to the firm's reputation through association? Have they understood the service that you are going to provide and the limits that you have set?

- Secondly, there is the work.

All work carries risk and a firm needs to be able to determine which parts carry higher risk than others.

This can be a generic category such as property transactions, or a specific part of a process such as giving advice on tax in a matrimonial case.

- Staff are also a risk.

There is the basic need to have properly trained staff competent to carry out the work.

As important, is the risk that arises from poorly supervised and under-supported staff.

Solicitors' firms are knowledge-based service providers and the quality of that service rests in the quality of the 'knowledge workers', that is, the lawyers in the firm.

- Finally, there are the processes and procedures in the firm.

Unless the staff are supported by well managed and consistently applied procedures that are clear to everyone, there will be risks of overlooked matters or confusion about lines of responsibility which rapidly lead to complaints and claims.

All risk management policies should provide for the analysis of these four categories of risk and include the measures that the firm and staff intend to take to reduce the risk.

But policies alone are not enough to ensure a reduction in risk.

Firms that approach risk management on the basis that it is uncompetitive will not apply risk management policies, however good the principles embodied in their paperwork.

Typically, this will be firms that appoint risk managers at a lower salary scale than the fee-earning solicitors and then undermine their credibility with the operational team by stigmatising them as uncommercial.

Risk management has to be led from the top and a consistent message delivered to staff that it matters.

The cost to the firm of complaints and claims in increased premiums and excesses make it a commercial necessity.

When you add the loss of reputation that comes from a notorious case then it may be the difference between survival and extinction of a firm.

This column was prepared by AFP Consulting, a Division of Alexander Forbes Risk Services UK Ltd