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MEASURING A LAW FIRM’S RISK MANAGEMENT: Smart Firms Do it Before A Claim Occures, Others May Do it After

Serious claims against a law firm may have a devastating effect, going far beyond the actual dollars involved. The impact includes large amounts of time lost, deteriorating relationships between and among partners, and, in many cases, repercussions within the firms’ client community.

The impact on the fabric of the Partnership itself is a case in point.

It is not at all unusual for the Partner most involved with the matter which led to the claim to leave the firm entirely. In our Risk Reviews, we have found that in almost 65% of those matters involving serious claims, the Partner most involved with the case which led to the claim had actually left the firm within 18 months of the issue having arisen. Clearly, the impact goes far beyond the financial.

Our observations of law firms which have suffered serious losses indicate that the impact of these losses have to be carefully considered in ways separate and distinct from dollar damages. Not at all unlike a patient who has experienced a serious trauma, law firms tend to want to immediately forget about their professional liability problems. It’s very much a case of “denial” in the classic sense. The firm wants to pretend that the matter never arose even though the repercussions are still very much in evidence. You could make the argument that the partner involved in the matter, as a continuing reminder of these difficulties, is almost “cast out” from the Partnership. In this way, the firm enables itself to believe that the departing Partner was actually the concern, not the real problem, which is the way that the firm handles its business on a continuing basis.

The only way that a firm, once it’s experienced a serious claim, can avoid costly mistakes in the future is by analyzing and coming to grips with what has happened in the past.

That’s why an objective review performed by a third party can be so helpful. It allows the law firm to focus on the details of the occurrence and hopefully learn from it. This kind of review assists the firm in not only dealing realistically with its problems but, even more importantly, developing and implementing a strategy to see to it that the problems do not recur.

There are some Practice Standards or “Rules of the Road” to use in order to measure the ability of a law firm to manage itself effectively.

These are standards which we have developed to create measurable objectives. It allows us to review a firm and report on the ability of the firm to handle its affairs in a professional and risk adverse manner. In part, they include:

Partnership or Shareholders Agreement;
Overall Management Structure;
Mechanics of the Practice;
Financial Management;
Case Acceptance Principles; and
Conflicts and Ethics Considerations.

THE PARTNERSHIP AGREEMENT
A Partnership or Shareholder Agreement should help to translate overall firm philosophy into day to day policy and then provide the wherewithal to see that the policy is carried out.

The Agreement should have provisions setting out duties and responsibilities of the Partners. It should detail a basic compensation scheme which provides for compensation to those Partners who are responsible for not just the billable hours but also for doing other things important to the overall health of the firms, tasks such as training associates and supervising staff. These may not make money in and of themselves but they help provide a setting in which money can be made. In the long run, particularly in a Risk Avoidance context, they are just as important as billing.

It is just this simple: law firms which have a clearly defined structure with duties and responsibilities set out do not have the claims problems of firms which do not have such a structure.

OVERALL MANAGEMENT STRUCTURE
The general structure of the firm, whether or not it has a Managing Partner, an Executive Committee, etc., should be delineated in the Partnership Agreement or Shareholder Agreement. An analysis of this structure as it functions on a day to day basis determines the firm’s capability to develop policy, translate that policy into a plan of action and then carry it out.

Firms that have an effective Management Structure are less likely to have claims, not because they have better lawyers, but because they have created policies which are well-considered and then carried out.

MECHANICS OF THE PRACTICE
The translatable goals of the Partners, affected by the then-created structure of management nets the Mechanics of the Practice. This encompasses the system design for the day to day firm activity. It also includes the hiring of staff to carry out those Partner-created objectives. A firm which sets goals for itself, including the rewarding of Partners for doing not strictly billable work, will avoid many claims situations.

FINANCIAL MANAGEMENT
Adequate Financial Management in a law firm means that the firm has accurately anticipated its financial requirements by profit planning and budgeting. The quality of its Financial Management affects the way that the firm makes decisions. Cases in which there appears to be a conflict may not be handled properly if a firm is suffering from cash shortages. Risks are taken in which claims are very often the inevitable result.

A law firm which is well managed financially may be able to withstand the difficulties which ensue if there is a major claim. Firms that are not well-managed financially do not survive for very long.

CASE ACCEPTANCE PRINCIPLES
The ability of a law firm to make accurate determinations of what they are good at, what their attorney population is capable of doing effectively and what they should avoid is the crux of claim avoidance today.

The notion that a firm can be all things to all people does not work well for most law firms. It is the reason that so many small and medium-sized firms have experienced so many claims.

Law firms must set standards for their case work just as they do for their finances and for their compensation. They must also determine the way in which the firm accepts new matters: how they’re approved and who must sign off on them. Case Standards and Procedures need to be in place before the case arrives in order to be effectual. Those standards must be determined by the Partnership. Individuals who will not accede to those standards must be controlled.

CONFLICTS AND ETHICS
Is the same matter a Conflict for your firm when you need billable client work in the office as it is when there is more than enough work to go around? That’s the question that partners should ask themselves. Conflicts are close calls. They don’t rise up and announce themselves (most of the time). They are difficult because they are complicated.

Law firms must address the ethical issues of their practice in their Partnership or Shareholders agreement. Beyond that, systems must be developed (Mechanics of the Practice) which will isolate potential conflicts and make them known to the Partnership, not to just the individual attorney. More than one opinion should always be brought to bear in a potential conflict situation.

CONCLUSION
In an ideal world, lawyers could practice their craft unconcerned by prospects of law suits against themselves for malpractice. Since we are far from that circumstance, it behooves lawyers to practice defensively and to do all that they can to protect themselves before and after the claim occurs. Firms which are not well-organized and cohesive may come apart under the pressures of a claim against the partnership. Firms that are well-structured will withstand these difficulties and may become stronger because of the experience. That’s a worth-while goal.

Thomas Berman

Thomas Berman is involved in all phases of law firm practice management, including Mergers and Acquisitions, Systems and Structure, Partnership/Shareholders Agreements, Planning, Succession, Compensation and of course, Risk Management. For the last twenty two years, he has worked with well over a thousand law firms of every kind, a single lawyer to several hundred lawyers; Intellectual Property to Plaintiffs Personal Injury Law. He can be reached at: tberman@bermanassociates.net

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Filed Under: Practice Management

About the Author: Thomas Berman is involved in all phases of law firm practice management, including Mergers and Acquisitions, Systems and Structure, Partnership/Shareholders Agreements, Planning, Succession, Compensation and of course, Risk Management. For the last twenty two years, he has worked with well over a thousand law firms of every kind, a single lawyer to several hundred lawyers; Intellectual Property to Plaintiffs Personal Injury Law. He can be reached at: tberman@bermanassociates.net

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