Are Lawyers Risks and Crisis Managers?

Lawyers in legal departments and law firms like to refer to themselves as risk and crisis managers. But, to be qualified as such, is it sufficient to be consulted in order to clarify legal questions when crisis and risks arise? If not, what more is needed, and how could internal and external legal advisors position themselves better in this respect?

If you follow recent statements by employees in the banking industry, it can be observed that they justify their high wages through their role as “key risk takers”. To understand this position it is necessary to separate the internal and the external view on risk-taking. From an internal perspective assuming a higher risk than other employees might justify a relatively higher salary, whereas from an external point of view the question arises whether a customer may transfer its own risk to a lawyer.

In analogy to this we can have a closer look into what the takeover of risks for lawyers really looks like: Firstly, there is an entrepreneurial risk. This internal perspective can be associated with the provision of correct legal advice. There is no risk (directly) transferred to the lawyer by the client. It goes without saying that a layer`s client assumes that the legal advisor himself will personally take the entrepreneurial risk into account.

This must be distinguished from the case where lawyers actually take over a client`s risk and can ultimately be held accountable for it. This is particularly crucial in the context of the discussion about the commonly used “hourly fee model”, which might be underlined by the lawyers’ demand for an upfront payment. With this model or a prepayment the legal service provider attempts to transfer its own entrepreneurial risk to the customer. From a lawyers perspective this is explained by referring to the (economic) independence, which they claim to ensure through that. But on the customer’s side it results in the exact opposite and burdens the essential trusted relationship between him and his legal advisor.

If you don’t want to go that far as a lawyer, but you would like at least to be considered a “risk manager”, the question arises as to what it exactly is that needs to be managed by a lawyer. To understand this, it has to be analyzed how a traditional risk management process works and how a legal advisor can actively contribute to this process. Lawyers are – often without noticing it – integrated within the customer’s risk management process. This can for example be the case, when a legal advisor is asked to predict the likelihood of winning a case and provide an estimate of the possibly resulting damage figure (including the lawyers’ fee) (see the so called “lawyers letters”). If lawyers are not aware of the reason why they are asked to predict certain figures, they run the risk of mistaking these questions. This is the reason why it is crucial for lawyers to develop a profound understanding of risk management.

In this context, it might be useful for external lawyers to understand how a CEO or General Counsel prioritizes the legal department in the concept of the so-called “Three Lines of Defence”. Is a legal advisors seen as a business partner in the first line or rather as a compliance partner in the second line? This classification simply indicates what role the legal department takes within a company. For internal and external lawyers this is of importance, as they can derive of it what kind of legal counselling the company is expecting from them. Legal advisors who have never asked themselves such questions may have missed an opportunity to increase client satisfaction or – especially important for law firms – to win new clients or mandates.

If you are interested and curious about such questions, we recommend to take a look at the attached short video in which these topics are furtherly explained (up to minute 22.20, so far available in German only). And if you would like to know more about management topics for lawyers, we suggest to watch the video up to its end (in German) and for lawyers in law firms to check our available E-Learning Tool in English.