Lawyers deal with risk every day. Whether responding to a summons and complaint, drafting an estate plan, or structuring a limited partnership, lawyers are called on to identify the areas of risk and resolve them. Because most lawyers lack formal actuarial training, few lawyers can quantify the actual level of risk in a given situation, or the exact degree to which their actions and advice reduce that level of risk. And yet, “risk reduction” is the main reason businesses and individuals hire lawyers. This articles explores the nature of risk, how lawyers assess risk, and how they can profit from doing a proper risk assessment.
Value Added Proposition
In determining the “value added” proposition of going to a lawyer, there are few clear guidelines for the client to use in determining the “ROI” or Return on Investment. If you purchase an insurance policy, you have a fixed cost, a known return (up to the coverage limits), and a “risk of loss”. These factors can be used to determine whether one insurance policy is better suited to your needs than another.
Lawyers can and do play a major role in the business world, similar to that of an insurance policy. A lawyer can charge his or her clients “higher legal fees” only by “quantifying the reduction in risk” that comes with hiring his or her firm, and demonstrating a clear (and more certain) return on the investment than that offered by the firm’s competitors. By focusing on the “value proposition” and not the “fee schedule” the lawyer can have “happy clients” and “larger fees”.
Risk/Reward Ratio
This article does not hope to explain all the actuarial principles of assessing risk. Like you the reader, I am legally trained (a recovered lawyer turned technologist), but I do have some clients who are actuaries. Businessmen look at risk/reward ratios. A potential million dollar loss with a 10% risk is worth $100,000. A businessman may spend up to $50,000 to avoid that risk (or roll the dice). Anything more is money poorly spent. By contrast, take a potential $400,000 loss, with a 50% risk, and a businessman will gladly pay $100,000 to $200,000 to avoid that risk. And if your legal advice and/or action can only reduce the risk of loss from 50% to 10%, you have still increased the value proposition of your services and can charge a fee commensurate with the value you gave to your client.
Reducing the Level of Risk
One of the key ways a lawyer can “reduce the risk” to his or her clients is to increase the quality and consistency of the firm’s work product. The typical way to do this is to (1) spend more time on each transaction – increasing billable hours, or (2) hire more talented junior attorney, thereby increasing leverage. A minority of law firms, with some success, have developed standard procedures, protocols, and forms for producing the actual work product. The development and refinement of standard forms has the affect of increasing the “baseline” work product, and allowing more time for “crafting and counseling”. It also allows for more junior attorneys and paralegals to do much of the work, increasing leverage.
While forms and procedures can be effective, the protocols must be reviewed periodically and the forms must be regularly updated to reflect the current state of the law and best practices. If you don’t, the value proposition of your legal work product will decline over time. Such work is typically viewed as a “non-billable cost.” In reality, such work is a capital investment in your business, an investment of “time” rather than money, but one that has clear and quantifiable returns.
The Next Step – Automation
Standard forms and protocols are a good start. But the ongoing maintenance costs can be quite taxing on a firm. Changes in procedures often require expensive retraining of the staff. Changes in standard forms require ongoing vigilance. It is often easier to leave the form as it is, and let each attorney modify it, than to put variations and alternate text into the form.
Enter stage right, automation. Switch to a case management system where the protocols are electronic, where the process is governed by easily modified business rules, and where users can refine the protocols easily. Switch also to a document assembly system which represents an amalgamation of the standard forms and the attorney specific modifications into a decision-tree of choices which result in a first draft document which more closely resembles a final draft document.
The result of automation is a substantial “reduction of risk”. The automation increases the quality and the consistency of your work product, not to mention leveraging the attorney’s time from efficiency gains. Moreover, such systems are flexible. Protocols can be changed on the fly. A new trigger can be created that adds a newly required step to the process that first automatically. New provisions of the tax code can be incorporated into the document template so that they are included in all generated documents.
The reason to adopt automation is to “reduce the risk” of inconsistent work product. The reason to bring consistency to your work product is to allow you to more accurately quantify the reduction of risk to your clients. And once you can quantify that reduction of risk, you can increase the perceived value of your services. And this will mean the ability to effectively charge higher fees.