Getting out of depth

A basic concept of risk management is the principle of risk versus reward. This simply means that the greater the risk, the greater the reward should be. Any firm that undertakes high-risk work for a low reward or return is looking for trouble. It follows that to determine the level of the reward, the risk attaching to the work needs to be analysed at the commencement of the engagement.


The analysis process would look at the likelihood of error and the potential impact of an error. The outcome of the analysis may be that the fee-earner is of the opinion that there is little chance of anything going wrong and, even if it did, the impact, or the financial loss that would ensue was pitched at an acceptable level.


On the other hand, the likelihood of error may be great, and potential financial loss substantial. Apart from dictating the level of costs that may properly be recoverable, such a situation should also mean that careful attention is paid as to whom the work is delegated to, and the level of follow-up supervision that may be necessary. It is essential that the fee-earner who is assigned the engagement has the necessary expertise and seniority, as well as the time and resource to do the work properly.


This is why best practice would dictate that a head of department or team leader signs off all new work to ensure that the partner responsible for the team or department is fully aware of the risk profile within his jurisdiction.


It is also important that the risk profile is kept under regular review. Most lawyers will be familiar with the situation where a matter starts being relatively straightforward and then develops into something more complex. This is not an uncommon situation and the danger is that the fee-earner, having started with a matter well within his capabilities, rapidly gets out of his depth with the result that the risk of error increases dramatically. This is common in corporate law, where, for example, matters transpire to be considerably more complex than the original instructions suggested.


Before closure, the file should also be reviewed to assess the risk and that it has been properly managed throughout the retainer. It is not just financial impact that features in the analysis, but also potential damage to reputation, which of course is the greatest risk confronting a law firm.


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