Make More Rain : risk managment

Know Your Alternatives - Wrapping Up the Series

RussHaskin — Tue, 02 Mar 2010 14:00:00 GMT

As I mentioned in November, when I started this series, it could hypothetically go on forever. Half of my consulting efforts have been focused on alternative fee arrangements over the past year. There is little doubt that I will continue to post on the...(read more)

Research from the Redwood Think Tank - Alternative Fee Arrangements

MichelleStPierre — Fri, 26 Feb 2010 17:15:00 GMT

Four times per year we host the Redwood Forum, which is a chance for Redwood users to get together online and talk about business intelligence, law firm management and finance, and the role our tools play in that space. The Redwood Think Tank is hard...(read more)

Alternative Fees – Trouble Brewing?

MichelleStPierre — Thu, 18 Feb 2010 18:16:00 GMT

Is the recent dust-up between Kasowitz, Benson, Torres & Friedman and its long-time client Duane Reade Inc. a bad omen for alternative fee arrangements or just a call for better management of these arrangements? As you might have read recently , the...(read more)

Key Performance Indicators

DerekSchutz — Thu, 12 Nov 2009 21:46:00 GMT

I recently read an article posted on Bruce MacEwen's blog Adam Smith, Esq. titled " The Great "Laterals" Conversation, Chapter 2 ". The article itself is insightful and speaks largely on (surprise, surprise) lateral hires. However...(read more)

Know Your Alternatives: Contingent Work Basics

RussHaskin — Tue, 20 Oct 2009 18:53:00 GMT

At our User Conference this year we had a presentation called "Contingent Work: Worth the Investment?" The title of this presentation poses a question that is asked by many firms, especially those that are large in size. There are many boutique...(read more)

Too Good To Be True

Admin — Tue, 24 Mar 2009 22:04:00 GMT

Shortly after I graduated college I had just been dumped by college sweetheart, was not happy with my original career choice, and my billfold was getting smaller and smaller as the country was in a recession. Safe to say I was in a bit of a quarter-life crisis and my confidence was slightly south of nothing. That said, within my larger circle of friends I had noticed and briefly met a girl whose beauty was so striking that the room stopped every time she walked in. I and my friends...and pretty much everyone else thought there was no way she would ever be interested in a guy like me. I am no Brad Pitt to say the least. Yet to my surprise she started to actually pursue me (That should have been the first sign that there was clearly something wrong with her). On our first date we went to a bar and I remember immediately hearing whispers from other male patrons about how in the world a loser like me could be with a gal like her. Those whispers made me feel pretty good, important even.

Now here is the reality. Within five minutes of that date I realized that this girl had so much baggage that even United couldn't lose it all. In addition every time I talked with her I wanted to claw my eyes out. Even my friends who at first thought she was a knockout quickly changed tune and told me I was a moron for dating her. Every moment was full of drama, I could never make her happy, she messed with everyone's mind, had a temper that would make Chuck Norris cry, and Chuck Norris can't cry. My billfold was not only gone but would not feel the touch of debt free cash for quite some time. I still bang my head against the wall every time I think of those days. Why did I date her??? Why would I have subjected myself to that torture??? Well, reflecting back, it was because I was on the rebound, I didn't have many other prospects at the time, my self esteem was way down, the whispers made me feel like a somebody, and I just didn't have the skill yet to pick the right people to date.

Now that I have bored you with part of my dating past there is a reason why I bring this up in a law blog. Travelling from firm to firm I have heard many stories about risky clients that have been taken on within the recent past. Some of these clients promised big returns on contingency cases, yet even though the likelihood of success was slim the firms took on that work. Why you may ask? Well, in this down economy where attorneys are starved for hours worked the mere chance that maybe just maybe they could win made them take on the matter. How did it turn out? Nine times out of ten, just as you would expect. Resources were poured into the case, the firms played with house money and at the end of the day there was absolutely no return.

In other cases I have seen very risky clients being brought in who not only have poor payment history but are demanding the world when it comes to fee arrangements and terms of payment. Again the primary reason is that work is down and attorneys need hours. Right now in many minds any hour is a good hour. Sadly this is a major problem that needs to be addressed. Just like I was down in the dumps after college, so too now are many firms. Self esteem is low after a downturn in growth, layoffs of peers, and pressure to bring in any originations. Yet the idea that any work is good work is simply false. As my colleague Bo Yancey recently mentioned, understanding the opportunity for the firm with respect to what the client is offering is essential for long term sustainability. A lot of firms would be better off not taking any of this overly risky work and focusing their efforts on identifying prospects, (most likely internal ones) that can help get acceptable work for lagging practice areas until while dust clears.

We know all too well how hard this economic downturn has hit not only the legal industry but the industries that firms serve. It is a depressing time for many of us, but we still have to keep our wits about us and make the right decisions. I made the mistake of taking on a very risky venture in my dating past. Not only that but even after I knew it was a failure I kept it going for months afterward. I challenge firms to not make a similar mistake and analyze your intake process. Try your best to make the right decisions on clients despite the pressure for originations. Finally, if you realize you made a big mistake, correct it as quickly as you can before you drain additional resources. I'd like to think that my billfold would be twice as big now if I hadn't made the choices that I did. Perhaps the same can be said for many firms ten years down the line, long after this recession.

-Russ Haskin

Russ Haskin is Director of Consulting for Redwood Analytics/Lexis Nexis

Indispensable Man or Mack Truck Threat for Law Firms

Admin — Wed, 10 Oct 2007 17:39:00 GMT

With a new year approaching, it is appropriate to objectively look at the firm from a SWOT perspective. SWOT stands for Strengths, Weakness, Opportunities and Threats. Going through a SWOT exercise is one of the steps in a structure planning process. Even without the formal planning process, it provides a framework for objectively considering how prepared the firm is for the future.

One of the threats many firms face is the indispensible man or woman. It is often a rainmaker. But yours might be a tax attorney or some other member of the legal team. It could be the firm’s office manager or billing clerk who is the only person with the knowledge to get the firm’s bills out the door.

The question always arises, what do we do about the indispensible person? Money is usually the response. “We have got to increase their income because we can’t afford to lose Jim (or Betty).” The problem is money will not stop a Mack Truck! The point being, any of us can be run over by a truck on the way home.

If the loss of a single individual is so serious as to threaten the survival of the firm, there is only one sound solution to that threat. Make them dispensible!

You do that by hiring, training, or grooming their replacement. Or you do it by disseminating their knowledge more widely with the firm. You document their critical knowledge so that it can be handed off or shared with others.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

BSA Targets Law Firm Software Pirates

Admin — Mon, 02 Jul 2007 16:56:00 GMT

The Business Software Alliance (BSA) is a trade group whose members include the likes of Microsoft, Adobe and Computer Associates. The BSA's job is to protect the property and financial interest of members by identifying and recovering damages from organizations using the unlicensed property (software) of their members. And they are aggressive—encouraging disgruntled employees to blow the whistle. Virtually any business, including law firms, is at risk. Even with good intentions, you are likely to have software installed and in use on your computer equipment for which you do not have a license or do not have the BSA’s level of required proof of purchase.

The BSA’s definition of piracy leaves no room for gray—it is a black or white issue. They define piracy as “The illegal use and/or distribution of software protected under intellectual property laws.”

The law firm Scott & Scott specializes in defending companies against the BSA. They explain how the BSA works this way:

“The Business Software Alliance maintains telephone hotlines and a web site to encourage disgruntled employees and vendors to make anonymous reports against companies of all sizes.”

“The Business Software Alliance investigates all reports of software piracy without confirming the veracity of the information provided or the motive of the person making the complaint.”

“Once a report is received, the Business Software Alliance makes a decision about whether to request a self-audit or to immediately file suit. In the overwhelming majority of cases, the Business Software Alliance pursues the self-audit approach. Acting either through an internal enforcement attorney or an outside law firm, the BSA will send a letter to the target company requesting a self-audit.”

According to Scott & Scott, ignoring a BSA demand doesn’t work. If you or one of your clients receive one of the BSA letters, you need to seek the advice of an attorney experienced in BSA defense.

Don’t expect your midrange law firm to be below the BSA’s radar screen. Law firms are heavy software users relative to their size. The independence afforded to the firm’s lawyers leaves a lot of room for pirated software, as defined by the BSA, to find its way onto law firm computers.

If Scott & Scott had their way, we would have a new definition of pirated software:

“Software piracy is the distribution of counterfeit software and/or use or distribution of authentic software constituting the intentional violation of intellectual property laws.”

Unfortunately that is not the way BSA sees it. Under their definition, your firm and your clients are BSA targets. Take prudent steps to avoid having unlicensed software creep into your computer systems and workstations. Make sure that your accounting and IT people have devised a method for retaining proofs of purchase for all software licenses. Finally, unless you have BSA defense experience within your own firm, you might want to remember the name Scott & Scott.

Morepartnerincome.com is sponsored by Juris. For information about Juris® products and services for increasing law firm performance and partner income, contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Lawyers Unwittingly On Camera

Admin — Mon, 25 Jun 2007 16:24:00 GMT

As young CPAs in the mid 1960s, several of us were in a small town having dinner at a local restaurant. It was the night before we were to make a surprise bank audit. The conversation, in whispered tones, turned to the bank job we had the next morning. When we arrived at the bank, the police were waiting!

That was when I learned that you never know who is listening. Things are getting even more treacherous. Today, do or say something that can be interpreted as inappropriate and you could star on YouTube the next morning. With that starring role, your career can take a serious blow or it can be sent down the drain entirely. In today’s world of security cameras, cell phones and the Internet, you are never out of sight—never out of earshot!

There can be only one standard of conduct and everyone in the law firm needs to be continuously reminded that someone is always listening, watching and could be RECORDING!

For more on this growing risk, read Carolyn Elefant's June 19, 2007, post on Law.com, “Watch What You Say at a Conference—It Might Wind Up on YouTube.”

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Wild Weather, Fires, Floods Threaten Law Firms

Admin — Tue, 15 May 2007 17:11:12 GMT

Something Neil Cameron wrote jumped out as I read the British publication Managing Partner: “You can lead a horse to water…Don’t wait for it to drink. Stick a hosepipe down its throat!”

Here comes the hosepipe. Driving to work this morning, the car radio news was reporting that a Pentagon study predicted 3,000,000 U. S. deaths from a pandemic with 40 percent of first responders and medical providers too sick to perform their duties. This news comes after unusual Easter snowstorms affected large portions of the country and crippled our transportation system for several days. Wildfires are burning on both coasts, including one that endangered Griffith Park in the heart of Los Angeles. Heartland storms just wiped out an entire town and floods are putting downstream cities underwater.

The hand of Mother Nature is not the only one that law firms have to protect themselves and their clients from. Individual law firms dependent on technology systems are at risk from system failure, data loses, viral attacks and security breaches. Terrorism, vandalism, pipe breaks, power blackouts and fire, even a small fire, add to the threats that law firms face.

Don’t forget the firm’s most valuable and precious assets that walk out the door at night to face their own risk and mortality as individuals. The “office” can be secure and the firm will have to deal with the loss of key partners or personnel without warning.

By now you would think law firm leaders would have gotten the message. A survival plan, a plan to deal with emergencies and the loss of access to key attorneys and staff with minimal interruption, is a business necessity and a professional obligation. Those firms without plans are betting their future, and the odds are against them.

The same issue (April 2007) of the Managing Partner containing Neil Cameron’s quote included the article Plan of Action dealing with the increased emphasis UK firms are placing on business continuity plans in the face of a pending regulatory change that will require the principals of law firms to make arrangements for the continuation of the practice in the event of an emergency or lost of access to legal personnel. You can find the article at www.mpmanagingpartner.com.

While robust continuity plans are desirable, relatively simple basic steps can provide an important safety net for the firm and its clients:

The first priority is personal safety—always protect lives first. Establish evacuation and reassembly procedures. Make sure everyone understands that no one is to risk or endanger their life or the life of others for paper, media, or any other material or firm property.
Have your data backed up using one of the continuous online backup services like LiveVault®.
Make the move toward a paperless office—-electronic copies of your client files can be backed up—paper files go unprotected.
Provide all legal talent with the ability to work from home with computer and Internet connections.
Devise a communication plan. Maintain current employee contact information (including an alternate contact outside of the area for use as an intermediary) and get the contact information in the right hands and in various forms, including a printed document. At a minimum, establish calling "trees" so that by contacting a few people, information can be disseminated quickly to everyone. Better yet, provide all legal talent and key personnel with cell phones and preferably PDA devices like the BlackBerry®. Ideally, an emergency phone number should be set up with a non-local phone service and communicated to employees as well as clients.
Identify a small crisis team and a team leader to coordinate operations during the crisis period.
Address the issue of where the firm can set up a temporary operation. This may be as simple as identifying the homes of certain partners or preparing a list of options, including branch offices or client locations. It is a good idea to identify and establish contact with a commercial real estate organization that you can call on a moment’s notice. Generally, the space issue can be resolved in a reasonable period after the fact.
Your plan could be as elaborate as contracting with an offsite disaster recovery facility or maintaining a backup server and network facility, but at a minimum you should know who to turn to for essential equipment and the related services. The safest source and service provider will be one located outside of your geographic area. If you have laid the proper groundwork, equipment and network availability can usually be replaced in a few days.

While you are at it, also focus on the issues of medical emergencies and physical office security. With that in mind, see the prior post What is in the Law Firm Medicine Cabinet? and How Secure is Your Law Firm Suite?.

You can find extensive information on disaster and continuity planning on the Internet or through the ABA. There are professionals available to help you if you need it. The important thing is to do something. If you doubt that, just turn on the news. If you are having trouble getting firm partners to make business continuity provisions a priority, stick a hosepipe down their throats!

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center at 877/377-3740, e-mail info@juris.com or go to www.Juris.com.

$30 Million Law Firm Embezzlement; How Can That Happen?

Admin — Mon, 02 Apr 2007 17:07:11 GMT

“Hardworking” attorney embezzles thirty million dollars! My brother J. Steven Collins, the Knoxville attorney and one of the founding partners of Burroughs Collins & Jabaley, PLC, forwarded the story to me and asked, “How can that happen?”

Unfortunately, law firm embezzlement is hardly an infrequent event. The amounts change and the embezzlers can be a billing attorney, administrator, office manager, accountant, or bookkeeper, but many similarities are present in reported cases.

Back to my brother’s question, how can this happen? There are several factors making law firms more susceptible to misappropriation of funds—part-time executive management, absent or weak financial management, inadequate internal controls, high volume of pass-through disbursements, decentralized approval and signing authority, plus a tradition of deadline or crisis-driven transactions. Many law firms have to add to the list the power of unchecked individual attorneys to create their own rules when it comes to “their” clients.

One study by a major CPA firm reported that the average incident goes on for 18 months before detection. More than half of the time the defalcation is exposed only through a tip or by accident. External audits are not the answer. Less than 11 percent of embezzlers are caught as a result of external audits. Fraudulent checks, credit cards, payroll, petty cash, and outside vendor accomplices are all favorite tools of the law firm embezzler.

According to the ABAJoural EReport story, Lawyer Stole Millions, Indictment Says, by Stephanie Francis Ward, this New Orleans partner sent clients fictitious billing statements with enclosed self-addressed envelopes, directed to the attorney’s attention. Funds received were deposited to the firm’s trust account for the client. The partner would then ask the firm’s accounting department to write checks from the trust account to businesses he set up and controlled. Those businesses were disguised as transaction participants. The partner allegedly created phony paperwork, such as closing documents, to make the transactions appear legitimate. The attorney was described as hardworking and was one of those who insisted that any billing questions related to “his” clients be referred to him for resolution. He was discovered because a temporary worker, who didn’t know about his hands-off rules, received a call from a client asking about a bill.

Perhaps the most common characteristics of the embezzler are the following:

Completely trusted and never checked
Several years service with firm
Rarely takes vacation/holidays
Secretive and rarely delegates to others

While they apparently did not apply in the $30 million case, four other characteristics are often present:

Personal/family health or financial problems
Lifestyle inconsistent with income
Rumors of affair or drug/alcohol abuse
Unusually close relationship with vendor

What should you do to protect your firm? First, select business software with built-in audit trails and controls. Do not allow chiefdoms within the law firm. It is a business, and no attorney should be allowed to create their own rules, bypassing internal and business controls, for the handling of “their” clients.

Remain alert to the reality that it can happen in your firm. Keep your eyes and ears open. Obtain professional assistance to implement appropriate internal controls, including segregation of duties. Insist that employees and attorneys take vacations as consecutive days under an arrangement where others assume their duties. Send trust and accounts receivable statements showing all transactions independent of the individuals responsible for billing. Do not let a crisis take over and circumvent normal controls and procedures. Budgeting, comparative financial results, and detailed review and questioning of monthly financial statements are an essential function of law firm management and play a vital role in protecting and preserving the assets of the firm.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Client Attrition Risk Scorecard for Law Firms

Admin — Thu, 15 Mar 2007 18:11:24 GMT

A recent study by Redwood Analytics as reported by Larry Bodine identified the distinguishing characteristics of clients retained by law firms. The absence of those characteristics and the presence of others can identify clients most likely to go elsewhere. The study is a reminder that law firms can use their business system to create a scorecard according to attrition risk and having done so can target those clients for remedial steps. The scoring part is the easy part; developing a culture willing to take action to improve retention is the harder part. As for actually producing the attrition risk scores, your business software should track the necessary indicators. To produce a scorecard you will need a custom reporting procedure. Law firms with in-house capabilities should be able to do that internally using reporting tools but, in any case, your software provider should offer custom reporting services for a reasonable fee. If not, you have the wrong software or wrong software provider.

What are the attributes you want to measure?

On the plus side Redwood found that long-term clients had the following attributes:

Provides the firm a large amount of legal work
Has a mature, established relationship with the firm
Uses the law firm for matters involving two or more practice areas
Two or more partners are significantly involved with the client’s work

Redwood also found the following:

First year clients have an attrition rate of 50% compared to 20% for clients with a four year history.
Clients with only one partner involved have the greatest attrition rate.
Too much or too little partner time on matters creates an attrition risk. Morepartnerincome believes that the danger zone is anything less than 10% or more than 60%.
Clients most at risk have an overall realization of less than 80%, i.e., discounts don’t retain clients.

You will have to play around with this but start out trying the following:

Give 10 points to a firm whose prior year fee revenue met the 1% test. (To keep it simple, divide your annual fee revenue by 100. Use the amount in your report to identify clients meeting the “large amount of legal work” test.)
Deduct 5 points if the fee revenue for the prior three months x four is less that the 1% test, i.e., fee revenue is declining.
Add10 points if the client has been with the firm for three or more years.
Add 5 points if the client has matters in at least two practice areas.
Add 10 points if the client has multiple billing (supervising) attorneys on active matters with billed amounts during the prior three months.
Add 5 points if partner hours on the prior three months’ bills were greater than 10% but did not exceed fifty percent.
Deduct 5 points if unbilled fees exceed the prior two months’ fees.
Deduct 10 points if billed but uncollected fees exceed the prior three months’ fees.
Deduct 5 points if prior year collections where less than 80% of the prior year value of billable hours at standard rates.
Deduct 5 points if the percent of partner hours on the prior three months bills were less than 10% or greater than 60%.

There is nothing magic about the above weights for the items listed. You can and should vary the weights to fit your firm’s experience. There is no perfect score. Those with the highest points are the least likely to abandon the firm within the next three years. Those with the lowest score are the most likely to leave.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Protecting the Law Firm's Reputation

Admin — Thu, 15 Feb 2007 19:51:00 GMT

The Harvard Business Review’s February 2007 issue included a scholarly article dealing with protecting a business’ reputation. The authors noted that firms with a strong positive reputation attract better people, can charge a premium for their services and products, and enjoy greater client loyalty.

The Catch 22 is that the more important your reputation is, the more vulnerable it is to anything that damages that reputation. So what proactive measures can you take to protect this extraordinarily valuable firm asset? After-the-fact crisis management is not the answer. Actions taken at that point are attempts to minimize the damage already underway.

Start by assigning someone the responsibility for managing the risk. It starts by monitoring and intellectually questioning three important aspects of the risk and then mobilizing coordinated efforts through the firm leadership to head off threats that appear on the horizon.

We are always judged by others—clients, vendors, employees, peers, competitors, etc. What we are is determined through their eyes and not our own. The responsible individual should take steps to track through various means the three aspects of reputation risk listed below. Report to the leadership and recommend prophylactic measures where appropriate. The three areas are:

Reputation Gap: How are we perceived by those who judge us versus our reality? The greater this gap, the greater the risk. Action is needed to change the perception or the reality to close the gap. A failure to live up to inappropriate reputation can be as costly to the firm as a failure to live up to the reputation you previously earned. Likewise, the failure of the public to give the firm due credit and market position means it will not get the business it should have and is likely to attract the wrong prospective clients.

Changing Expectations: How are the standards of those who judge you (and enterprises like you) changing? Are tastes, ethics or values changing? Are clients changing what they look for in terms of how they relate to their providers? What about the things they value most? Is it loyalty, responsiveness, friendliness, or other things? Do they want to socialize or get right to business? Do they value gray hair or youth? Do they want to do business by phone, email, or in person? Do they expect a center city premium location? Is convenience or prestige more important? Failure to see changing preferences in our fast-paced times can erode your reputation in a few short years. How quickly did your law firm embrace e-mail or the growing expectations for law firm web sites? Do your attorneys understand the expectations of the Generation X and Generation Y clients that will replace your baby boomer clients as they leave the scene?

Organization-Wide Coordination: Once we understand the reputation we have and want, the next question has to be, are we acting in accord with that reputation? Is every department and every individual aware of our reputation goal and performing accordingly? Do our phone handling practices reinforce our image or bring it into question? How about how we receive visitors to the office? Are our communications with clients consistent with our image? Do our couriers represent us consistent with our reputation? Do we have partners, associates, or others who aren’t on board?

In most firms, risk to reputation is not currently managed. Responsibly has not been assigned. Those who enjoy a stellar reputation should take note: their most valuable asset will always be a risk. The first step in managing that risk is to put someone in charge.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Cyber Insurance For Law Firms

Admin — Wed, 14 Feb 2007 19:35:17 GMT

Ed Poll wrote an informative article on the subject of cyber insurance appearing in the January 2007 Law Technology News.

He explains that if you are interested in cyber insurance, you should first review your current coverage. You are probably spending too much on traditional insurance plans, such as property, and errors and omissions. Those policies do not cover cyber damages, and most of your value resides in unprotected data.

Where do you go for specialized cyber insurance? Ed points out that American International Group, Chubb, and Lloyd’s of London have offered coverage since the late 1990s. The biggest risk involves unauthorized access to confidential information. Insurance coverage should address both direct financial loss as well as liabilities arriving due to damage to clients and other parties. Ed Poll is the principal of LawBiz Management Co. and Edward Poll & Associates Inc. He is the author of LawBiz.Blog and his email address is edpoll@lawbiz.com

Laptop theft and the resulting exposure of confidential information is an increasing risk to law firms. A separate article in Law Technology News by Julie Machal-Fulks and Robert Scott (starting on page 46) dealt with security risks associated with portable devices and is well worth a read. Having recently attended LegalTech and observing some risky behavior involving attendee laptops, it is worth passing on to you as a reminder. “When using your laptop at conferences, keep your eyes on it.” Laptop theft on Wikipedia is a valuable source of information for protecting the information on your laptop.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Law Firms Ignore Their Biggest Risk

Admin — Tue, 05 Dec 2006 19:45:29 GMT

The December 4, 2006 Time Magazine includes an article dealing with the psychology of risk or "Why we worry about the things we shouldn’t and ignore the things we should."

It is well worth the read. It seems nature has left us to navigate this advanced world with a prehistoric brain. We are wired to respond to immediate threats rather than long term threats that may pose greater risk and danger. We are wired to respond to those things we dread—things that can cause pain and suffering.

The problem with this is that it leads to poor decisions. We elect to drive rather than choose the lower risk alternative of flying. We worry about mad cow disease, which has not killed one person in our country, but we continue to subject our bodies to practices that will lead to a fatal heart attack. We worry about lightning when more people die from falling out of bed. The article makes for interesting reading on a personal level, but it also has ramifications from a business risk standpoint. Misreading risks and ignoring those with higher certainty occurs in most law firms.

We worry about the gun-toting disgruntled client when a medical emergency is far more likely. We insure an important partner’s life but make no plans for the certainty of their eventual retirement. We purchase fire insurance but take inadequate steps to deal with data loss. We worry about malpractice claims and ignore the risk imposed by our aging partners.

One of the steps in strategic planning is to identify the risk faced by the business and then take steps to mitigate strategic risks—those with the biggest impact related to their likelihood of occurrence. To help our “old brains” put risk in proper perspective, planners should compute a Risk Index number for each item. A Risk Index is a computation based on likely occurrence and impact. For example, list the risk faced by the firm and assign to each a percentage of likelihood that the listed risk will occur within a given timeframe. For example purposes, let’s use 25 years.

Over the next 25 years, what is the likelihood of:

Destruction by fire

Sudden death or disability of key partner

Retirement of key partner

Server crash without recoverable backup

Major malpractice loss

Assign each a percent of likely occurrence in the next 25 years.

Destruction by fire = 05%

Sudden death or disability of key partner = 25%

Retirement of key partner = 100%

Server crash without recoverable backup= 100%

Major malpractice loss = 15%

Next, assign each an impact percentage and multiply the two to create a simple risk index.

Destruction by fire = 05% * 80% impact = 04 Index

Sudden death or disability of key partner = 25% * 60% impact = 15 Index

Retirement of key partner = 100% * 60% impact = 60 Index

Server crash without recoverable backup = 100% * 40% impact = 40 index

Major malpractice loss = 15% * 90% impact = 14 index

When one looks at risks faced by the firm in the above example using their Risk Index, the first concern of the law firm should be continuity planning. Their second concern should be taking additional steps to protect against loss of data. Yet at a strategic level, these two risks are often ignored in many firms. The two risks with the lowest Risk Index in our example are fire and a crippling malpractice loss. These are the two areas firms are most likely to have addressed at a partner level. It isn’t that those two risks shouldn’t be addressed; we just have a tendency to ignore risks of greater certainty. We do so because our brains are wired to react to some threats with fight or flight signals while ignoring other, more modern threats.

Identifying risks and viewing them from the standpoint of their risk index is one of the steps in a structured strategic planning process. Partners are not actuaries and are unlikely to precisely quantify likelihood or impact, but their collective judgment will be close enough to provide sound business insight into risks that need to be addressed from a strategic level. The law firm is a source of livelihood and wealth, and survivability should be the first objective of the business.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.