Legal liability part two: managing risk

This might come as a shock but the truth is that you don’t have to have done anything wrong to receive a solicitor’s letter demanding compensation.

A change of management, corporate financial difficulties, boardroom politics or simple greed can all result in clients not wanting to pay a consultant for delivering advice, service or a system, and looking to a solicitor to help them.

The first and, in my view, most important ingredient of effective risk management is corporate consciousness. The risks and potentially disastrous effects have to be fully appreciated at board level. For a culture of risk identification and reduction to permeate a business, the lead has to come from the very top.

It is no coincidence that leading companies have a risk management function at the executive level, often backed up by a large internal legal team.
For smaller businesses, the practical effect of litigation can be even more crippling and it is essential for business owners to take it seriously.

Many consultants have said to me ‘it could never happen to me’ or ‘my client is a personal friend and would never dream of suing me’. The first step in effective risk management is to accept that risks really do exist.

For example, it is generally accepted by the scientific community that one day an asteroid will collide with the Earth. What we don’t know is where and when it will hit, or what it will look like. The likelihood of this happening in the next 50 years may be very low, but the risk still exists.

Once a consultant accepts that risks do exist, the next practical step is to identify the risks facing the business. To be effective and avoid or reduce the big loss you will never know about, this needs to be an ongoing process and eventually part of your business culture.

To identify such a culture in practice, imagine a consultant negotiating a new piece of work with a sophisticated client who includes a clever penalty cla use in the contract. If the consultant can confidently bring this to the attention of the consultancy’s legal or management team (despite the possibility of it leading to the loss of the work), then the firm will have successfully developed a risk-conscious culture.

Another key area where careful risk management can save thousands of pounds is complaint and contract management. For example, does every person in your firm know how to respond to and escalate complaints? An assumption that complaints will go away or somehow sort themselves out can lead to disastrous delays and, more importantly, prevent the problem being resolved quickly and efficiently. And don’t forget, criticism from a client is not always something that a consultant wants to tell their manager about.

When looking at the risks facing your business, you need to consider physical risks (such as property damage and bodily injury), financial risks, credit risks, reputational risks and any other type of risk that might affect your business. You know your business better than anyone else and are best placed to identify weak spots.
Once you have identified a comprehensive list of risk types, you need to quantify the potential impact to the business, both in terms of the likelihood of it happening and the possible outcome if things go wrong.

In the case of the asteroid hitting Earth, the probable outcome would be total devastation, but the likelihood of occurrence is so small, based on our current knowledge levels, that we can discount the risk.

For tangible risks with a material chance of occurrence ­ for example, default by your clients ­ the next step is to minimise the risk. Tightening up payment terms or increasing the frequency of payment chasing are practical steps you can take.
Most risks are capable of being reduced or managed, but very few can be removed altogether. For this latent exposure, the final step is to consider ‘effective risk transfer’ ­ removing the potential impact from your balance sheet and put ting it onto someone else’s ­ which will be covered in next month’s concluding article in this series.

Gary Head is professions underwriting director at Hiscox