Friday, May 24, 2024

How to Conduct a Law Firm Risk Assessment


“Taking risks doesn’t mean shirking responsibility, but embracing possibilities.” Vick Hope

Especially if that responsibility is conducting a law firm risk assessment.

Leave it to an author and journalist to have a way with words, right? While applicable to anyone’s professional or personal life, we think this quote rings especially true for attorneys and legal professionals. Recognizing common risks and responsibly planning for them can help your firm avoid worst-case scenarios. 

As a legal professional, proactively identifying and mitigating risks to protect your law firm’s reputation and financial stability are crucial to your success.

If you aren’t sure where to start, that’s where we come in. We suggest kicking off your firm’s risk management strategy with a thorough law firm risk assessment this will help you identify the areas of your business that are most at risk and enable you to focus your resources on the areas that matter most. 

Is Conducting a Law Firm Risk Assessment Important?

Yes. That’s what this whole article is about. Effective risk management not only mitigates losses but can also positively contribute to the competitive standing of a firm. This is where you can apply that “embrace possibility that comes from risk” mindset, as conducting a legal risk assessment can instill integrity within your firm and better your reputation in the long run. 

It’s also worth noting that not all risks are bad. Some risks could end up growing your client base or even set your firm apart from the pack. Risks can in fact yield possibilities after all. Just keep in mind that risks are always better taken when you have a plan ready in case things don’t end up how you thought they would. And, you may even be more willing to take more risks that have a potential upside if you know what to expect if things go south. 

What Are the Key Risk Areas in a Law Firm?

The first step to putting together a quality law firm risk management plan is being able to understand what type of risks your law firm could be up against. For most firms, the primary areas of risk relevant to a law firm include cyber threats, financial risks, operational or people-related risks, firm management, and strategic and environmental risks. 

Common Threats Within Top Risk Areas 

Take a look at some of the threats that these common areas of concern can pose. 

  • Cyber: When considering potential risks to your firm, cyber threats top the list. From phishing attempts, DDoS attacks, and good old-fashioned malware and data breaches, cybercriminals have many opportunities to take advantage of and target your business or your clients’ personal data. And even if your firm is well-protected, cybercriminals can get around security systems by hacking less-protected networks belonging to third parties. Truly, there are so many risks to consider when assessing the digital side of your business. 
  • Financial: Look at your firm’s financial dealings, and you’ll likely uncover another treasure trove of risks that could involve your internal financial controls, financial transparency and disclosure processes, credit, firm investments, and portfolio. You’ll also want to think about anti-money laundering precautionary measures as a part of your assessment. 
  • Operational: The people within your business can also pose risks to it. Employment, recruiting, and overall management of your employees’ physical and mental health all have their own risks. 
  • Firm management: You’ll have to consider the business side of your firm when assessing overall risk, too. Factors like client relations and professional responsibilities, including malpractice and potential litigation support, should be accounted for in your risk assessment. 
  • Strategic: Further, your firm’s reputational and market risks must also be factored in. A  risk in another area of your firm could trickle down to this strategic piece and could end up causing longer-term damage than the initial threat. For example, let’s say your firm is a victim of a data breach. Your IT team quickly handles the situation, but word gets out and existing clients want to stop working with you. What do you do? If you think about this scenario in your risk assessment, you’ll have a plan ready instead of having to act on the fly. 
  • Environmental: Last but not least, you’ll want to take into account those circumstances that are completely out of your hands as well. No one expects or wants a natural disaster or epidemic to happen, but you can plan for one. 

5-Step Law Firm Risk Assessment 

While drawing up a risk assessment plan, think about your firm’s goals and level of risk tolerance. Once legal risks are identified and prioritized, you can establish controls that limit risk and expose residual risks so you can plan for the unexpected. Here’s a step-by-step guide to help law firms conduct their own risk assessments.

  1. Identify your assets. In this case, assets can include things like revenue and extend to things like private client data. Go through each of the areas of concern outlined above to wholly account for your firm’s assets. Create the list and break it out by department or concern type. 
  2. Identify the risks associated with your assets. Once you know what you have to protect, you’ll want to identify the potential risks associated with each of them. We know that the risks facing your firm are vast, so take your time when outlining the potential threats. Proper planning can be your saving grace when worst-case scenarios become reality. Be sure to keep in mind the individual threats that exist for the different areas of risk. A comprehensive understanding of both the immediate cause of the risk and its underlying root cause is necessary addressing the root cause may be even more effective than mitigating the risk itself. And the likelihood of the risk occurring and range of outcomes the company could face are also important to note within this section of your assessment.
  3. Identify the cost associated with the risks. Once you have spotted and analyzed all of the risks, you will likely want to estimate the cost or value of the risk, depending on whether the risk has the potential to have either a negative or positive outcome. You might find that some risks are in fact worth taking. There is a simple and standard formula for this: Risk value = probability of event x cost/value of event if it occurs.
  4. Identify how to control the risks. You’ll want to identify risk mitigation strategies and response plans in addition to the risks and cost assessment. These response plans should include a recommendation for what to do and why. Contingency planning is an important component in a risk assessment it can act as a well-conceived game plan when you may not be clear-headed enough to react in the best way in the moment of crisis.
  5. Record your findings and revisit regularly. Risk work is never really done. You’ll want to regularly review and update your law firm’s risk assessment to ensure it’s ready to do the most for you when you need it. Set a quarterly review schedule and make changes when needed. Just be sure to communicate any updates to the entire firm. 

 

Accepting that risk exists and protecting against these threats will only give your firm an edge against the actual risks and your competition. And who knows, you may end up taking some risks you might not have otherwise felt comfortable with, and these risks could pay off for your firm.

Plus, executing a proper risk management strategy can also save your firm money on insurance costs. Chat with an Embroker insurance expert today to see how risk mitigation can save you in more ways than one.

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