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

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