Enhancing your risk management capabilities through strategic partnerships
April 2014 | SPECIAL REPORT: MANAGING RISK
Financier Worldwide Magazine
In the not so distant past, it was typical for large national and international corporate clients to have deep, long-term relationships with their legal service providers. This changed in the 90s with many clients viewing legal services as a fungible commodity in which cost was the determining factor. An extreme example is the auctions set up by clients allowing firms to bid down the price for which they will perform certain services. Recently, the pendulum has swung once again and there has been a move toward re-establishing long-term relationships with legal service providers, principally through long-term alternative fee arrangements. Much has been written about the economic benefits of these long-term relationships, but little time has been devoted to exploring the numerous intangible benefits they bring, particularly with respect to risk management.
As with any outsourcing relationship, engaging in long-term relationships with legal service providers is not without risk, and clients may have concerns about operational and reputational risks posed by working so closely and openly with external service providers. However, if done correctly, long-term relationships between clients and legal service providers can help the client mitigate operational and reputational risk and improve the client’s ability to manage risk generally.
When clients engage legal service providers in a long-term strategic partnership rather than having engagement by engagement mandates, the resulting relationship develops several important characteristics. Over years of working together the legal service provider gains a comprehensive and sophisticated understanding of the client’s business, its goals and challenges, and an appreciation for the client’s business strategy. After long-term collaboration on various types of legal matters, as well as budgeting and strategic planning, legal service providers build an institutional memory which allows them to identify and remediate operational risks for clients. They are able to see the business as a whole, rather than a discrete legal project, and can use this perspective to assist clients to more effectively and efficiently manage risk. For example, many organisations require reporting on the risks related to litigation and other legal projects being managed by legal service providers. Those with long-term relationships with clients are better able to complete those reports in a manner which integrates the context in which the business operates and its tolerance for different types of risks. They will know if a client is particularly sensitive to reputational risk because of some recent bad press, or is sensitive with respect to a certain regulator because of an ongoing investigation.
The same can be said for other types of risk, such as cyber risk. Many companies now conduct cyber risk audits of their legal service providers. This is a difficult and time-consuming process which can be vastly reduced in a situation where there is a long-term relationship. The legal service provider will also be in a better position to effectively identify and address any cyber risks facing the client.
In addition to these specific benefits, more generally, the legal service provider and its client develop a mutual commitment to each other’s success which breeds loyalty and trust. As an example, clients are often comfortable calling their legal service providers for small one-off advice, on issues with respect to which they might not have otherwise sought legal advice. Legal service providers will also be more willing to provide value added services such as continuing education courses, or specialised secondments to provide support to clients. They could even be part of a client’s business continuity plan by providing a secondary worksite for the client’s legal group in case of an emergency.
These partnerships allow lawyers to become acquainted with the company’s culture and its appetite for risk. As a company grows and changes, so too will its business challenges and its legal needs. A lawyer will be better able to identify and assess those changing needs if it has an institutional memory of the client’s organisation and can appreciate how and why a business is changing. Also, when lawyers work closely and strategically with a client over time, they will come to understand the regulatory framework that applies to the business. All of this allows both the client and the legal service provider to mitigate the operational and reputational risks inherent in the provision of legal services. Despite the benefits of engaging in long-term strategic partnerships with legal service providers, corporate clients, and their internal counsel, may have concerns about the operational and reputational risks posed by such open relationships with external service providers. These are the same risks that exist in most outsourcing relationships, such as the risk of compromised confidentiality and the exposure to conflicts of interest. As a result of these strategic partnerships, lawyers will have access to the client’s business strategy and confidential policy documents.
Although these risks are real, addressing them early and openly will not only mitigate them substantially, but could put the client in a better position to minimise risk and improve organisational resilience than if it had more traditional, short-term relationships with legal service providers. With respect to reputational risks, if the relationship between the lawyers and the client is a partnership where the lawyers not only understand the business, but are invested in its success, it is in the lawyers’ interest to find a legal solution that will protect and advance the client’s reputation.
Conflicts of interest can be addressed at the outset of the strategic partnership by setting out guidelines requiring early disclosure and review of potential conflicts on an ongoing basis as new legal issues develop. When a partnership is first created, an organisation might ask outside counsel to identify and discuss any potential conflicts that are philosophical or policy-driven in nature that could compromise a position taken by the client.
Lawyers in long-term strategic partnerships with their clients may be more willing to notify clients of potential conflicts early on and before any actual conflict develops, in order to preserve and foster the mutually beneficial relationship of loyalty and trust. Additionally, when this type of relationship exists, lawyers may be less inclined to request conflict waivers unless absolutely necessary. If they are necessary, the client will have confidence in the fact that the waiver will not adversely affect the client and its relationship with outside counsel, or dilute outside counsel’s loyalty.
Similarly, concerns relating to confidentiality can be addressed early on in the partnership. Strong partnerships allow clients and their outside counsel to work together to develop mutually acceptable methods of diminishing the risk of confidentiality breaches. Generally speaking, lawyers engaged in long-term partnerships with a client will be more involved in the client’s contingency planning and risk assessment, perhaps as part of a multi-disciplinary team, putting the client in a better position to mitigate operational and reputational risks.
The benefits of long-term strategic relationships between clients and their legal service providers are many. Beyond the obvious economic benefits, there are intangible advantages to fostering a relationship of mutual trust and loyalty. When lawyers are invested in their client’s business and strategic planning, they are in a position to help identify and manage risks. Long-term strategic partnerships between clients and legal service providers create opportunities for lawyers to minimise the operational and reputational risks that come with most outsourcing relationships, while advancing their client’s organisational resilience.
Emily Jelich is vice president of Enterprise Optimization and associate general counsel at the Royal Bank of Canada. Brett Harrison is a partner and Cara Zacks is an associate at McMillan LLP. Ms Jelich can be contacted on +1 (416) 974 5526 or by email: firstname.lastname@example.org. Mr Harrison can be contacted on +1 (416) 865 7932 or by email: email@example.com. Ms Zacks can be contacted on +1 (416) 865 7144 or by email: firstname.lastname@example.org.
© Financier Worldwide
Royal Bank of Canada
Brett Harrison and Cara Zacks