Legal Risk Management

Legal and Risk Management for Small Business
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If you find yourself imagining ways to avoid: (a) trouble collecting money owed, (b) complex legal issues eating into precious time, or (c) key business relationships going sour in the future, you’re thinking about how to manage legal risk. A basic definition of legal risk is an uncertain legal outcome that has the potential to cost you or your business time and/or money. Your goal is to get a step or two ahead, saving time and money by avoiding or minimizing the risk.
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How to Assess Legal Risk Management Practices

Below, you will learn about ways to avoid legal risk in business, compliance, and legal risk management.

What is Legal Risk Management

Legal risk management is made up of the steps you take to direct and control your business when faced with immediate legal risks or possible future legal risks. You might first identify the risk, then reach a conclusion about the seriousness of the threat, then figure out what you’ll do about the risk. These steps can be summarized as identification, assessment, and treatment. Legal risk management is a proactive process that increases your business success by keeping you a step ahead of potential problems.

An example of risk management and legal issues could be the classic rainy day slip-and-fall. There’s uncertainty about whether it will rain, when it will rain, how hard it will rain, whether the rain will happen at or near your business location, etc. There’s uncertainty about the customer, age, physical fitness, clothing and shoes, etc. And there may even be uncertainty about the conditions at your business.

First you identify the risk – on a rainy day its possible that someone will enter your business and slip and fall due to a wet floor or wet feet. Second, you assess the likelihood of the various uncertainties (e.g. possibility of rainy day, visits to the business, unsafe conditions at the business). Third, you decide how you’ll treat the problem – what you’ll do to avoid it or make it more manageable (less costly). One business may get away with doing nothing or hanging a “slippery when wet” sign and that’s it. While another business’s legal and risk management might include increased staffing on rainy days, signage, umbrella bags, and additional insurance protection.

Because it’s likely that your business faces more than one potential significant legal risk, managing legal risk would include a review of all areas of potential legal uncertainty. Identify those legal risks that may result in significant loss of time or money. Do your best to quantify each significant legal risk (e.g. this could result in a loss of $xxx or so many days of time). Then plan how you’ll control each of the legal risks.

Click to schedule a free lawyer consultation. Call to discuss how to avoid your legal risk today: (212) 658-1752.

Advantages of Legal Risk Management

The benefits of legal risk management include saving time and saving money. Most people prefer to avoid legal problems so that they don’t have to deal with them. The key advantages of legal risk management are the result of proactive steps you take to identify, measure, and control potential legal risks. By staying a step ahead, you minimize or eliminate legal difficulties before they come up.

The above definition of legal risk focused on uncertain legal outcomes that have the potential to cost you or your business time and/or money. Because most legal problems do not make it to court, and the few that do rarely go to trial, the potential uncertain negative outcome is whatever time or money you invest in order to make the problem go away. This could include the time you spend running around getting papers, filing documents, researching, making phone calls, negotiating, etc. It could also include fees, penalties, settlements, money owed that you give up on collecting. It could also include risks you run because you unintentionally, or intentionally, don’t reply, don’t comply, don’t pay, etc.

By putting you ahead of your business’s most significant risks, legal risk management procedures lower the amount you invest in compliance, negotiation, or failure to comply. You benefit because you avoid the typical cycle of delayed legal input then the rush to try to save the situation while holding down costs. Instead, identify and understand your significant legal risks. Then control them before the situation escalates. You save time and money. That’s the advantage of legal risk management.

Click to schedule a free lawyer consultation. Call to discuss how to avoid your legal risk today: (212) 658-1752.

Legal Basis for Risk Management

Legal requirements for risk management vary depending on type of business, size of the business, legal jurisdiction, and regulatory environment. An example of a direct legal requirement for risk assessment would be a business operating in a heavily regulated industry where risk assessments, audits, inspections, and compliance procedures are mandated by law. Sarbanes-Oxley is an example of a mandated legal basis for risk management, that applies to both public and private companies, but only after they reach a certain size.

Even where there isn’t a mandated legal requirement, businesses embrace legal risk management procedures, which may be informal. These procedures may consist of organizing and maintaining corporate documents and records, keeping an eye on key legislation, or pursuing or avoiding certain types of business. Most business owners keep an eye on potential litigation, new legislation or regulation that could impact the business, and operational and contractual risks. Legal risk management formalizes these informal processes.

Areas that may create legal aspects of risk management include:

  1. Competition / Advertising
  2. Operational / Contractual risks
  3. New Legislation / Regulation
  4. Litigation
  5. Corporate Governance / Ethics
  6. Environmental Regulation
  7. General Compliance
  8. Document Retention / Data Protection
  9. Fraud Prevention
  10. Intellectual Property
  11. Product Liability
  12. Health and safety.

To formulate your management of applicable risks, you may adopt policies and procedures that focus on one or more specific risks. For example, if you own a restaurant, you may adopt policies and procedures that focus on reducing the possibility and cost of Health and Safety violations.

Click to schedule a free lawyer consultation. Call to discuss how to avoid your legal risk today: (212) 658-1752.

How to Assess Legal Risk Management Practices

Risk assessment is at the core of legal risk management. A typical risk assessment focuses on: (1) identifying the legal risk; (2) estimating the possible damage the legal risk could cause; (3) evaluating and prioritizing that legal risk in relation to your business and other legal risks; and (4) determining how you will deal with the risk. Depending on the legal risk, you may add a fifth step, monitoring the legal risk and adjusting the way you deal with the risk as time goes by. Those are typical five steps of risk assessment during legal risk management: (1) identification of legal risk; (2) estimation of legal risk; (3) evaluation and prioritizing (ranking from most costly to least costly) legal risk; (4) treatment of legal risk; and, in some cases, (5) on-going monitoring of legal risk.

Performing a cost-benefit analysis is one of the big things you can do to increase the usefulness of your legal risk assessment. The cost-benefit analysis could be done as part of the estimation or evaluation steps (steps 2 or 3). Your cost-benefit analysis tries to zero in on the likelihood and consequences of the legal risk, and put a dollar figure (and/or time estimate) to that legal risk. The point is to make the cost-benefit of the legal risk as concrete as possible so that you can make better decisions.

The results of a concrete cost-benefit analysis should be an estimated risk value. The risk value is your estimate of the legal risk’s potential consequences and the likelihood of those consequences. The potential consequences can include delay or financial consequences (time and money) or other consequences (e.g. unnecessary aggravation). Generally, the cost-benefit analysis and risk value will be something that you generate internally due to your intimate knowledge of the legal risk’s impact on your business situation. Your lawyer can help you by analyzing the relevant law, regulation, etc., and providing you with potential outcomes based on various scenarios. But to get to the numbers, you’ll need to rely on your own information and judgment.

How you assess legal risk management practices will depend on your commonsense. The point of the risk assessment is to find a useful and cost efficient way to identify, estimate, evaluate, treat, and possibly monitor legal risks that could cause you or your business significant harm. In many cases an informal risk assessment and cost-benefit analysis, along with an understanding of the legal impact of any final decisions, will be sufficient.

Click to schedule a free lawyer consultation. Call to discuss how to avoid your legal risk today: (212) 658-1752.

What is a Legal Risk Management Plan

A legal risk management plan is a way to identify and minimize or totally avoid legal risk on a day-to-day basis. The idea is to embed legal risk management into the fabric of your business so that you don’t fall prey to legal risks that may seriously disrupt or terminate your business cycle.

Steps in a legal risk management plan may include:

  • Identify the types of legal risk that could lead to lawsuits, settlements, penalties, etc.
  • Determine the frequency of negative consequences (loss of time or money) for each risk. This may mean looking at the frequency in your particular industry, or regulatory environment, or geographic location.
  • Determine the sources of information related to the legal risk. This may include documents, people (e.g. witnesses), areas of your business, etc.
  • Look for patterns.
  • Identify things you can do to head-off or minimize (mitigate) each legal risk. These are the corrective measures that you may immediately put into effect, or have available just in case.
  • To further insulate your business, implement policies and training, and keep both up to date.
  • Develop a preventive cycle (e.g. rinse, wash, repeat).

Your legal risk management framework will depend on the context of your decisions about legal risk. You may frame your legal risk management based on time (e.g. quarterly or seasonal) or value (e.g. above a certain cost) or something else. Your legal risk management plan is likely to operate within that framework based off of your legal risk assessment and cost-benefit analysis. Once you get things working, you should find it much easier to respond to your key legal risks and monitor those risks that you’ve determined should be monitored. Your preventive cycle (e.g. rinse, wash, repeat) should then operate as a way to continually improve the process, making it increasingly easier and inexpensive to implement.

Part of any legal risk management plan, or legal compliance management system, is keeping an eye on third parties that may add to the legal risks your business may face. These outside parties may include customers, suppliers, service providers, regulatory entities, business partners, or others. You should evaluate any third party that could force legal risk on you, or transfer legal risk, or otherwise communicate legal risk.

Another area to keep an eye on is anything that may require immediate changes to your legal risk management framework including new legislation or policies that have an immediate impact on your business.

Click to schedule a free lawyer consultation. Call to discuss how to avoid your legal risk today: (212) 658-1752.

Legal and Risk Management for Small Business

Small businesses often face serious legal threats on their own, without the advantage of knowledgeable legal assistance. This may be due to conscious cost-benefit analysis that leads to the conclusion that certain legal risks may be best dealt with by ignoring them until you simply must take action. However, sometimes a legal risk will pop up and leave you facing a serious, costly legal problem. Small business legal risk management is focused on narrowing that possibility and reducing the cost.

Legal and risk management for small business generally focuses on problems such as collection of bad debt, preparation of contracts, protection of intellectual property, insurance disputes, tax issues, employee and customer lawsuits, and product liability. Additional issues include contractor or supplier disputes, employee theft, confidentiality issues, internet security issues, and vulnerable company contracts or business documents.

The reality is that resources, no matter how plentiful, are always subject to limits. In addition, the time it takes to figure how and where to use resources (resource allocation) comes with the ever-present limitation of time.

To increase impact without adding to cost, legal and risk management for small business should include:

  • Ensuring that your business complies with current legislation and regulations that apply to your business.
  • Creating consistent standards around good practices geared toward reducing or eliminating legal risk.
  • Particularly for legal risks that you’ve determined should be regularly monitored, remaining aware of the legal environment and being prepared to adapt.
  • For areas where it makes sense, investing in building internal expertise centered around one or more significant legal risks. This could mean designating someone to stay up to date in a specific legal area.
  • If there is an area that presents a known source of significant legal risk, doing your best to find and use repeatable steps that help to minimize or avoid the risk from the beginning. This should decrease haphazard decisions that increase the chance of poor outcomes.
  • Avoiding neglect by scheduling periodic review. Depending on your style, this may mean putting up a post-it note, or adding something to your calendar, or a checklist.

To save time and cost, be creative, flexible and use your commonsense. It may not be cost effective to perform a formal risk assessment or thoroughly investigate every legal risk, including some significant legal risks. Legal risk management for small business is all about being proactive, and picking your spots.

Click to schedule a free lawyer consultation. Call to discuss how to avoid your legal risk today: (212) 658-1752.

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