Risk management: Where does innovation fit in?

Ronwyn North

Becoming better at managing risk and becoming more innovative are two challenges for today's lawyers and law firms. Good risk management is about taking action today to prevent being hurt tomorrow. Good innovation is about doing something new or different that adds value to clients or the business. But what is the relationship between risk management and innovation? How you answer this question may say more about you and your firm than you think.

Maybe you have not considered the question before. After all, structured approaches to managing risk are relatively new to law firm management and structured approaches to managing innovation are even newer. I am going to stick my neck out and say that firms with a good risk management framework will also be ready or well positioned to be good at innovation. This runs counter to a view I heard recently from a practitioner that risk management and innovation are polar opposites and that if you have one you will not have the other.

This view holds that taking risk management seriously means not being innovative because inherent in innovation are the risks and uncertainties associated with new ideas. However, this kind of thinking misunderstands the nature and practice of both risk management and innovation in the provision and management of legal services and the role played by personal attitudes and work preferences.  

Tailored solutions
Good risk management is not about being totally risk averse and aiming for zero uncertainty any more than good innovation is about ‘new' for the sake of novelty regardless of need or consequences. To be effective, both risk management and innovation require a culture where people are reflective about the performance of the business and client-focused.

Organisations and individuals vary in their propensity for risk-taking and openness to new ideas. Different times and situations may require more conservative or radical approaches. Effective approaches will manage risk without stifling opportunity and find new ways of doing things without throwing the baby out with the bathwater.  

Let us consider a couple of examples of the parallels and overlaps between risk management and innovation. In today's rapidly changing legal services market ‘lack of innovation' makes the list of top 10 risks facing the Australian legal profession.*

Does ‘innovation risk' feature on your firm's risk radar? It might appear under a different term such as ‘new forms of competition', ‘declining revenue' or ‘obsolete technology'. If your approach to risk management is any good, you will not only be worrying about these strategic, commercial and operational risks but you will be actively doing something to understand and address them. Good risk management also demands that you look for good solutions.

A good solution is well matched to the exposure and will reduce exposure in a systemic, affordable and sustainable way. A firm with a commitment to good risk management will consider innovative solutions, not only the tried and true. Again, in keeping with good risk management principles, the higher the risks the higher the safeguards, so the more radical the innovative solution, the more scrutiny, evaluation and testing will be applied before the ‘winning' solution is decided upon and implemented.

Get creative
Out of this risk-driven approach, an innovative solution will be a game-changer like Collaborative Law, which challenges the adversarial model; listing on the stock exchange, which challenges traditional notions of law firm ownership; alternative billing practices that challenge the tyranny of the billable hour; or virtual law practice and cloud computing, which challenge the bricks-and-mortar office.

Other examples of this more pervasive approach to innovation can be seen in those lawyers who are truly client-focused and solution-oriented in their approach to client work. Despite all the emphasis on ‘precedent', the practice of law is actually quite a creative endeavour in many ways. Looking for loopholes, coming up with new legal arguments, finding novel solutions for novel legal situations, doing things differently to reduce the costs to the client, and advocating law reform can all be exercises in innovation. These lawyers may be practising innovation without giving it a label.

Of course, lawyers can get into trouble if they take ‘creative lawyering', like ‘creative accounting', to an extreme that is not tempered by due consideration of the risks. Examples include novel arguments that truly have no foundations in law and result in personal costs orders; the structuring of transactions that are found to be illegal and result in convictions for aiding and abetting; or being so ‘commercial' as to amount to practising another occupation in breach of practising certificate or insurance conditions. Lawyers or firms who bring trouble on themselves in this way may lack risk structures, culture and disciplines; for example, around peer review and compliance.  

Firms with the more sophisticated approaches to risk management are often those that have more professional approaches to business management generally. A larger firm may have an organisational development function, a smaller firm may have a quality and continuous improvement program and a few firms may have both. These development and improvement initiatives that expand and extend existing approaches do not of themselves guarantee true innovation in the sense of making changes that disrupt and displace. However, they do show that firms have the infrastructure, resources and routines for informed reflection on performance, identifying opportunities to do things better, and for effecting change across the organisation. Also they have usually made the important leap of having processes that involve all staff, not just partners or management, in these initiatives. If these firms are not innovative already, often they need only a small nudge to ‘think outside the square' and look for things that others are not doing or at adapting the new things the early adopters are doing.

Boost innovation
Despite these characteristics that work in favour of effective innovation, I suspect that even in the most innovative of firms, innovation is not practised as rigorously and is harder to sustain than in industry. For example, in industry the business case and project management of innovation will have formal risk assessments and testing processes built in. Often these will be driven out of requirements for consumer safety. Risk management has a recognised place in innovation processes more so than in law firms.

With regard to sustaining innovation, it appears that the first Chief Innovation Officer to join the C- suite of a major firm did not last long and has jumped ship to an accounting firm and not been replaced. Another sad indicator is that certain Australian law awards used to have a ‘Box Breaker' category, but this award did not make the cut this year.

However, help is at hand. There are many things that can be done to redress the situation and improve innovation practices and here is a good one. Better understand your individual work preferences, and that of others, around creativity and innovation, and tendencies towards seeing obstacle or opportunities. If no one in a firm or work team has a strong preference for working with new ideas and if everyone has a strong tendency to see obstacles, not opportunities, then the chances of innovation coming easily and being effective are much lessened. At the same time, a firm or team full of creative types who only ever see opportunities is odds-on to be a risk management nightmare.

Today these characteristics can be reliably measured by various profiling instruments. Individual and team profiles can be very useful in providing insights into behaviour that is helpful or counterproductive towards innovation and risk management. A profiling exercise can also provide practical strategies for improving individual and team performance. 

Imagine that the future of your practice depends on being able to answer two questions from a potential very important client: "How do you manage risk?" and "How do you manage innovation?" Law firms tend to be better at answering the former than the latter, but they need to be able to answer both if they are to meet the challenges of providing good outcomes for clients, making a living and finding satisfaction in the process.

 

Ronwyn North specialises in helping firms manage client expectations and professional risk. She is also an accredited consultant with Team Management Systems.
rjnorth@streetonconsulting.com.au

 

* Perils the Profession Can't Ignore, Brianna Everett, Lawyers Weekly, December 9, 2010.