Teaming Inside And Outside Counsel To Effectively Manage Risk

If ever there was an overused phrase, it is risk management. It suggests that risk, chance and happenstance are things that are managed or controlled by some higher power of reason or divine inspiration.

For those of us who have been around long enough, we know that bad things eventually happen to good people (as well as bad people) and businesses will eventually be faced with unanticipated problems and challenges brought on by those very same good (and bad) people.

Murphy’s Law is alive and well in corporate America.

But if in-house and outside counsel work seamlessly together as a team, then risks can be truly managed more efficiently and effectively.

From The Inside

As far as in-house counsel is concerned, risk management is really mitigation of the cost to the company when the unexpected happens. This requires issue identification, planning the response to issues and problems as they arise, and managing the dispute resolution process when problems cannot be resolved informally.

It seems self-evident that early problem identification is key. The basic tenet is, of course, if one can see what is coming down the pike, then one can take actions to avoid and/or mitigate impacts to the company.

But in order to put even this simple principle into practice, proper infrastructure is required. Such infrastructure involves cultivating the sensitivity of managers and others to events giving rise to contract implications and, equally as important, the communication of any concern to the appropriate person or level.

In-house counsel is probably the person best able to assess the company’s infrastructure. Inside lawyers can gauge the experience and knowledge of managers because he or she typically interfaces with them during development of projects and the negotiation of contracts. He or she also sees in hindsight how managers and other personnel dealt or failed to deal with issues as they arose on previous projects.

It is important for a company that the information gleaned in this way be put to good use. All too often, however, it is not. Especially in today’s lean business environment, in-house counsel is overwhelmed with “current” workload, and there is little time to formulate programs and practices to address the need with management. But this is where outside counsel can be very helpful.

Outside Looking In

The world of outside counsel, particularly those having litigation-based practices, addresses all kinds of business dealings gone badly. Outside practitioners have also seen how critically important it is for business to function in a manner that avoids or addresses disputes quickly and appropriately.

Providing this insight to in-house counsel can be of invaluable assistance and a catalyst for change to less than effective business practices. Outside counsel and in-house counsel should team with the objective of sharing knowledge, gaining expertise, and establishing the credibility necessary to focus management’s attention on improving internal risk management techniques.

In this way, in-house counsel and outside counsel can act as agents for change within the company.

Some of this teaming can be overt, with offerings of training to management and staff by outside counsel of the risks certain business practices present. Teaming can also be subtler, relying on relevant experience of outside counsel in suggesting changes without the formality of training.

Whatever the approach, it is critical that an open and trusting exchange of information be maintained. Outside counsel must understand that “preventive” lawyering is more valuable to a company than dealing with a problem after the fact. In-house counsel must continually reinforce this same point to management.

Assessing The Problem

When a problem does arise, the importance of an early and ongoing relationship between outside counsel and in-house counsel cannot be emphasized enough. In-house counsel needs to assess the issues as quickly and as accurately as possible in order to report to management.

The company’s management has a duty (at least in a publicly traded company) to report material matters involving exposure to possible loss to its auditors and to establish appropriate reserves for contingent liabilities. Outside counsel’s role is critical not just in assisting the company in dealing with the particular dispute or matter at hand, but also in satisfying the auditors that it is being appropriately handled.

This, of course, challenges outside counsel to accurately assess the possible outcome of problems as soon as possible, which is never an easy task given that information is always limited and trial disposition (particularly jury trial disposition) is highly unpredictable.

Concurrent with the preliminary issue assessment, outside counsel must provide realistic budgets tied to separate tasks. Outside counsel must also identify the information required to develop a more comprehensive understanding of the issues.

Given the high cost of legal services, the complexity of today’s business transactions and the duration of typical disputes, it is critical for in-house counsel and outside counsel to communicate often about the appropriateness of legal services to be rendered. To the extent that the company’s personnel are available to perform some of these services (even if they only involve retrieval and review of records, etc.), the option to perform those services in-house should be examined.

Such an option need consider the internal drain on company resources as against the cost of performing this work outside. Striking the appropriate balance among getting the information required, staying within budget, and continuing business requires constant vigilance. Working together, in-house and outside counsel can develop the most suitable plan.

The Best-Laid Plans

The best-laid plans, however, can go awry once a dispute evolves into formal dispute proceedings — especially litigation. No longer does the company unilaterally drive the process. Instead, an opposing party can set the agenda and drive the costs. An opposing party driven by considerations other than primarily business interests can force scorched-earth litigation on a company. For example, it is not unheard of for public entities to be more driven by political concerns than by cost considerations.

Whatever the circumstances, it is critical for outside counsel to manage and periodically reevaluate the budget. In-house counsel must be made aware of potential overruns so that he or she may avoid surprises and timely inform management.

Outside counsel and in-house counsel should team on all settlement planning. It is never too early to assist management to consider settlement; yet settlement may be best pursued after sufficient information is exchanged between parties whose respective positions have then been defined.

This definition can then be presented to management and settlement expectations can then be determined. It is crucial that outside and in-house counsel work together to frame those expectations.

As trial or hearings commence, management tends to focus the responsibility on outside counsel to carry the flag, for better or for worse, into battle. In-house counsel should be involved in every step of the process, which at any time could offer an opportunity to settle. These opportunities should not be lost in the heat of the battle and require quick and informed decisionmaking.

Good risk management requires the active participation of in-house counsel and management with outside counsel. Seamless communication of information between in-house counsel and outside counsel, and constant reassessment of costs and settlement potential by both is the hallmark of effective risk management.

As a general premise, companies are not interested in vindicating rights, setting public policy or advancing case law. Instead, companies focus on minimizing disputes, distractions and disappointing returns on investments. The business of business is business — not litigation. Successful outside counsel not only understand this, they adopt it in all of their service offerings and interactions, from front-end advising to litigation.

Shrewd in-house counsel recognize the value of outside counsel as a team player and will use and rely upon those who not only understand the company’s business objectives, but who conduct their practices in a manner designed to promote those objectives.

Martin G. Schaefer is corporate counsel for Ionics, Inc., a 2,100-employee global company headquartered in Watertown, Mass. Richard K. Allen is a partner and chair of the design/construction practice group at the Boston law firm of Gadsby Hannah.