Outside general counsel

Most small and mid-sized businesses cannot afford the benefits of inside general counsel.  Some of the benefits of inside counsel include easy access to legal advice, cost controls on the cost of legal services, and legal focus and expertise in a specific business and industry.  What if it were possible to have at least many of the benefits of inside general counsel, without the fixed overhead of inside counsel?

Here are some things outside counsel can do to provide some of these benefits:

  • Manage legal risk, including annual compliance and legal reviews
  • Conflict resolution management.
  • Be readily available to respond to routine legal questions
  • Attend board meetings
  • Coordinate the delivery of all legal services
  • Gain industry knowledge by attending industry conferences
  • Work as a member of the management team
  • Review legal bills and work on alternative billing arrangements

Strategic risk management

Strategic risk management is part of strategic planning.  It is a systematic way of identifying legal risks in business, establishing programs for eliminating, avoiding, transferring, or mitigating the effects of such risk, and educating business managers on how to deal with such risks in the future.  It is designed to help business managers improve future earnings of the company by identifying and appropriately dealing with legal risk which leads to future costs that may be avoidable.

Why Focus on Prevention?

Failure to practice preventive risk management leads to crisis management and the loss of valuable corporate assets, including top management time, organizational stability, productivity, money, and morale.  The cost of prevention is nominal compared to the cost of resolving legal risks after they become problems or disputes.  Prevention cannot be delayed or avoided.

What is Legal Risk?

Legal risk is the possibility that a business will incur financial losses, including non-operating losses, based upon its legal relationships with its employees, creditors, competitors, customers, and others.  With a rapidly changing and increasing complex legal environment, the number of legal risks facing businesses is increasing dramatically.  Managing legal risk is no longer intuitive and the legal mine field through which business managers must now navigate is crowded with potential explosions.

How Does Strategic Risk Management Work?

The focus of strategic risk management is diagnosis of your business to prevent legal risk in the future.

  1. Risk Identification:  “What legal problems do I currently have and what are my future legal risks?”  Legal audits help diagnose or identify existing and future risks.
  2. Risk Assessment and Determination:  “With the existing legal risks in my business identified, how significant are they and what can I do about them?  Legal counsel helps create a program to eliminate, avoid, transfer, or mitigate existing legal concerns or risks.
  3. Strategic Risk Control and Avoidance:  “What strategy can I implement to avoid or control legal risk in the future?”  Legal counsel helps to establish a program for handling the company’s legal risk in the future.

What is a Legal Audit?

A legal audit is like a physical examination for your business.  It is a tool for analyzing the existing legal condition of your business and identifying potential future legal risks.  It includes interviews with key officers and employees and a review of critical documents, such as articles of incorporation, bylaws, minutes of meetings, policies and procedures manuals, contract forms, online contracts, and other significant contracts, and the company’s website.  Based upon the review conducted, an analysis is made and recommendations provided to management for handling the legal risks identified in the review.

Is It Possible To Eliminate All Legal Risk?

The objective of strategic risk management is not to eliminate all legal risk.  That would be impossible.  In fact, there is much legal risk that cannot be eliminated and there are legal risks that you will consciously accept because the cost of eliminating them is too high.  However, strategic risk management can help reduce the possibility of facing unexpected expenses in the future by dealing with legal issues now.

How Do I Know If I Need Strategic Risk Management?

If you are in business, you need strategic risk management.  Just as you cannot send your friend to the doctor for your physical examination, you cannot avoid having the diagnosis made for your particular business.  Business managers must plan for all aspects of business operations at the same time.  One such function managers cannot overlook is planning for legal risk.  If a manager focuses on production, but fails to anticipate how the production will be capitalized, the business has a high possibility of failure.  Likewise, if business managers focus on the future success of the business, but fail to effectively plan for legal risk, the business may face significant, if not insurmountable obstacles in the future.

What Legal Risks Do I Face?

Each business and each industry is different.  As a result, in addition to several common legal risks in business, you face unique risks.  For example, all companies face the possibility of employees making claims for harassment or discrimination.  However, software publishers face unique risks when selling software in foreign countries.  Your business should be evaluated individually and a plan adopted for the risks of your particular business.

Issues Which May Impact Your Business

The following are examples of common issues addressed by strategic risk management:

Are your online contracts enforceable, including your terms of use?

Does your website infringe on the intellectual property rights of others?

What rights do you have in your trademarks, and do your trademarks infringe on the rights of others?

Are your officers, directors, and shareholders protected from personal liability?

Are there any limitations on how or when you can terminate any employees?

Can your key employees compete against you or solicit your employees?

Are your distributors independent contractors or are they employees for whom taxes and other assessments must be paid or franchisees for whom federal law compliance is required?

Are you fully protecting your intellectual property as important assets of the company?

Is your business engaging in any price fixing or other unfair trade practices?

Do all of your means of raising capital, debt and equity, comply with federal and state law?

If one of your shareholders dies, can he or she sell his or her shares and control to a person who is adverse to other shareholders or current management, or who may not share the same values or goals as other shareholders and management?

Are your contracts current, and have you performed as required under your contracts?

Legal audit

When was the last time you were feeling healthy, but went to see a doctor because you wanted to avoid future illnesses? Usually we wait until we are sick and ready to go to the hospital before we take the time and spend the money to see the doctor. It is sometimes hard to get motivated to get preventive health care. Unfortunately, in some cases, waiting until we are sick can have lasting negative consequences.

The same holds true for our MLS businesses. Sometimes we do not know what potential business illness might be lurking inside. A business illness usually translates into litigation and damages, as well as lost sleep, lost productivity, anxiety, low employee morale, and other very negative conditions. I have done presentations for MLS and associations called “The Joy of Litigation.” Few appeared to enjoy the irony of the title, but it is probably safe to say that, except for litigators, most of us do not care for litigation. How do we know if our MLS business is in good business shape, or if there are potential litigation claims hiding in the wings? Does our MLS have a low grade business fever, or is there a major business artery ready to burst, and we do not know it.

Legal audits are the answer. Simply stated, legal audits are preventative health care for businesses. Lawyers trained in applicable substantive areas of law, and in conducting legal audits, pull out the legal stethoscope, blood pressure machine, and thermometer and check the health of the business. The first step in a legal audit is to provide a questionnaire to obtain basic information about your MLS. With this information, a checklist of documents and additional information is generated. The lawyer reviews the documents and information, and determines whether the MLS has a business fever, or an even greater potential business health problem. Thereafter the lawyer generates a report which identifies the potential problems, together with a list of recommendations to correct the problems and avoid future liability and legal concerns.

The legal audit will either help confirm the MLS appears to be in good business health, or disclose some problems that need to be resolved. Either result is a good result. Discovery of a legal health issue before a lawsuit is filed and served gives the MLS time to consider alternatives and develop a strategy to make the MLS well again. If the legal audit discloses nothing, as an executive officer you have acted prudently in making sure the appropriate steps are taken keep the company healthy. Some executive officers might ask, “Why would I want to discover latent issues that will make me look bad?” I do not ever recall a situation where an officer of a business discovered a problem before it exploded, and the officer was criticized for the discovery and resolution of the problem.

What business ailments might a legal audit disclose? For example, data feeds should not be given without a license agreement. The legal audit first determines if appropriate license agreements exist, and if they do, will determine if the critical legal issues have been covered. The purpose of the legal audit is not to rewrite all contracts and pick away at every detail. There is no written contract on the planet that cannot be improved. A legal audit reviews the documents at a much higher level. Another example, each MLS should have an antitrust compliance policy. The legal audit will reveal whether or not there is a policy, and if the answer is yes, whether or not the MLS is in compliance with the policy. Plaintiffs’ counsel love well drafted policies that have been adopted and discussed within the organization, but have been ignored when it comes to compliance. The non compliance establishes for the judge and jury the MLS knew what needed to be done to legally comply, but failed to do so. Non compliance with a policy is the proverbial “smoking gun.” The legal audit reviews rules and regulations to determine if key provisions are included, and if the MLS is a National Association of REALTORS® MLS, determine if there will be insurance coverage issues. These are only a few of the issues covered by an MLS legal audit. The list goes on.

The concept is the MLS gets a legal body scan and determines if there are any major concerns to address. Is a legal audit perfect? Will it catch every possible legal sore throat? No, just as a medical body scan cannot identify all potential health issues, a legal audit will not identify every possible legal risk. At a time when MLS are operating in a complex and rapidly changing environment, it is a risky course of action to ignoring what you do not know, and focus only on that which you know.

Another question: Does it make sense to conduct a legal audit at a time when revenues are falling, or at least not increasing, the subscriber base is weakening, and the board of directors is asking you to focus on the implementation of better and more efficient technology? The answer is there may not be a better time to be prepared for the future. The present may be considered a time of calm waters before the next surge in the housing market, or before your neighbor MLS knocks on your door and says, “Should we consider data sharing?” Now is the time to do an internal examination and make sure there are no surprises in the closet or latent business health issues.

A legal audit is therefore an efficient and a quick tool for measuring the business health of the MLS. The results of the legal audit will either help you, as an executive officer, sleep a little better at night knowing there are no obvious concerns, or they will give you an opportunity to identify and resolve potential business health issues before they grow and develop into major problems which may take much more money and effort to resolve.

What to expect from your lawyer, and the effective use of legal counsel

It’s pretty obvious that the world has changed with the Great Recession.  In many ways we are still not clear on how or why things have changed, we just know they have.  Financial decisions have been forever impacted by the terrible effects of the recession. Businesses face new concerns as a result of the sharp and protracted turn in the economy.

Professional services have not been immune to the effects of the recession.  In addition to the recession, there is a new generation of decision makers emerging who are comfortable with and use the internet in ways that prior generations have not experienced.  In particular, clients who purchase legal services are exploring and requiring changes to the delivery of legal services.  This article will explore how, in this new economy, businesses may more effectively use legal counsel.

Lawyers play a significant role in helping businesses succeed, including helping business avoid liability in general, comply with regulatory requirements, charting a course that protects the business from legal landmines, minimizing risk when engaging in transactions, and when disputes arise, helping to work through and resolve the disputes.

There are many excellent lawyers who are bright and provide good legal analysis.  But not all lawyers are effective at meeting the needs of clients.  A superior legal analysis may be good for understanding the problem, but if legal counsel cannot help craft a cost effective and meaningful solution, the brilliance of the lawyer is of no use to the client.  Similarly, if the business client is looking for a “Chevrolet” contract with a vendor, but their lawyer spends countless hours preparing a “Mercedes” contract, the client is not well-served.

Particularly in the aftermath of the Great Recession, the goal for business clients is to find a lawyer who can meet all of their needs.  When evaluating the effectiveness of legal counsel, a business should consider the following:

  1. Lawyers should be responsive.  Historically medical patients listened to a doctor’s diagnosis, accepted it, and never questioned the medical decisions.  Those days are over.  It is now accepted practice for patients to question doctors and medical staff on every healthcare decision.    Similarly, clients need to discuss with legal counsel their analyses and proposed courses of action.  Lawyers are simply people who provide a service, and just as patients should not shy away from asking their medical team hard questions, clients should not fear asking their legal counsel questions or discussing why a particular decision is being recommended.  There is one caution.  Sometimes simplistic or frequent questions from clients can indicate a lack of trust and confidence at any level, and become annoying.  Asking too many of the wrong kinds of questions, or demanding too much of a lawyer, may lead the lawyer to fire the client, long before the client thinks about firing the lawyer.  Similarly, if the relationship is strained, it is difficult, if not impossible, for legal counsel to be effective.
  2. Lawyers counsel; business managers decide.  Business clients need to remember they are ultimately responsible for all decisions made.  If a decision is flawed, there may be a lawyer to point a finger at, but at the end of the day, the business manager is responsible for the decision.  Lawyers work for their clients, and not vice versa.  Business managers manage the business, and all aspects of the business, and that includes the acceptance of legal services.
  3. Lawyers should be treated as counselors.  Lawyers have unique training, but after years of practice, they should have developed good judgment.  Although the role of lawyers has changed over the years, a lawyer is still fundamentally an independent and thoughtful third party who can counsel the client on how to address the business issues at hand.  Clients should be able to trust and have confidence in legal counsel.  If you as a client do not have confidence in your lawyer as a counselor, it’s probably time to look for new counsel.
  4. Lawyers need to understand the client’s business.   Decisions can no longer be made in a vacuum.  Although a legal analysis may be made perfectly, if it does not make sense in the context of the client’s business, or given the economic and other constraints, the analysis has little value.  Industries and competition within industries are changing, and legal counsel should have sufficient knowledge of the business and industry to be an effective counselor and problem solver.
  5. Lawyers should be problem solvers.  There are many lawyers who would love to take a dispute to trial, but in many cases, that is not in the best interest of the client.  With unique training, years of experience and good judgment, legal counsel should help clients solve their legal and business problems with the least cost and disruption possible.  It may not necessarily be in the lawyer’s best interest to solve a dispute quickly, but lawyers should always put the interest of their clients first when providing any legal services.
  6. Lawyers should be cost-conscious.  There is significant pressure on lawyers to deliver services more cost effectively.  Clients should ask their legal counsel about how a matter is being staffed, and if the services are being delivered by the best person or people for the matter.  Often is it more cost effective for a more senior lawyer to handle a matter than to have a young lawyer spin his/her wheels trying to work through an agreement or understand a complex legal problem.  Clients should be willing to ask legal counsel about alternative billing arrangements, such as fixed fees, blended fees, modified contingent fee arrangements, or any other creative way of billing that makes sense for both the client and the lawyer.  Keep in mind that if the arrangement does not work for both the client and the lawyer, it is destined to cause contention and fail.
  7. Lawyers should be proactive.  In today’s environment, an ounce of prevention is now worth ten pounds of cure.  Lawyers need to think ahead and anticipate potential problems.  Clients should invite legal counsel to be proactive.  For lawyers to be proactive, clients need to keep their lawyers informed of important business plans, directions, and strategies.  Lawyers need to engage in early risk detection.  Clients need to understand that in the long run it is more cost effective to bring counsel in on critical decisions at an early stage.  There is a natural tendency to want to avoid paying legal fees until it is absolutely necessary, but avoiding talking with counsel to save money will frequently result in a much larger bill for legal services later.
  8. Lawyers should manage the delivery of services.  Legal services don’t just happen.  They need to be thoughtfully planned for and provided.  Lawyers should watch the amount of legal fees being incurred for a particular matter, and if the costs of the matter are becoming too high given the nature of the matter, he/she should inform the client.  Lawyers should not simply handoff a project to another lawyer and assume and hope it will be done in a cost effective manner.
  9. Lawyers should add value.  LegalZoom and non-lawyer providers of legal services argue that they are filling a void.  However, the perceived value of paying less for a form document than engaging counsel to work through an agreement may be nothing more than a mirage.  If a client does not understand the value being provided by legal counsel, ask.  The lawyer should be able to explain the value being provided.
  10. Lawyers should use technology effectively.  Lawyers need to understand and use technology in a manner that will reduce the cost of the delivery of legal services, and enhance the value of the services provided.  For example, proving a client portal can provide a significant benefit to clients, and also reduce the cost of communication regarding documents.
  11. Lawyers should communicate.  There is simply no excuse for a lawyer not to communicate with his/her clients.  There may be a rare exception when a communication is delayed, but all client inquiries should have a response within a reasonable period of time.  Lawyers need to keep clients advised at all stages of a matter. The client should never have to ask about the status of the matter or what will happen next.

Effective use of legal counsel takes work on the part of the client, but it is well worth the effort.