Advantage of Using BSC For Legal Departments

Using the BSC for legal department measurement and evaluation is a technique that may be employed by a lot of companies in order to determine the performance level of their legal departments. This way, the method of evaluation is made simpler and more efficient with the use of a time-tested and proven evaluation tool.

The legal department of a company is in charge of making sure that the rules, regulations, and policies of the company are being carried out and observed by its members. Also, the department is given the task of handling all the legal matters that may be faced by the company, such as entering into contracts, making proposals, handling internal disputes, discipline of members, and the institution of suits and answering them, in case the company is made subject of one. This shows that the legal department has one of the most critical functions in the company structure. Hence, there is a need to constantly monitor its performance and effectiveness.

The present day has a large demand for satisfactory metrics and performance indicators in order to properly gauge the value of the legal services that are delivered by the concerned department in a company. Being a part of the latter, the success of the company has a large bearing in the success of the legal department because it handles one of the most crucial aspects of the functions of the company.

In taking consideration of the basic perspectives that affect a company, such as the financial, customer, internal business processes, and learning and growth, in relation to the vision and strategy of the company, the performance of each department can be better evaluated because of the specific concentration on each perspective. More so in legal departments, where in certain cases, the very existence of the company is placed on the table. The relationship of the legal department to the company in terms of the four perspectives involved in the balanced scorecard is also highlighted in the determination of its performance level.

As a feature, the balanced scorecard is a very simple measurement and evaluation tool to use in gauging the performance level of a department, or the company as a whole. Also, this instrument is a very economical tool to use. This reality is contrary to the general idea that using performance evaluation tool is a very complicated process, needing the expertise of measurement and evaluation experts and causing the company to incur a lot of expenses. With the fact of its ease of use and economical nature, the company will undoubtedly experience a more efficient evaluation process without the allotment of a lot of expense.

The value of the legal department to a company cannot be discounted. Using the BSC for legal department evaluation will certainly prove to be a good move for the company, considering that efficiency and economy are always in the forefront of the list of objectives of every company. All that has to be done is to know how to implement the tool and everything can be expected to flow downhill from there.

What to Know Before Using Legal Scorecard

For companies whose nature of business is concerned about legal activities, it is always top priority to measure performance as part of the execution of the firm’s core strategy. Every corporate leader knows that in order for a business or an organization to thrive, it must be able to operationalize or materialize its goal through strategic actions. However, acting out a strategy is never more effective without the use of scorecard system. But there is more to just adopting a legal scorecard. Learn how to plan.

Scorecards are the missing links between execution and strategy. Before, it was a trial and error process for legal-oriented companies to track performance. But now, through the aid of sophisticated and dedicated computer servers and highly intuitive software applications, it is easier than ever to see if the company is in the right direction. The process however does not end in procuring high end tools. The most important part in the process is the identification of the right measurement indicators. These are factors that are crucial to the success of the company’s strategies, factors that will clearly define the true function of shareholders, referral sources, attorneys, and even customers.

A strategy is actually more than just a plan. For a law company, it is the directional definition, a process that identifies which area or aspect the company should improve, do extremely well, and justify itself. The scorecard system, simply put, will help law companies carry out these directional processes. In order for the managers to effectively identify the indicators, here are some guide questions.

First, the managers need to ask “what are the areas that the company need to measure?” By answering this question, the managers will be able to determine what kind of reports they will be furnishing to different departments and leaders. It will help them decide if a report should be made company-wide or on the management level only, available only through a specific practice group, equity partner specific, or employee specific.

The second question to ask is “what areas should be measured through public sources and proprietary sources?” By answering this question, the managers will be able to obtain a comprehensive overview of how the company is doing in terms of strategic execution. It is basically just asking “are our activities or operations still aligned with our goals?” In connection with this, the managers will get an idea as to which type of data gathering practice they should implement in order to trace the operations, finances, clients, and people.

The third and final question is “should the company measure performance based on where the company is directed?” By answering this question, managers will be able to decide whether they should stick to strategy-related metrics or key performance indicators or consider other dimensions like customer satisfaction, internal business processes, financial measures, and human development measures.

By reviewing and dealing with these self questions, it will be easier for law firm managers to track the organization’s performance. By answering these questions, managers can focus on important indicators, rather than spend time on factors that produce results which are not really that significant. Remember that planning is still important when implementing a legal scorecard system.

How to Define Legal Risk

What is risk?
The informal notion of risk as the chance that something bad might happen is not a bad place to start defining risk. Better management requires a better definition though. We need to break risk into distinct parts that are measurable.

Risk is the probability of loss given an event
Mathematical precision is possible and desirable in some cases. Large financial firms, for example, have sufficient data about operational losses that they can build predictive models based on experience to measure risk. They are the exception.

To illustrate how we might define risk in statistical terms take the formula:

R = p * LGE

In this case R stands for risk, p for Probability of Event expressed as a percentage, and LGE stands for Loss Given Event. LGE is a measurement of the financial harm from an event. LGE can include non-financial losses, but they must yield to measurement for the formula to quantify risk.

Most organizations do not have the data or resources (or confidence in) abstract models of risk. Organizations without statistically valid loss data can still measure and manage risk, particularly legal risk, by simply moving a few steps toward quantification, away from the “bad stuff” notion.

Risk under ISO 31000 offers an alternative approach
The traditional approach to risk suffers from another important deficiency. It focuses only on losses, presumably because the origins of risk models are in insurance (how much to charge for protection from “bad stuff”?) and credit risk (what happens if the borrower doesn’t pay?).

In 2009, the International Organization for Standardization (ISO) released a fresh approach to risk and risk management: ISO 31000:2009 Risk management – Principles and guidelines.

ISO 31000 provides a new definition of risk that is especially useful for measuring legal risk. Risk is the “effect of uncertainty on objectives.” Risk management then starts with identifying uncertainty and then evaluating effects (positive and negative).

Legal risk is difficult to measure. However, with the help of the ISO 31000 definition of risk, we can express legal uncertainties and then measure them and their potential effects. We may not achieve mathematical precision, but we can achieve better management.

Four types of legal risk
There are four broad categories of legal risk, or four areas of legal uncertainty: structural, regulatory, litigation, and contractual.

Litigation risk
Litigation is the most discussed legal risk in organizations. Litigation is often public and always distracting. The range of events that cause litigation is broad: employee misconduct, accidents, product liability and so on. The list can seem endless.

When management meets with the lawyer to discuss “What is the chance we will lose this case and what are the likely damages,” it is too late for risk management. Prior to litigation, we need to identify the areas of uncertainty that affect our objectives. Risk management is not fortune telling. Instead, we want to narrow the possible outcomes from particular events.

For example, a court case in an influential state invalidates a fee charged to consumers as an undisclosed interest charge subject to compensatory and punitive damages. Our organization charges a similar fee. However, the fee is charged a certain number of times and in known states. The statute in question carries known penalties. We have the building blocks to measure and manage legal risk from similar litigation.

Organizations invest significant sums to prevent litigation. It is helpful to weigh the cost of the risk management against the possible outcomes.

Contract risk

Contract risk is the most pernicious and difficult to track among legal risks. The traditional approach to contract risk focuses on a breach of contract by one party and the extra-contractual liabilities that might arise. This approach treats each contract individually and in isolation.

Most organizations focus their contract risk management strategy on drafting effective agreements. Quality contract drafting is necessary, but not sufficient to manage contract risk. There are cases where one contract can create significant risk, such as:

  • An exceptional share of revenue is tied to one contract,
  • Procurement or service contracts for critical components allow for disruption or price escalation, and
  • The counterparty does not indemnify us for damages that carry exceptional consequences like unpaid taxes and environmental problems.

In most cases, however, individual contracts often do not, on their own, have the gravity of litigation. The substantive, common and difficult to track risk is the uncertainty that arises from the contract portfolio in its entirety. Systemic under-management of contracts creates expense leakage and missed revenue opportunities.

Regulatory risk

The growth of the administrative branch of government is daunting to most business leaders. Regulatory risk represents the uncertainty of the consequences of an agency’s action.

A few examples will illustrate the point:

  • A transportation company applies for a license to expand its operations to a new hub. Uncertainty regarding the agency’s decision as well as the scope of the decision create risk. Under ISO 31000 the agency’s decision can have positive effects, but the uncertainty creates risk.
  • A product manufacturer and distributor offers a novel product warranty to generate additional revenue. State insurance commissioners can determine that the warranty should be classified as insurance. They can then impose fines, require insurance applications, impose conditions on the product and pursue civil remedies depending on the state statue.

Identification of regulatory risks is challenging, but the uncertainty about the effects is measurable. Regulations grant powers to the agencies charged with enforcement of the statute and regulations. Penalties range from fines to administrative orders.

Structural risk

Structural legal risk is rare for most organizations. Structural legal risks arise from uncertainty about the underpinnings of a particular industry, technology or method of doing business. When the airline industry was regulated, for example, there was a structural legal risk that the industry would be deregulated.

The scope of a structural legal risk is broad and it usually alters the competitive landscape.

Structural legal risks can arise from sources other than legislation. Antitrust litigation can significantly alter pricing in an industry or key business relationships. Consumer protection enforcement actions can also change the fundamental assumptions of an industry, but rendering a marketing practice (multi-level marketing, for example) unacceptable.

Structural legal risk is also a good example of the ISO 31000 definition of risk. We can be uncertain about the change from a regulated to a deregulated industry. The potential effects are varied, some are positive; some are negative. A structural change can benefit one organization while harming another.

Effective risk identification

To identify risks reliably requires a workable definition of risk. The ISO 31000 definition of risk usefully includes “positive risks.” This is right lens for identifying legal risks and, ultimately, managing legal risks.

Risk in an information problem. We can manage risk when we understand the scope and components of our uncertainty. The approach to risk can guide the organization to develop a risk management strategy.