ManagementGlobal Market Update April 2012 - Home | Lockton Companies

Commercial Risk Management—Global

PAM GROVER-MITCHELLRisk Management Executive

Professions Team+44.20.7933.2639

[email protected]

L O C K T O N C O M P A N I E S

Market Update April 2012

COMMERCIAL RISK MANAGEMENT

BOOSTS TOP SOLICITORS’ PROFITSLaw firms at the top and bottom of the Lawyer U.K. Top 100 get the best value from their investment in risk and compliance. Costs in these groups are lower compared to the number of services provided. While insurance premiums are slightly larger for Top 20 firms than for any other category, this simply reflects the higher levels of cover purchased by the larger firms.

For firms in the middle of the Top 100, the news is less promising.

Although Risk Management and Compliance (RM&C) teams in the Top 21-40 firms generally provide the best service and partner support, they do not enjoy the same economies of scale as the largest firms, and cost by far the most to run.

Top 41-60 firms fare worst: although their per-partner RM&C spend is nearly as great as that of the Top 21-40 firms, the range of services their RM&C teams provide only slightly exceeds those at the bottom.

These are the primary findings of research conducted by Lockton’s Professions team among Top 100 firms in September 2011 to create the profession’s first Risk and Compliance Index (R+CI).

Market Update, Commercial Risk Management—Global Lockton

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Midtier firms perform less well in part because some overengineer their risk management. A risk manager may leave a Top 20 firm to lead the RM&C team at a smaller firm and go all out to offer a gold-plated service. This is reflected in the R+CI’s “enabling” score, which gauges how useful partners deem the RM&C team to be. There has to be a commercial balance between cost, benefit, and service; however, and in the middle firms, the costs are disproportionate to the benefits provided.

Cost Benefit Analyis of Risk and Compliance Functions in the Top 100 Law Firms

Size of Firm Top 20 21-40 41-60 61-100

RM&C Total Average Spend £690,000 £777,000 £496,000 £231,000Number of Partners 197 134 87 55

Cost per Partner £3,500 £5,800 £5,700 £4,200Size of Team 11 10 6 3.5

Insurance Premium £12,400 £11,000 £11,300 £9,400Average Number of RM&C Services Provided (of 13) 8.4 8.9 5.9 5.4

Average RM&C Helpfulness or “Enabling” Score (out of 5) 3.9 4.3 4.0 3.9

Scope for Improvement in Culture and Processes

In terms of partnership culture, only 13 percent of RM&C teams reported being consulted from the start when the firm was considering strategic issues such as lateral hires or the addition of new teams. However, in the Top 50 firms, risk managers were nearly 25 percent more likely than their peers in the 51-100 bracket to be consulted first across a variety of risk issues. Nearly half of all Top 100 firms take into account some elements of claims, complaints, and RM&C information when determining partner remuneration, with the Top 21-40 group 25 percent more likely to do so than the rest.

In terms of automated processes, just 10 percent of the Top 100 firms have an integrated practice management system (PMS) or workflow solution which also handles

conflict checking. This suggests that a great number of firms are still struggling with the need to show that a conflict check is undertaken for every matter. Half of the Top 41-100 firms rely on fee earners or secretaries to handle new client inceptions and one-third of the Top 100 do the same with respect to compliance with anti-money-laundering (AML) regulations.

Findings Offer an Objective Benchmark for Outcomes-Focused Regulation (OFR)

These findings are timely. Under the Solicitors Regulation Authority’s (SRA) new OFR regime which came into force last October, the SRA is expecting firms to demonstrate objectively that their risk management is effective and compliant. But as risk management has so far been unique to each firm, teams have little information as to how other firms’ RM&C functions work; so, historically, they have no basis for comparison or any objective benchmark for what “good” looks like. The R+CI research sets that benchmark.

Risk management spending should benefit a firm commercially by offering demonstrable value, both on the balance sheet and in the range and quality of the services provided to fee-earners.

We hope that the Index, which we plan to update annually, will give participating firms greater knowledge and awareness of what their peers are doing and enable firms to plan their approach to and investment in risk.

More Information

For detailed findings of the report see the detailed notes overleaf.



Detailed Findings

Lockton’s research, conducted jointly with legal business consulting firm Kindleworth, assessed Top 100 law firms’ RM&C functions by ranking them in terms of their insurance profile and the strength of their operational infrastructure. Firms that enjoy the best claims histories and buy the widest and most comprehensive professional indemnity cover from the most sophisticated underwriters for the lowest cost scored highest on insurance. Likewise, firms with commercially appropriate approaches to risk and compliance, with the most engaged partners and management boards, supported by the most cost-efficient, proactive and reliable client-facing RM&C teams, scored highest on the operations scale.

Risk Management and Compliance (RM&C) � Outside the Top 10, the average size of a law firm

risk management team is 7.5 full-time-equivalent staff.

� The average salary of someone in this team is £50,000.

� 30 percent of risk people say their team will need to grow in 2012.

� Only 16 percent of Top 100 firms conduct annual cost-benefit analyses on their RM&C functions.

� The U.K. Top 20 invests an average of £3,500 per partner on employing a risk management and compliance (RM&C) team of 11 people, securing outsourced support and on related automated systems and process costs.

Size of Firm Top 20 Top 21-40 Top 41-60 Top 61-100

Cost per Partner £3,500 £5,800 £5,700 £4,200Team Size 11 10 6 3.5

Automated Systems and Processes � Only half of Top 100 firms say that IT is

“proactively engaged” in planning and producing risk systems and processes.

� Only 10 percent of the Top 100 have an integrated practice management system (PMS) or workflow solution which also handles conflict checking. This suggests that a great number of firms are still struggling with the need to show that a conflict check is undertaken for every matter.

� Half of the Top 41-100 firms rely on fee earners or secretaries to process new client inceptions, and 33 percent of the Top 100 rely on lawyers and secretaries to ensure compliance with AML requirements. This increased potential for human error increases firms’ exposure to sanction.

Reporting � Twenty-five percent of the Top 100 centrally store

and monitor engagement letters, but only 16 percent state that they provide exception reporting on such letters, including where limitations on liability have been removed.

� Approximately 50 percent of the Top 100 monitor both time being recorded and financial transactions taking place for clients that are not yet compliant with AML requirements.

� About 90 percent of the Top 100 do not seek the RM&C team’s input in partner appraisals and remuneration reports.

Partnerships and Culture � Approximately 27 percent of Top 50 risk managers

have a legal background, with that number rising to 58 percent for 51-100 firms.



� Risk people in the Top 50 firms are nearly 25 percent more likely than their bottom-50 peers to be consulted first across a variety of risk issues.

� Only 13 percent of risk people said they are involved from the start, or at a fully strategic/long-term level when the firm is considering strategic issues such as lateral hires and significant new teams or offices.

� Most risk management people say their firm has no blame culture (87 percent in the Top 50, 69 percent in the bottom 50).

Client Care, Complaints, and Claims � About 33 percent of Top 100 law firms still rely on

fee earners and secretaries to complete new client/matter procedures.

� Close to 66 percent of the Top 100 employ client relationship managers, but only 40 percent of firms consider that client feedback is gathered effectively and understood.

� Around 40 percent of the Top 100 do not review files before instructing debt collection agents.

� Across the Top 100, risk management is considered the least important service an underwriter should provide, whilst claims management and handling are among the most sought-after services.

Insurance � For the Top 20, the cost of PII equates to an average

of £12,400 per partner, for the Top 21-40 the figure is £11,000, for the Top 41-60 the figure is £11,300, and for the Top 61-100 the figure is £9,400. The average across the Top 100 is £11,000.

� Approximately 60 percent of the Top 100 have considered using a PII captive.

� About 10 percent have a good knowledge of products to insure cyber risk.

� Around 50 percent of the participants have a good knowledge of catastrophe asset protection.

ManagementGlobal Market Update April 2012 - Home | Lockton Companies

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