Running a law practice is hard, and you put yourself, your business and your reputation at risk every day. But when you think of risk, what are you thinking of? Perhaps you are thinking about risk to your license: your ability to practice law. Or maybe you are thinking about risk to your business reputation, like nasty reviews. Perhaps you are thinking about risk to your clients, like missing deadlines. These are all valid concerns, and most lawyers have systems in place to manage some of this risk. As an easy example, you might have a system to ensure that you document all of your client deadlines and get them into your case management tool.
The most common way to manage these risks is by having checklists of red flags that you employ throughout the client lifecycle, specifically during your sales process (intake) and during the client engagement. Most firms have at least a printed checklist of red flags to avoid taking on bad clients, and some have red flags for things that happen when working on the client's case.
I find it helpful to take a broad view of risk, taking into consideration at least five categories of risk. For each one, let's look at the related risks, and some potential red flags that we should look out for.
Financial Risk
Financial risk is a risk to your income (the money you take home at the end of the day). The most common financial risk is not getting paid for the work you do, either because the client ran out of money or the client refuses to pay. It could also be the risk of not having enough work to do in the first place. It could be money lost from expensive advertising that isn't getting you leads.
Here are some red flags that herald financial risk:
The client asks you to start working on their case before they sign a retention agreement and fund the retainer.
The client tries to talk you down on your fees, or ask for a firm commitment on price
The client thinks their case is a "slam dunk", and should not require much work.
This category easily represents the most common actual business risk you face, although it is not often paid the most attention. That distinction belongs to the next category, malpractice.
Malpractice Risk
We all are familiar with this risk: the risk of losing your license. Although this is scary, it actually takes a lot to lose your license permanently. There are lesser risks, though, like getting a nasty Google review, having a grievance filed against you, getting sanctioned, being forced to pay attorneys fees, or being suspended. They all cost you time, money and reputation. Some of these can be caused by actual malpractice (you messed up the case), but many times these are precipitated by mismanagement of the client, rather than the case.
Here are some obvious red flags:
The client fired their last attorney
The client seems suspicious of your motives (or of attorneys in general)
The client has written nasty reviews of other people or attorneys
Here are some not-so-obvious red flags:
The client is slow to provide documents that you request, or downright refuses to provide certain documents
Client exhibits a lot of anger toward you or your staff
The client contacts you right before a major deadline in their case
The client exhibits a strong victim mentality with regard to their case
Resource Risk
You have a limited number of hours you can work per day, as do your employees and contractors. Wasting time is expensive. Resource risk is essentially the risk of tying up your limited resources on things that could be avoided. Some common causes include time spent arguing about an invoice with a client, time spent trying to get a client to pay their invoice, time spent attending networking lunches that never produce referrals, time spent replacing a paralegal that just quit, or time wasted waiting for no-show PNC (potential new client).
Some red flags for resource risk include:
The client contacts you right before a major deadline in their case
The client exhibits a strong victim mentality with regard to their case
The client shows up late or cancels meetings with no notice
The client requires a lot of hand-holding, or is excessively needy
Temperament Risk
This category really points to one type of risk: that you might be dealing with a loose cannon, one that may cause strife for you and your firm. This category of risk is typically enmeshed with other categories, as the related behaviors has a ripple effect.
Here are some specific behaviors to look out for:
Client has anger issues
Client has a history of drug usage
Client has previous arrests for violent behavior (of course if you are a defense attorney, this may not be a red flag)
Client is suing "for the principal of the matter"
Some more subtle issues include:
Client is a no-show for the initial consultation or a planned meeting
Client feels it is ok to harass your staff, or sends nasty messages and claims they were not, in fact, nasty
Strategic Risk
The final category is one we often overlook in the heat of the moment. Strategic risks keep you from achieving your firm's goals. For example, if you represent the construction industry, it would be a serious risk to accept a client suing a construction company, even if that company is not a previous client and the new client is your best friend.
Here are some common strategic goals, and red flags that help protect them:
Increase Referrals. This is common goal of all attorneys, as referrals are free business, and the referral is generally predisposed to think that you are an excellent attorney. A red flag here would be:
a client that contacts you right before a major deadline
a client that distrusts lawyers
a client that is having trouble paying their invoices
Focus on (some group). Let's say you are a probate attorney trying to establish your firm as focusing on large, complicated probate cases. In that case, a red flag might be:
a client with no real property
a client with a net worth under $1m
a client that wants to give all of their assets to their dog
Increase Profitability. Perhaps you have a lot of clients, but are not making much profit. You need to focus on paying clients that can afford your services. Some red flags might be:
a client that can not pay your full retainer
a client that is reluctant to litigate their matter
a client that argues every line of their bill
Now What?
Great, we now have a long list of red flags. How does this actually help my business?
Preparing lists of risks and corresponding red flags is a great start, but just having the lists only gives you awareness of your risks. It does not, in practice, actually prevent the risks from happening. To make use of these lists, you need to:
Integrate them into your workflows,
Monitor them to see when risk is rising, and
Analyze them to see what the actual cost of these risks are.
Integrate Your Red Flags
The first step is to put your red flags into your intake and case management processes. Start by brainstorming all of your red flags, using the categories above to jog your memory. Then get the lists into your sales and case management systems. Paper lists are fine for on-the-spot decision-making, but they are difficult to monitor and analyze. Sooner or later, they will need to be put into a spreadsheet or some other software. Might as well bite the bullet and move to a completely online system.
You might also want to assign certain red flags a higher value than others (e.g. a multiplier). You might also want to count how many times a red flag has been tripped, or make a note that the behavior leading to the red flag is in some way outstanding. Keeping notes on exactly what happened is also helpful when you are doing analysis later on.
Monitor Your Red Flags
Whenever you or a member of your staff sees a red flag, they need to immediately go into the system and check off the flag and add notes on what happened. Then you need a way to see the cumulative effect of these flags. This could be a count of red flags the client has incurred, or a color-coding system showing green/yellow/red for how bad it is getting.
If the risk gets too high, it is time to take action! Always be prepared to turn down a client or fire them if the risk is too high.
Analyze Your Red Flags
Finally, you need to analyze the red flags your business is incurring.
A simple analysis might be a count of the types of red flags you are seeing, either by red flag or by category. This will help you understand what the real, current risks are to your business. Perhaps you are seeing a lot of financial risks (clients that can't pay their initial retainer, or clients that run out of money during the case). This information can help you create a better intake process that weeds out risky clients before they ever hire you.
A more complicated, but useful analysis would be to track the financial impact of the red flags to your bottom line. For this you would need to track your billed and collected for each case, then track the red flags that were associated with that case. You could then see, for example, that clients who have trouble paying their initial retainer lead to a 70% collection rate (they pay 70% of their bills, and you have to write off the other 30%). Now you can actually see the financial impact of controlling your risk!
Finally, you could track which marketing campaigns brought you clients with impactful red flags. Perhaps your Google Ads are bringing you leads that do not meet your strategic direction, or that your billboard advertisement is bringing you clients that can not pay their invoices. You can use that information to optimize your marketing spend to favor campaigns that bring you problem-free clients, and cut or optimize campaigns that are bringing you risky clients.
The Payoff
Paying attention to your business risk is an easy way to cut costs and avoid financial losses. Here are some of the benefits our customers have seen after implementing a red flag system using Outlaw Practice:
Massive reductions in Accounts Receivable (and therefore increases in take-home pay)
Reduction in grievances filed/nasty reviews
Reduction in abusive, jackass clients
Reductions in marketing spend while increasing the number of good clients
There really is no downside here. Taking inventory of your business risks and creating red flag lists is an insightful, practical and impactful exercise. It isn't hard to implement and the payoff is huge.
What Do You Think?
Have you implemented a red flag system at your firm? What were your results or lessons learned?
Questions?
Drop me an email at john@outlawpractice.com and I will be happy to answer your questions!