Legal Must Help the Business Take Smart Risks to Grow

Legal departments that are too conservative may neglect organizational needs and underdeliver on objectives. The key is to take smart risks.

General counsel (GC) in all industries are grappling with a challenge that has serious implications for the organization and for legal departments: In-house lawyers are often providing guidance that is too conservative at exactly the time organizations must accept more risk to achieve and maintain growth.

This makes it difficult to deliver on a core mandate: Supporting the business in taking smart risks that support growth and fuel innovation and competitive advantage. 

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The disconnect carries a heavy price tag. When legal guidance is too conservative, business decision makers are:

  • 2.5 times more likely to forgo business opportunities that legal recommendations have made less attractive
  • 4.25 times more likely to scale down the scope of the opportunity in response to legal guidance
  • 2.5 times more likely to suffer delays in capturing these opportunities as they work through legal guidance and requirements

“Gartner research revealed that overly conservative legal guidance — in other words, guidance that does not align with the business’s risk appetite — creates a loss of $672,000 in value per lawyer annually for the median legal department,” says Stephanie Quaranta, Director and Team Manager, Gartner. “With median department sizes of 26.5 lawyers, that’s a loss of $17.5 million to the organization each year.”

Why is this happening? From tariffs to new regulations to industry disruption, organizations face an environment characterized by unprecedented levels of uncertainty. “In this environment more than ever before, success depends on the GC and the legal department providing risk-aligned guidance in quickly evolving terrains,” says Quaranta.

When facing unpredictable situations, human nature is to play it safe. In addition, in-house lawyers are trained to be conservative, so it’s no surprise that when asked about the guidance they provide business decision makers in today’s uncertain environment, only 13% of lawyers reported being comfortable taking risks. 

Build lawyers’ risk-taking know-how

As the environment in which lawyers provide guidance changes, they must rely less on knowing the right answer and more on their risk-taking know-how, the transferable set of practical knowledge and skills that enable lawyers to provide risk-aligned guidance. To build their know-how and provide risk-aligned guidance, lawyers need four key things:

  • Subject-matter expertise
  • Understanding of the right risk posture
  • Decision frameworks to structure analysis
  • Real-life examples of right risk-taking

Although most legal departments are effective at providing lawyers with access to relevant subject-matter expertise, less than 40% are effective at the other three components. In fact, only one-quarter of legal departments embed effective structure into lawyers’ risk analysis. 

GCs must act to build know-how

Improving risk-taking know how is not something that lawyers can do on their own — this requires intervention from the GC and legal leadership. Leaders must:

  • Facilitate regular conversations within their department on the appropriate risk posture for key legal risks. 
  • Embed structure in lawyers’ risk analysis that helps them assess the assumptions they rely on and avoid biases. 
  • Remove conflicting signals from the real-life examples of risk-taking that lawyers see on a daily basis. 
This article is excerpted from the 3Q19 issue of Fi.r.st. – The Gartner Journal of Finance. Risk. Strategy.

This article is based on insights that are part of an in-depth collection of research, tools, templates and advice available to Gartner clients.

 

Gartner for Legal & Compliance Leaders can read the full article by Stephanie Quaranta in 3Q19 issue of Fi.r.st. — The Gartner Journal of Finance. Risk. Strategy or read the full report Taking the Right Risks to Grow: Key Findings From Gartner’s 2019 Risk-Aligned Legal Guidance Model.

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