Screening clients: How to decide if you should act for a client

George Wilkinson, risk partner at Ashfords, explores the questions ?to ask when taking on new clients

Three things you will learn from this Masterclass:

1. How to determine whether to act for a client

2. What commercial due diligence to undertake

3. How to manage the decision-making process

Law firms spend a lot of time focusing on turnover or on profits per partner but, as I am often reminded by my commercial clients, if turnover is vanity and profit is sanity, cash is reality. This article looks at client take-on: the questions to ask, the information you need and the commercial considerations to bear in mind when deciding whether or not to act.

Although cashflow depends, ultimately, on getting paid for the work you do, the starting point is having that work, whether from existing clients or new clients.
But the problem with new clients – whoever they are, wherever they come from and whoever introduced them – is that they are likely to be more of a risk than existing clients because they are an unknown quantity. You will probably have no relationship with them, no history and no experience of them.

So whether you are going to get paid for the work has to be a risk. The decision to take on a new client has to be based on a mixture of knowledge (information gathered), expectation (the fees you hope to generate) and instinct (experience). ?Get the weighting wrong between these, and the result may be very different to what you expected.

The starting point in any new client take-on is to ask the right questions and, as far as possible, to check the quality of the replies and information you receive.
There are four key questions ?to consider:?

1. Can we act?

2. Do we want to act?

3. Should we act?

4. What could go wrong?

Can we act?

Can we act, or, to put it another way, ?when can’t we act?

This is relatively simple and there are a number of specific instances where (particularly for UK firms) instructions cannot be accepted, either because of the mandatory provisions of the SRA Code or because to do so will be a breach of criminal laws:?

1. conflict of interests (chapter 3, SRA Code) – whether own-interest conflicts or client conflicts;?

2. confidentiality (chapter 4, SRA Code) – if you cannot reconcile the duty of confidentiality to one client to the duty of disclosure to another, the protection of confidential information is paramount;?

3. anti-money laundering (Proceeds of Crime Act 2002, Terrorism Act 2000 and Money Laundering Regulations 2007) – the regulations expect a risk-based approach, depending on the type of client, the business relationship, the product or the transaction, which will (or should) be useful in deciding whether you are able to act; and?

4. service standards (chapter 1, SRA Code) – the obligation to provide a proper standard of service.

Do we want to act?

Even if there is no legal or regulatory bar ?to acting, the next question is: do you want to accept the instruction?

All too often, law firms fail to undertake the most basic commercial due diligence. For some reason (non-recoverable time?) most lawyers seem to think that anti-money laundering client due diligence (CDD) and conflicts checks are sufficient.
This may tick the compliance box, but client take-on procedures are not just hygiene factors.

CDD is a starting point, but you ?should go much further and consider ?the following:?

• Why are they looking to instruct us? Have they been recommended to us and, if so, by whom??

• Who were their previous lawyers and why do they want to change? Did they jump or were they pushed, and was it cost, service, personality and/or expertise that prompted the switch??

• Is there a commercial conflict??

• Where are they based? Will geography make it difficult or more costly?

• Will acting for them involve us in any reputational issues??

• Will we make money on the work? Is it profitable? Will they pay their bills??

Legal conflicts are relatively easy to manage, provided you have systems that allow you to identify own interests and client conflicts, and your lawyers understand how to use them.

Dealing with confidential information issues has its own problems but, on analysis, should not cause the risk manager too many problems.

Far more challenging is a commercial conflict – that is, both recognising it ?and dealing with it. There may be a ?great deal of emotion and not a little irrationality involved, and it is important to recognise that clients often feel strongly about a commercial conflict. Taking on a new client where there is a commercial ?conflict with an existing one may cause significant problems.

And, if existing clients can be a problem, so too can partners. How ?do you tell one of your key rainmakers ?that his new and hard-won client may cause rather more than ripples with another of your firm’s major clients?

Leaving aside the need for effective communication, which should have taken place before you arrived at this point, who takes the decision and how do you communicate this to the disappointed target (and partner)?

Large law firms will usually have conflicts committees but most don’t, ?and few have effective policies or ?controls for dealing with a commercial conflict. In an increasingly competitive?legal world, sorting out commercial ?conflict issues is essential.

Should we act?

There are two distinct elements to the question of whether the firm should act for a particular client: ?

1. Can we do the work? ?

2. How do I feel about acting for this client??

The question of whether the firm can do the work is, or should be, the easier of the two to answer. There are regulatory issues and your assessment should include the following considerations:?

• Do we have the expertise??

• Do we have the resources? Not just do we have the people, but will acting for this new client (and work for new clients may often seem more exciting than work for existing clients) impact on the way we manage other clients??

• Who will do the work and who will supervise??

• What if circumstances change? Do we have the resources, depth, experience and flexibility to deal with this?

• Can we make money? Will we be able to do the work at the right margin and will it be profitable? Or will we likely lose money??

The question of how you feel about ?acting for a particular client is much ?more subjective and is all too rarely ?asked, possibly because it is almost impossible to answer if you are not in ?a position to do anything about it (and ?that is probably most of us, unless you ?are particularly robust).

It also takes us away from the binary world of regulatory obligation (can we act?), and the more easily-understood? world of financial and practical considerations (do we want to act?), ?into the no less important (but somehow less tangible) world of ethics and ?personal discomfort.

This is particularly difficult for younger lawyers, who may all too easily be seduced by the glamour and excitement of a particular client. As there is very little glamour or excitement in most lawyers’ day jobs, finding a client who offers this, albeit vicariously, is often seen as a bonus.

For many lawyers, particularly those under pressure to find clients, do the ?work and bill for it, the difference between those clients for whom you are not able to act and those for whom you might not want to act is not always as distinct as ?it should be.

What could go wrong?

Effective client take-on is all about de-risking the instruction. You will have done much of the preliminary due diligence as you work through the questions, but pause, consider and think about what could go wrong.

You may be about to tie up a lot of resources for quite some time, your existing clients may suffer, you may find yourself out of your depth and you may find that getting paid is a lot more difficult that you expected, especially if the matter has not gone to plan.

Winning the client is only half the battle. Leaving aside doing the work, the other half is getting the client to pay. ?This involves:?

1. costing the work correctly;

2. agreeing the price with the client; and

3. managing the relationship. ?

Getting it wrong is a lot easier than getting it right. Low-balling for work may get it through the door, but you may find yourself doing the work for less than it is worth. Worse, it may set a relationship with the client that you later find hard to change and dispirit your team: no one likes their work being undervalued.

Decision-making issues

How do you make your decisions on client take-on and who makes them? Your client take-on procedures should ensure that the decision of whether to take on a client is only made by a partner, but this may brings its own problems.

The essentials of the classic partnership – informal collegial control and involvement in decision making – are for many of us a thing of the past. Not only do we often not know all of our partners, but legal work today is so diverse and complex that understanding what your partners do may be quite difficult. Thus, the client take-on decision may be made by just those partners involved in the work.

What checks and balances do you have in place to minimise the risk of a poor decision? Senior professionals are just as likely to make poor decisions as more junior ones, and the mistakes they make are often significantly more serious.

Just as damaging is that partners are notorious for not playing by the rules. They ??often override or ignore their firms’ policies or systems, and their partners may be reluctant to challenge their behaviour.

Partner management in client take-on is critical, as partners may commit to new clients without going through the risk assessment process and instead simply make a judgment call.

Striking a balance

Just as our own understanding of risk informs our personal decision-taking, it follows that it will be reflected in the decisions we take at work – not least in respect of the clients and the work we take on.

The trick in managing any business is to strike a balance between encouraging risk taking and managing risks effectively. Any new client take-on should involve a sensible risk assessment – but don’t make the procedure too complex, and recognise that partners (who are highly skilled, motivated and talented) are an integral part of the process.

Finally, bear in mind the times we live in. Hard times often make for poor decisions, leading us to skew the risk assessment, weight expectation more than we perhaps should and make decisions about client take-on that in better times we might not.

g.wilkinson@ashfords.co.uk