Risk counseling is one of the most important things we do as lawyers and contract professionals. That's why it is so frustrating when we can see our advice isn't resonating with the people who make the final risk decisions.
During our webinar this week exploring contract risks in small legal departments, Stephanie Woodworth and Tamra Tyree Moore explained one of the reasons why that happens. It's because of how we describe the risk.
We tend to think about and explain risk in terms of legal concepts. But our business clients think about these issues differently. They measure business objectives with numbers. While we are talking about limitations of liability and indemnification exposure, our clients are more focused on project budgets, revenue recognition, and product runway.
This disconnect in risk framing can lead to uninformed decision-making. Stephanie shared an example of how she framed a risk by its financial impact. Her company was considering a promising vendor that would process personal data. The vendor's liability coverage did not line up with the commitments her company made to its own customers. Instead of describing it only in terms of a legal gap between the two positions, she framed it as real financial exposure. There would be a significant gap between what the company may owe its customers and what the vendor would cover. The company's leadership chose a different vendor.
Stephanie and Tamra highlighted another advantage of pricing contract risk. It clarifies whose decision it is. Very few risk decisions are purely legal ones. When you give a risk a number, your legal judgment becomes another business input. Business leaders are used to making the call based on the numbers. Framing risk in financial terms helps them do that.
Here are three practical strategies that I took away from their discussion:
Ground the number in what the company can survive. Tamra suggested starting by asking about potential scenarios in terms of financial performance. What would an uncapped liability do to the balance sheet?
Price both sides of the decision. Compare the costs of taking on this risk to the costs of walking away from the deal.
Offer your point of view. Our clients need our opinions about the best course of action. But don't stop there. Close out your advice by asking, "What am I missing?" This question may uncover information or context that leads to a different path.
Our business clients weigh the risk using financial frameworks. When we explain legal risk in terms of cost, our clients can understand the risk and weigh it against everything else. And helping people make better decisions is exactly our job.
Read the top 10 takeaways from this webinar with on contract risk in small legal departments in this article:
