In an article first published in New York Law Journal, Burford Capital CEO Christopher Bogart discusses what lawyers and their clients can expect in 2018—and the role legal finance will play.
The start of a new year provides built-in inspiration to approach old problems in fresh ways, but also requires us to look back at what worked (and didn’t) in the previous year. In the business of law, this will likely mean that the persistent economic pressures on law firms and legal departments will cause lawyers and the C-suite to seek new solutions to introduce innovation and efficiency into their practices. One solution to take under consideration is legal finance.
For an in-house legal team, those economic pressures include controlling legal spend, managing legal risk, avoiding negative accounting outcomes and shifting as much cost as possible off balance sheets. For law firms, those pressures are concentrated on the need to provide the most services for as many clients as possible without sacrificing profitability or exceeding appropriate risk exposure.
Because legal finance can provide relief to these pressures, 2018 may see continuing growth, a trajectory certainly seen in 2017. While increased use of litigation finance has been notable—with research suggesting as much as a four-fold increase in use of litigation finance between 2013 and 2017—the portion of overall spend being financed is still a single-digit percentage of overall litigation spend. This leaves room for ample room for additional growth in the coming year.
Additionally, on a macro scale, given the gloomy predictions by some that 2018 may hail a brand-new recession, legal teams and law firms may feel a new urgency to address persistent economic pressures. Beyond this, there are several key trends that may drive the growth of legal finance across 2018 and beyond.
Clients will continue to ask for innovation.
In August, in a move that was hailed as a harbinger of a coming wave of client-led innovation, Microsoft announced a plan that will almost entirely eradicate the billable hour as a means of paying for legal services. Microsoft’s leadership cited a desire to get the best value from its law firms by moving to alternative fee arrangements and emphasized the importance of setting up “deeper relationships” with law firms acting as its partners. Microsoft’s favored AFA models are fixed fees premised on a result, and retainer-based agreements. However, deputy counsel David Howard noted that the types of cases that will be the most difficult to transfer to these kinds of AFA models will be larger, single matters with a higher degree of risk.
As 2018 rolls forward, we will likely see an increasing number of corporate clients pushing for innovation from their law firms along with the hastening realization that the billable hour simply might not cut it anymore. With that mind, client demands for innovations within the business of law—such as Microsoft’s recent announcement—may feed into the growth of litigation finance. This type of financing approach is well-suited to address idiosyncratic single case scenarios like the ones described by Mr. Howard.
Law firms will want to demonstrate value.
The top challenge identified by law firm respondents to the 2017 Litigation Finance Survey is the ongoing pressure to be more competitive in bringing in new business. That’s harder than ever, given decreased demand for legal services, price competition and the entry of new types of competitors into the market.
Possibly as a result of these pressures, the use of litigation finance by law firms will continue to increase as a tool to preemptively address clients’ need for innovation in pricing while meeting firms’ needs to maintain profitability. In the survey, several law firm leaders who are using litigation finance attested to the fact that they are doing so to gain a competitive edge in the marketplace. A partner at an AmLaw 20 firm “think[s] about litigation finance as early as the pitch stage … from my perspective it will continue to allow me to compete for business that I couldn’t otherwise compete for.” The head of commercial and international disputes for a leading UK firm recently agreed that “there is increasingly a recognition that clients expect us to be well-informed about litigation funding, and … that funding will allow us to work in new ways and be more competitive.”
Across the new year, law firms will likely continue to increase competitiveness by putting funding in place for the firm and demonstrate value by proactively educating in-house lawyers who aren’t as familiar with legal finance about its benefits to cost and risk management as well as accounting outcomes.
Generational change will impact the business of law.
The business of law is notoriously slow to change: according to a recent survey, 65 percent of law firm leaders say partners resist most change efforts. Yet 72 percent of all law firm respondents believe that the pace of change must increase. Some of this desire for increased change comes from necessity and reflects clients’ demands for innovation. In the field of legal finance, some lawyers noted that broader cultural shifts reflecting generational change is leading to increased use.
A partner at an AmLaw 20 firm said that when he first worked with Burford in 2009, “there was cultural resistance to litigation finance. Since then, as a result of many factors—retirements, new talent—there’s been a generational shift in terms of thinking.” Similarly, a UK head of disputes notes that “there are lots of lawyers who were educated 30 years ago that understood as a basic principle that you couldn’t sell a claim. However, the generation who have joined the business in the last five years have grown up with that idea … . Now it’s much more in regard to how litigation finance would work for them.”
As has historically been the case, younger generations of lawyers will pursue new and innovative strategies to take on the inefficiencies that plagued those that came before them. Litigation finance, which allows for a new way of thinking about legal claims and the business of law, is a trend to watch as millennial lawyers rise through their firms and companies.
Legal finance offers relevant solutions from “back to basics” to complex strategies.
In the commercial litigation finance sphere, there is evidence of growth in more complex forms of legal finance. One example of this is portfolio financing, where financing is secured across a body of legal matters. For clients, portfolio finance provides a means of moving litigation costs—for both plaintiff and for defense matters—off balance sheets, thereby addressing some of the negative accounting outcomes of on balance sheet litigation spend. For law firms, portfolio finance increases capacity to offer clients flexible payment models, to pursue new business and to invest in growth (for instance, new hires or new offices). The managing partner of a corporate and business litigation firm interviewed as part of Burford’s 2017 research emphasized how valuable it is that his portfolio arrangement enables the firm to move quickly and decisively. A UK head of disputes described portfolio financing as “a major opportunity for us to go out into the market with funding in place and develop clients. It gives us a particular selling point which is very useful to a firm of our size in competing with other firms.”
However, even as portfolio financing represents a strong trend that will likely continue throughout 2018, it’s not likely to displace litigation finance in its most traditional form: single-case financing. According to 2017 research, a majority (59 percent) of lawyers surveyed say that the ability to pursue claims that will bring value to the business is a trigger for using outside finance. As a result, it’s unlikely that the demand for more “basic” forms of financing will be eclipsed in any way by the continued growth of portfolio financing.
Ultimately, the business of law is changing, spurred by the desire for flexibility on behalf of both law firms and their clients. 2018 will likely see further crystallization of this change, as more companies follow Microsoft’s lead and law firms rush to innovate and compete for clients and as millennial lawyers, comfortable with new solutions, rise to prominence. It follows logic that litigation finance—the growth of which is driven by the desire for flexibility and innovation—will advance hand-in-hand with this larger sea change.