The commercially-minded legal department

Among the trends we expect to see more of in 2019 is this: Legal departments will continue to become more commercially-minded, and to achieve this aim will increasingly utilize legal finance, specifically to create certainty around litigation costs and to pursue affirmative recoveries without adding expense or risk to corporate balance sheets.

 

Defining the “commercially-minded” legal department

What do we mean by a “commercially-minded” legal department?

A commercially-minded legal department is one that, like all other corporate functions, meets budgetary standards by staying within its allotted expense line—but that, like all other corporate functions, also meets value-generating standards, by proactively adding measurable value to the organization.

This second attribute—value generation—has long been held to be an impossibility for legal departments, which have traditionally been dismissed as very expensive cost centers designed simply to protect the organization from legal risk and to react defensively when it is threatened.

But that model is changing, and the commercially-minded legal department is emerging in its place. This is captured in MIT Sloan Management Review research that demonstrates the increased impact that a more proactive corporate legal strategy focused on value can have on an organization compared to the more traditional reactive legal department model:

“Companies operating in the value pathway use the law to create tangible and identifiable value…. A key differentiating attribute of the value pathway is that managers and attorneys work together to devise legal strategies and techniques that increase ROI in ways that can be directly tied to a profit-and-loss statement.”[1]

We would posit that legal departments are seeking to move toward this more commercially-minded value pathway not only due to the business imperatives of corporations but also given the career goals and attitudes of in-house lawyers themselves. In our experience, in-house lawyers prize innovation and bring a more commercial perspective to their role as general counsel—and they often have intentionally chosen the in-house route precisely for the opportunity to have a demonstrable impact on a business that measures impact in P&L statements.

Most companies exist to earn profit for shareholders: Commercially-minded in-house lawyers are not only keenly aware that their employers have this mandate but also commit themselves and their teams to playing a part in that equation.

 

Two paths to ROI: Containing costs and affirmative recoveries

Commercially-minded legal departments have two primary paths to increase ROI in ways that can be directly tied to a P&L statement.

First, they can reduce their cost to the organization—and many corporate legal teams have done that very publicly by reducing their outside law firm relationships, negotiating alternative fee arrangements with those that remain, in-sourcing some legal activities and out-sourcing the most transactional legal needs to the lowest-cost providers. Microsoft is but one recent example of a legal department that has taken this approach, going a step further by announcing a related goal of moving entirely away from hourly fees as a mechanism for compensating law firm partners.

Although controlling costs is necessary and appropriate, there is only so much cost-cutting that an organization can achieve. As an article in the Harvard Business Review puts it, corporations must also “aim higher”: “We recommend framing the issue differently: How can the legal team create more value for the company?”[2]

Indeed, the second route for commercially-minded legal departments to increase ROI is by adding value to the organization. Although there are many ways they can do so, one clear path we would focus on is through affirmative recovery programs. Affirmative recovery programs merit this focus because it has been our experience that an increasing number of legal departments are being assigned specific recovery targets.

Affirmative recovery programs at DuPont, The Home Depot, Tyco, Ford and others have been generating headlines for over a decade. To name two of the most frequently cited examples, DuPont’s legal team generated cumulative recoveries of about $2.7 billion between 2004 and 2013,[3] and Ford’s recoveries in one quarter generated enough revenue to more than offset all its legal costs for the period.[4]

Numbers like these are so eye-popping as to cause some to question recovery programs in toto, and to advise in-house lawyers to stay within the traditional box of the “protect and react” legal department. In our view, in-house lawyers should not expect to generate billions or to “turn the legal department into a profit center”, but nor should they neglect to pursue recoveries when their companies are wronged—by competitors and suppliers that engage in anticompetitive behaviors, by vendors and partners that break contracts or commit fraud, by businesses that infringe on intellectual property, or when their businesses otherwise suffer losses as a result of illegal behaviors that can be recuperated through meritorious commercial litigation or arbitration.

To neglect to pursue recoveries when their companies are wronged with resulting monetary damages would be neglect their role as protectors of corporate assets—and again, we note that an increasing number of in-house lawyers are being given affirmative recovery targets. Nonetheless, too many GCs still neglect to pursue recoveries out of concern that doing so will add cost and risk that will impact the bottom line: According to 2018 research, more than two-thirds of all respondents (70%) say their organization has chosen to forgo claims due to the impact of associated legal expenses on the bottom line.[5]

Legal finance, as we explore below, resolves this problem.

 

Legal finance and the commercially-minded legal department

With cost containment and affirmative recoveries as the two primary paths through which in-house lawyers can increase ROI and impact the corporate P&L, legal finance should become the go-to tool for commercially-minded legal departments. Below, we explore how it can work to achieve these goals.

 

Legal finance creates certainty around cost and risk exposure

Like all other corporate functions, the legal department is expected to meet budgetary standards by staying within its allotted expense line—but unlike any other corporate function, the legal department faces nearly insurmountable obstacles in doing so. To name the most obvious example: It is nearly impossible to force complex commercial litigation and arbitration to fit the conventional corporate budgeting ethos. A GC may, with outside counsel’s help, create a budget positing that a matter will cost an assumed amount to resolve, over an assumed period, resulting in an assumed outcome—but there will be no certainty around any of these numbers. That is due to the idiosyncratic variables that are inherent to each unique piece of litigation: The GC and her law firm cannot actually forecast opponent tactics and activity levels, judicial pace and intensity, how long litigation will take and therefore how much it will cost. Thus however carefully the GC may strive to manage within established budgets, this uncertainty will frustrate her ability to stay within allotted expense lines.

Legal finance changes this dynamic—enabling the GC to set and stick to a budget with certainty around the company’s cost and risk exposure.

With legal finance, a capital provider advances funds to cover the cost of commercial litigation or arbitration. Capital is typically provided on a non-recourse basis, meaning that there is no obligation to repay the investor if the underlying litigation is unsuccessful, and often across a pool of cases (including mixed plaintiff and defense cases). In exchange for that, the investor is entitled to a portion of the monies generated if the litigation is successful. And this means that commercially-minded GCs can budget with confidence. If disputes resolve negatively, they know exactly what their downside exposure is: Nothing, as that risk is borne by the outside investor. If matters take longer than expected, they needn’t worry about the extended drain on the company’s cash resources, because the upfront cash has been forwarded by the investor. And if matters resolve successfully, the GC will also have a good sense of what the recovery will yield for the corporation, because terms will have been agreed with the outside funder at the outset.

In the years to come, legal finance will increasingly help commercially-minded legal departments create certainty around their cost and risk exposure using a “leasing for litigation” model with which the business world is already very familiar.

 

Legal finance enables legal departments to reach recovery targets without increasing cost or risk

Corporations, no less than consumers, can be victimized. When competitors and suppliers engage in anti-competitive behaviors, when partners break contracts or commit fraud, when other parties infringe on intellectual property, such activity can result in staggering losses to business.

Whereas “old school” legal departments might be inclined to treat all but the most egregious of these losses as a cost of doing business rather than impose the additional expense and uncertainty of seeking to make the organization whole through litigation or arbitration, commercially-minded legal departments are increasingly pursuing meritorious affirmative claims because they recognize that these

claims are corporate assets that the legal team has an obligation to stakeholders to monetize—no less than if the company had been the victim of theft.

As one GC interviewed in 2018 put it, “If I had a need, I would have an obligation to my shareholders and my board to explore any opportunity to pursue a meritorious recovery to the company… I have a fiduciary duty to do so.”[6]

Because the funder assumes the cost and risk of resolving the dispute regardless of outcome, legal finance enables GCs to pursue affirmative recoveries without adding legal expenses or uncertainty. This makes it an especially powerful tool for legal departments with affirmative recovery targets because they can work closely with the funder to identify a pool of meritorious matters and to secure financing for all of them on a portfolio basis. This enables the commercially-minded legal department to be extremely strategic about affirmative recoveries without introducing cost or uncertainty. As an additional advantage, Burford Capital can offer the benefit of a decade’s worth of proprietary data based on analyzing trillions of dollars’ worth of commercial disputes that enables them to model outcomes with comparative precision.

Among the advantages of such a portfolio-based approach is not only a lower cost of capital because risk to the funder is diversified across multiple matters, but also the ability for the commercially-minded legal department to finance defensive as well as affirmative matters.

 

Commercially-minded legal departments quantify their value to the organization

Legal departments have historically faced significant obstacles to proving their value to the organization: Although no one would question that avoiding a negative outcome is indeed extremely valuable, it’s hard to quantify a negative. What legal departments can point to as metrics of their value to the organization are strategies that bring in additional monies, and that do so in ways that increase efficiencies and improve reporting outcomes.

As legal departments are increasingly held to the same budgetary and value-generating standards as other corporate functions, legal finance helps GCs maximize litigation recoveries, yet do so in a way that protects the company’s bottom line, avoids surprises and creates certainty around their commercial litigation and arbitration spend—all without altering their existing processes or relationships.

 


[1] Robert C. Bird and David Orozco, “Finding the Right Corporate Legal Strategy,” MIT Sloan Management Review (Fall 2014).

[2] Danny Ertel and Mark Gordon, “Points of Law: Unbundling Corporate Legal Services to Unlock Value,” Harvard Business Review (July-August 2012).

[3] “Dupont’s Legal Recoveries Initiative,” Presentation to ACC Annual Meeting (October 17, 2016).

[4] “Corporate America Discovers Its Inner Plaintiffs’ Lawyer,” WSJ Blog (May 13, 2011).

[5] 2018 Litigation Finance Survey, available at http://www.burfordcapital.com/2018-litigation-finance-survey/

[6] 2018 Litigation Finance Survey, available at http://www.burfordcapital.com/2018-litigation-finance-survey/


Additional reading

Disclaimer

This section of Burford’s website is intended for the use of Burford’s public investors and is required to be provided under AIM Rule 26. Burford also maintains a separate private funds business. Information presented here is not intended for the use of private fund investors, nor is it presented in the appropriate form for such investors. Moreover, Burford does not present this information as a solicitation of private fund investment, which occurs only through appropriate offering documents.