“The clients are under enormous pressure. The legal departments are under pressure. The firms are under pressure to be competitive… Anything that can relieve that tension is a good thing. Litigation finance relieves that tension in part because it means clients can have their difficult negotiations with the funder. It takes the law firm out of the firing line.”
Head of global disputes, AmLaw 50 firm
As quoted in Burford’s 2016 Litigation Finance Survey
Clients are still feeling the heat on costs—and it is getting worse
As part of an ongoing commitment to understanding the economics of litigation for clients and firms, Burford recently conducted independent research with in-house and private practice lawyers that addressed, among other things, the biggest business challenges they face now and anticipate in the years to come. Not surprisingly, many in-house legal teams identified budgets as the overarching challenge. Simply put, they are under increased pressure to contain costs. Indeed, 94% of clients said that increased pressure on legal budgets, staffing and spending is a significant challenge today—up from 80% in 2014 and 73% in 2013.
Many in-house lawyers therefore face a dilemma: they must find a way to reduce costs when their companies may well be engaged in more (and more expensive) litigation than ever before.
Faced with shrinking budgets and growing scrutiny, many in-house lawyers are turning to their outside counsel for discounts—essentially hoping to pay less for the same legal services they’ve always needed.
Others have had to take even more drastic measures to contain costs—they’re simply cutting down on litigation altogether.
According to Burford’s 2016 Litigation Finance Survey, 29% of clients have been forced to forego bringing litigation they believed was meritorious and would have produced recoveries for their companies because of budget and capital constraints. Another 23% have actually dropped a claim they were pursuing because the company wasn’t willing to continue to have the associated legal expenses hitting the bottom line.
Obviously, neither of these scenarios is desirable—which explains why nine out of ten clients are looking to their law firms for innovation.
Firms’ biggest challenge in the multi-billion-dollar legal market is staying competitive
Clients’ budgetary pressures have had an immediate impact on law firms. Firms that have long expected their clients to pay an hourly rate are more recently finding that their clients are requesting a discounted rate. And Burford’s 2016 Litigation Finance Survey suggests the issue is more widespread than ever before. This year, 100% of private practice lawyers identified pressure from clients for discounted or alternative fees as a major business challenge—that is up significantly from 2014 and 2013 (74% and 77% respectively).
So, what happens when a firm can’t—or is unwilling to—offer a discount?
They may lose a good client.
According to Burford’s survey, 54% of in-house respondents have shifted work to firms that proactively offered alternative fee arrangements, including litigation finance.
To remain relevant in a changing legal market, firms need to understand their clients’ needs—and be prepared to offer a solution that satisfies clients tightening budgets without eating into firm profits. By listening to—and perhaps even anticipating—clients’ needs, firms gain a competitive advantage that can help them keep existing clients, and potentially attract new ones.
Bridging the gap: Clients, law firms and financial innovation
Innovation will certainly be needed to alleviate the tension between clients and firms and add more capital and financial expertise to the mix. The research confirms that clients today are happy to share risk with their lawyers, and they actively seek alternatives to traditional pricing models from their lawyers. Unfortunately, both of these expectations often place a burden of capital and risk on firms greater than the current law firm business model can tolerate and support. Other solutions—like litigation finance—are needed.
In the years since Burford first started out, litigation finance has proven itself to be an important mechanism to bridge the gaps between client and law firm needs. But it’s increasingly used not out of economic necessity, but as a matter of choice—as a smarter and more efficient means of unlocking the asset value of pending litigation and adding cash flow to businesses and law firms.