Over the last decade, law firms have developed a more commercially driven business model to meet growing competition and changing client demands. While this shift has been progressing incrementally for years, the disruption of the last year accelerated progress as firms were quick to reevaluate their technology, operating models and management.
The pandemic-induced economic slowdown also prompted law firms to carefully review their financials and sharpen their focus on pricing, profitability and longterm growth—all of which remain priorities today. Central to this effort is the law firm Chief Financial Officer (CFO). No longer restricted to the traditional number-crunching role, the new law firm CFO has become a strategy-influencer, increasingly integrated into firm management and essential for innovation.
Influencing change within the firm
In an interview, Holland and Knight CFO Mia Stutzman explained the evolution she has experienced in her 10 years with the firm—and captured a larger trend of the CFO’s expanding role within law firms. “Law firm CFOs have become more externally focused[…]. I've seen the finance department's role evolve from that of budgeting, processing transactions and maintaining the firm's financial statements to one of data analytics, development of creative pricing arrangements and direct client interactions.”
As of 2017, over 71% of all AmLaw 200 firms and more than 85% of the AmLaw 100 employed CFOs. As firms continue to adopt more “corporate” best practices, these numbers should continue to climb, with a new wave of collaboration between law firm CFOs and firm management.
Big law firms have hired CFOs because they consciously decided to become more business-minded. Law firm CFOs bring a unique perspective to the executive leadership team. They are integral to innovating firm strategy and are increasingly client-focused to ensure that the firm remains profitable, innovative fee structures are sustainable and that the firm is wellpositioned to drive measurable change.
Balancing increased firm expenses with client demands
Despite having reported record returns in 2020, law firms anticipate experiencing accelerated expense growth as the sharp expense reductions recorded in 2020 create an unsustainable year-over-year expense comparison in 2021—particularly as firms return to the office, resume travel and partner meetings. To manage these increased expenses, firms are prioritizing the security of their cash flow: 93% of CFOs at AmLaw 200 firms identified boosting profitability as their top priority for this year. Their clients, however, are unsurprisingly focused on reducing legal costs. Herein lies the friction between law firm profitability and client satisfaction, both of which are inextricably linked to a law firm’s financial strategy—the management of which now falls to the CFO.
Reducing legal costs and risk is not a new priority for law firm clients. Since the 2008 recession, clients have been looking for more predictability, alternative fee structures and flexible pricing. But the liquidity concerns sparked by the pandemic have led clients to develop a heightened interest in learning about managing litigation costs and mitigating risk. Their interest comes with new responsibility for firms, whom clients expect to proactively present financing options.
Both clients and partners therefore benefit from the existence of a law firm CFO. The CFO—being the expert in firm financials— is better equipped to draft, review and negotiate financing products, allowing lawyers to focus on delivering positive outcomes to clients. Clients are more likely to see flexible fee structures and innovative pricing and firms are likely to see higher revenues and margins. In fact, firms who employ a CFO see over a $300,000 increase in profits per equity partner compared to firms without a CFO.
Legal finance helps law firm CFOs deliver novel solutions to partners and clients
Clients want low costs and flexible fee arrangements; law firms want to get paid— and CFOs have become critical to delivering sustainable solutions. With a legal finance partner, CFOs can increase value to their firms by bringing solutions that bridge the gap between client demands and firm expectations. Savvy CFOs are using legal finance help them serve clients without interruption, pursue new business and practice areas and accelerate the payment of post-settlement payments and client receivables. In short, CFOs help their firms boost liquidity and profit while reducing risk.
Serve clients without interruption
Law firms can use legal finance to continue working with clients even when clients’ capacity becomes constrained. Particularly useful for hourly billing firms, fees and expense financing (in which the finance provider pays for the cost associated with the commercial litigation or arbitration in exchange for a portion of the ultimate award or settlement) fulfills the needs of companies that can’t afford or don’t want to pay their lawyers by the hour, or of law firms that wish to offer clients flexible terms but can’t or don’t want to assume the entire contingent risk of doing so.
Pursue new business without increasing risk
84% of law firm lawyers cite managing contingent risk as an important challenge. With a portfolio financing arrangement (in which a pool of capital is tied to a pool of existing or future matters) firms can take on more cases without increasing risk to the firm. This product enables firms to continue to grow and avoid turning down good clients.
Accelerate post-settlement payments and client receivables
A legal finance provider can purchase a firm’s outstanding receivables, allowing the firm to convert its receivables to cash. In hourly fee matters, this generates revenue regardless of when clients ultimately pay bills. In resolved contingent fee matters, it generates revenue even if a court has not yet approved a settlement or payment is delayed for some other reason.
Balancing the needs of the client with the goals of the firm is no small feat, and firms are more successful with the expertise of a CFO. With legal finance, the law firm CFO is better equipped to deliver novel solutions, and in the process, demonstrate value to the firm by reducing risk and enhancing liquidity and profitability.