CFOs are increasingly working to innovate the legal department and find new ways to add value to the business.
Heading into 2023, Chief Financial Officers face a number of headwinds, including record inflation, a potential recession, the rising cost of debt and continued operational challenges resulting from labor shortages and supply chain inefficiencies. Under these conditions, finance teams are revisiting their companies’ capital health and reviewing their cash and risk management strategies. As part of that review, they should also carefully review the company’s legal assets.
Having advised management teams for over 15 years as an investment banker and consultant and in my previous role as a Chief Operating Officer, I know the pressure companies face to identify new ways to create value and cut costs, with much of that pressure shouldered by CFOs and senior finance leaders. However, I’ve only recently become acutely aware of the hundreds of millions of dollars in untapped value that many companies have in an area that will surprise most CFOs: Their legal departments. Indeed, instead of being typecast as a cost center, the legal department presents CFOs a massive opportunity to recoup lost value and generate liquidity from pending litigation and arbitration claims.
Below are three considerations for CFOs seeking new ways to add value, liquidity and certainty heading into 2023 and beyond.
Treat affirmative legal claims as assets
When talking to CFOs about their high value affirmative litigation claims and how legal finance can help them pursue those claims without adding cost, I like to ask the question: What is the difference between enforcing an account receivable claim and a legal claim? Every CFO would follow up on an outstanding payment from a vendor or client, so why not follow up when the company has been materially harmed?
The answer I get almost every time: Because litigation and enforcement are expensive.
It’s a fair answer, and exactly the response I would expect from CFO’s. They are absolutely right, litigation and enforcement are expensive, and that’s why legal finance exists. Legal finance allows CFOs to bring and pursue strong claims, just as they would an account receivable—admittedly, a risky and expensive receivable. Legal finance companies assume the cost of paying lawyers and legal expenses to pursue a high value claim in exchange for a portion of the proceeds when the claim is successful.
Ultimately, legal claims are assets and companies are increasingly recognizing them as such. For example, the US General Counsel of Nestle, the largest publicly held food company in the world stated at a recent industry conference: “One of the prior panelists made the connection between claims being assets of the company and our job being to protect the assets of our organization. Letting claims wither on the vine without pursuing them is not taking care of our assets, so we view that as part of our responsibility.” CFOs are also increasingly recognizing this: According to 2021 research, 59% of finance professionals recognize legal claims as assets that represent future cash flow.
When every penny counts—and CFOs are doing everything they can to protect their business—every opportunity to add value should be explored, especially when doing so doesn’t require the company to increase its costs and enables it to recover significant damages to the business.
Leverage every asset to add value and liquidity
In my experience as an ex-COO turned CFO, the legal department and in-house litigators have not traditionally focused on finance and operations. However, as legal and finance departments work together more closely, that perception is changing—and should.
As the cost of capital increases, companies need to look at new ways of raising capital for the business, instead of taking on more debt. The more that CFOs become aware of how legal assets can be leveraged and the tools available to corporate legal and finance teams to help them, the more value companies will derive from their legal departments.
For example, one such tool which companies are increasingly using to create value and enhance liquidity is a monetization: A deal type which provides an injection of working capital by accelerating or advancing a portion of an outstanding claim, judgment or award.
While an injection of working capital is beneficial at any time, accelerating capital that would otherwise be illiquid for the many years it can take a high-value commercial dispute to resolve makes particular sense in a down economy because it adds immediate liquidity that can be used for any business purpose—whether that means immediate hiring, R&D, growth initiatives or any other need for the business.
Even companies with ample cash to pay lawyers’ fees and expenses benefit from the immediate liquidity provided by legal finance monetizations, rather than waiting potentially years to unlock the captive value of their claims, judgments and awards—especially given the probability of declining business revenues and the prospect of increased capital constraints.
Reduce expenses and preserve working capital
While there is always pressure on the CFO to cut costs and reduce risk, a recessionary environment exacerbates that pressure. Given that 81% of executives anticipate a recession in the next six months,1 it’s unsurprising that 77% of CFOs report deploying new cost-cutting measures.2
Litigation is expensive regardless of the economy’s health, but in a recessionary environment the legal budget is more highly scrutinized. This often means forgoing claims altogether—because basic risk versus reward logic often means that the very real risk of an ultimate loss in court, or a years-in-the-future win, creates more risk than the company would like.
The reality is that legal claims are assets and do represent future value. And while going to court is generally not a company’s first choice to resolve a dispute, there are circumstances in which a company has been materially harmed and the only recourse to be made whole is litigation or arbitration.
With legal finance capital, litigation need not be a cost-drain. Depending on the company’s need and the nature of the claim, a legal finance provider can reduce litigation costs by funding the fees and case expenses. Again, legal finance capital is not debt, and it’s not a loan. When a legal finance provider accelerates a portion of a pending claim, they don’t get paid until the business wins its claim. If the ultimate result is a loss or a distant win, the legal finance partner assumes all the downside risk of loss and the duration risk that comes with the often painfully slow legal process.
For any investment, CFOs know that it’s essential to have the right tools and team to make tactical, data-driven decisions. The same rule is true for litigation. Not every legal claim is worth pursuing, but when the claim that is comes along, a legal finance provider can help finance and legal evaluate outcomes, reduce or remove costs, recover value and boost liquidity.
I’d say that’s a win for both finance and legal.
Chief Financial Officer
+1 312 757 6070
Jordan Licht is Chief Financial Officer of Burford with responsibility for managing and overseeing Burford’s global finances and financial strategy. In that capacity, he oversees Burford’s funding, capital management, financial reporting, and investor relations, and is a member of Burford’s Management Committee and an ex officio member of the Commitments Committee.