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How legal finance supports legal innovation

August 18, 2020
Greg McPolin

As macroeconomic conditions cause in-house legal budgets to shrink—and add to GCs’ already lengthy list of priorities—legal tech has taken on renewed urgency as a potential pathway for legal departments to save money and create efficiencies. The challenge, of course, is that new technologies present immediate costs. And at a time of cash scarcity, GCs are increasingly hesitant to spend scarce cash on untested solutions.

Affirmative recovery efforts, aimed at generating cash through meritorious litigation and arbitration, can help pave the way for funding legal innovation. But frustratingly, in the current economic climate, the cost and risk of litigation may dissuade in-house decision makers from pursuing valuable claims, causing companies to leave millions on the table.

Legal finance offers a powerful solution.

By financing or monetizing affirmative litigation and arbitration, companies can unlock the value of their legal assets— without adding risk to the balance sheet. In so doing, GCs and in-house leaders can free up (or generate) capital to reinvest in the legal department. Thus, affirmative recovery efforts, financed with third-party capital, do more than generate cash for the business: They allow legal departments to invest in innovation.

The urgency of legal tech

For years, “innovation” has been the legal industry’s hottest topic—and now, in this newly remote world, it seems that Covid-19 may accelerate the adoption of many long-heralded technologies. For instance, popular existing solutions such as digital contract management  and e-billing will likely see continued use and adoption by legal departments trying to reduce costs and streamline process. GCs and in-house leaders will almost certainly look to implement new cybersecurity and data management tools, given the increasingly digital nature of legal work and ever-more complex global compliance demands. And more generally, legal departments will seek high-value but cost-effective alternatives to traditional and expensive outside counsel wherever possible. Though legal technology promises to help companies achieve those goals, it can only do so with significant investment.

Generating cash to finance innovation

Research shows that in-house legal departments are leaving significant cash on the table year after year. According to the 2019 Legal Finance Report, 72% of in-house lawyers report that their companies have failed to pursue meritorious legal claims for fear of adversely impacting the bottom line—and 65% report that their companies have unenforced judgments or uncollected awards valued at $20 million or more.

Understandably, GCs and in-house leaders may be reluctant to pursue the value of their legal assets, given the cost and risk inherent in affirmative litigation—but legal finance addresses those concerns. In the simplest scenario, companies can finance legal fees and expenses either for a single case or for portfolio of cases. Increasingly, companies are also taking advantage of monetizations, whereby they receive capital, based on the value of their affirmative claims, for general business purposes unrelated to the underlying litigation or legal asset. In both cases, capital is provided on a non-recourse basis, meaning that companies owe nothing to the financier in the event of a litigation loss or negative case outcome. Moreover, legal finance helps companies generate cash without taking on risk.

With the ability to generate risk-free value, legal departments can become profit centers for the business—and can focus on creating new efficiencies. By inverting the role of the legal department, GCs and in-house leaders demonstrate themselves savvy as business leaders. They allow their departments to generate capital that can then be reinvested in transformative technologies, both for the legal department and for the business writ large. Legal finance not only supports legal tech: It can bankroll innovation.