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Law firms need to incentivize efficiency over quantity

March 18, 2020

Too many law firms continue to favor the billable hour model and rely on it to measure internal performance. Recent press reveals that some law firms are even doubling down, increasing or supplementing their compensatory incentives for the number of hours billed throughout the year.

Continuing to incentivize lawyers to bill as many hours as possible regardless of efficiency or client value has numerous downsides. I’ll name just three:

It doesn’t serve client interests.

Clients want their outside counsel to achieve the best outcome as quickly and cost effectively as possible. According to independent research commissioned by Burford in 2019, 70% of in-house lawyers agreed that “companies should take steps to manage legal costs such as moving away from the billable hour and limiting the firms they work with.” This illustrates the demand by in-house lawyers for flexibility from outside counsel. It is this mindset which has led to an increase in outsourcing of lower level legal work to professional services companies.

It can be bad for lawyers.

Emphasizing quantity over efficiency can be unhealthy for lawyers, as an ongoing series by The American Lawyer on mental health at leading law firms notes. Indeed, some Big Law firms are offering attorneys extended sabbatical opportunities to destress and unwind, and Seyfarth Shaw’s “Inspiration Project” gives attorneys scholarships to pursue endeavors related to health, wellness, lifelong learning and community impact.

It can discriminate against women.

The system of remunerating lawyers based on the number of hours worked can be disadvantageous to lawyers who act as primary caregivers for children or other family members. While this needn’t just mean women lawyers, women remain primary caregivers and so are especially subject to the need for efficiency in balancing caregiver responsibilities with work. According to attorney Nicole Galli, founder of Women Owned Law, “The entire system is not set up for women—or men who value a life outside of work—to succeed… you have the billable hour, which incentivizes working more rather than working efficiently.” Women lawyers may be especially susceptible to the negative impacts of the billable hour given that they historically inherit fewer client relationships and opportunities than men. As a result, a woman lawyer may need to dedicate more time to business development and bringing in new clients than her male peers—which further eats into the amount of time she can ultimately bill. The traditional law firm structure disproportionately affects women in that they are under pressure to hit billable-hour targets like their male counterparts while simultaneously under significant pressure to build a book of business on an uneven playing field.

It is unlikely that the billable hour will disappear entirely anytime soon—indeed, news of its demise seems perennial. But for all the reasons cited above, lawyers should be moving toward efficiency over quantity whenever possible—and in numerous ways, legal finance can help them in this regard.

Legal finance helps law firms and clients work efficiently

With legal finance—also known as litigation finance, litigation funding and third-party funding—a litigant or a law firm uses the asset value of commercial litigation or arbitration to secure capital from a third party, either to finance the litigation fees and expenses or to monetize a pending claim or award. Legal finance providers almost always commit capital to matters on a non-recourse basis, with their return entirely contingent upon a successful outcome. If a matter they’ve backed loses, the legal finance provider loses the entirety of its commitment and earns no return.

Legal finance providers are by definition focused on ensuring they commit capital to matters that will resolve both positively and efficiently, and they can be powerful partners to law firms and clients as they move to prioritize efficiency over quantity. Here’s how:

Legal finance starts with a budget.

Most lawyers don’t prioritize building litigation budgets but ensuring that one is in place is essential to legal finance—indeed it’s part of the diligence process through which financing is secured—and this creates a powerful basis for managing hours efficiently. Depending on the finance provider, helping lawyers stick to and manage litigation budgets can be an important “value add” for clients and law firms.

Legal finance can be used to help firms build risk-sharing practices that wean them off the billable hour.

Law firms that wish to move from an hourly model to lucrative contingent fee-based plaintiff practices can use legal finance to move toward a new risk-sharing reality, for example by creating capital facilities through which they can secure funding for multiple contingent matters. In order to retain top clients, law firms must find innovative ways to reduce costs. Law firms should demonstrate flexibility in sharing risk with clients—either by working on contingency or by working with an outside finance provider to share risk. In the US, taking matters on contingency is an effective means to offer more attractive terms to their clients. However, when law firms take matters on contingency, they assume an extraordinary level of risk of outright capital loss in the millions for lawyers’ fees and case expenses. Such law firms greatly benefit from a legal finance partner to help manage the contingent risk and to represent multiple clients with meritorious but highly risky and expensive matters. Globally, law firms can also use legal finance as an innovative business development tool to help their clients shift risk and manage the costs of litigation. Legal finance allows clients to pursue meritorious disputes that they would otherwise shy away from due to the associated costs. Law firms that are well-versed in legal finance can work with their clients to implement an effective recoveries program and add value to the business through the organization’s legal department.

Legal finance can be used to empower women.

The Equity Project is a $50 million pool of capital earmarked to finance commercial matters led by women lawyers, where the litigation or arbitration is being led by a woman, where a woman receives origination credit or is the client relationship manager, or where the case is run by a women-owned firm. With financing from The Equity Project, women lawyers can demonstrate to clients that it’s possible to fund their litigation without adding additional pressure to their balance sheet—giving women a competitive edge to help them win new clients and procure that all important origination credit. The Equity Project is an economic incentive that helps women originate new business for their firms, which should relieve some of the pressure to build a book of business and allow women lawyers to spend more time providing valuable legal services to their clients.