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Legal finance: "Recession protection" for legal departments

October 12, 2019

This article was published during Covid-19. To find out how legal finance helps corporate legal departments in today's economic conditions click here.

Two-thirds of CFOs in a recent global survey said that they expect the US economy to enter a recession by the third quarter of 2020. More than nine out of ten GCs surveyed as part of another study said they consider a recession to be imminent—but only about one in ten (11%) said they felt prepared to deal with such a downturn.

Fortunately, as a new study from Burford demonstrates, savvy CFOs are already looking to find creative solutions to manage legal risk and cost, and are ready to work with GCs to “recession proof” the legal budget.

Since 2012, Burford has commissioned annual Litigation Finance Survey research measuring the depth of understanding and use of legal finance by in-house legal departments and law firms. But the impact of legal cost and risk is felt beyond the legal team and outside counsel; it is also a key concern of CFOs and other senior finance professionals.

Recognizing the broader corporate impact of legal spend, Burford commissioned new research with 500+ CFOs and senior finance professionals. The 2019 Managing Legal Risk Report: A Survey of CFOs and Finance Professionals reveals how CFOs think about managing legal cost and risk and demonstrates how in-house and law firm lawyers can more effectively work with them to solve their most urgent business needs—particularly in the event of an eventual economic downturn.

The 2019 Managing Legal Risk Report reveals that a recession would have an immediate impact on legal budgets. Two-thirds (66.9%) of CFOs and finance professionals agree that if the economy enters a recession, they will advocate the reduction of legal budgets. And yet, recessions often give rise to significant legal claims. Working with shrunken legal budgets, GCs and in-house lawyers will inevitably face additional obstacles as they protect their organizations by pursuing and defending against litigation—which by definition is costly, time-consuming and difficult to predict.

The research shows that CFOs and finance professionals are aware of this challenge: 47.2% recognize that the inherent unpredictability of the GC’s job is a major challenge. With that in mind, it comes as no great surprise that most CFOs (66.9%) say that if the economy enters a recession they will be even more likely to advocate the use of legal finance.

Recessions force legal departments to do more with fewer resources. With legal finance, legal departments are able to do more with more—because the company offloads legal cost and risk to a third-party funder. The capital provider takes on both the cost and risk of any underlying litigation or arbitration, freeing up capital for the company to use for other business purposes. Legal finance shifts the economic burden of expensive and often protracted litigation and ensures that the company can focus on maximising legal recoveries rather than minimising legal spend. Because legal finance is also usually non-recourse (meaning the finance provider is repaid only if the legal dispute is resolved successfully) this means that companies are free to pursue meritorious litigation with beneficial outcomes for the business without throwing up any downside risk.

As finance professionals and in-house and law firm lawyers work together to develop innovative solutions to recession-proof the legal department, legal finance is an obvious solution—one that offers both surety in legal budgeting and cover against downside risk. In other words, legal finance is recession protection for legal departments.