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Legal finance: An important tool for driving business in a downturn

  • Christine Azar
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Christine Azar

Christine Azar

Director

Former Partner, Labaton Sucharow

The events of 2020 have disrupted the deal flow for law firms across sectors and practice areas and upended traditional new business origination strategy. However, new research highlights how law firm leaders—and their clients—are finding opportunities to generate more revenue and strategize for the future.

According to the 2020 Legal Finance Reportresearch commissioned by Burford and conducted by GLG and Ari Kaplan Advisors—law firms are looking at ways to adapt their business operations in the aftermath of the pandemic to meet the needs of liquidity-constrained clients. Legal finance offers solutions, both to clients and the law firms that serve them.

Law firms’ top challenges: Generating new business and remaining competitive

97% of all lawyers cite external conditions such as the economic downturn and impacts from Covid-19 as the top challenges facing their businesses, with around 50% expecting both budgets and revenue to shrink in the next year. The onus will therefore fall on law firms to accommodate the needs of the clients they serve to retain business and remain competitive. 

“[Law firms should] learn how clients are scrambling and where they can help. There is a lot of chaos right now in corporate America. It may make sense to front-burner issues.” Associate General Counsel

In fact, two out of three law firm lawyers identify increased competition, and 84% cite generating new business as immediate and pressing challenges. This is because the recession has adversely impacted law firm business development opportunities as clients’ budgets and appetite for risk drop significantly.

With companies looking for ways to recover value for their organizations without spending millions of dollars, law firms face increasing demands for risk-sharing solutions. The 2020 Legal Finance Report affirms that companies expect their firms to be savvy risk-sharers, with 81% of in-house lawyers saying openness to risk-sharing is an important law firm attribute.

Contingency practices are growing

Even historically hourly fee firms are recognizing the demand in the market for contingency offerings. The most striking recent example of this trend was in 2019, when Kirkland & Ellis, the largest “big law” firm in the US by revenue, announced that they would be taking on plaintiff matters and self-funding them through contingency arrangements.

 In a possible nod to lessons learned from the 2008 downturn, 68% of law firm lawyers in the 2020 Legal Finance Report say their firms are likely to build or augment contingency practices. Although this may overstate the actual rate at which law firms will adopt contingency and risk-based models, it recognizes their importance—and indicates firms’ growing understanding that they will need to make structural changes to the traditional law firm business model to stay competitive in the long term.

As the downturn continues, 61% of in-house lawyers are likely to purse claims as plaintiffs through affirmative recovery programs to generate cash and offset legal costs. These organizations will value working with firms on these matters that both know their business well and are willing to have some skin in the game.

Law firms will need a risk-sharing partner: Portfolio finance offers a solution

While contingency cases enable law firms to differentiate themselves from their competitors and to win new business, they also present a big risk of expense and cash flow loss to the firm if the case loses.

In good times, there may be enough revenue and immediate cash available from billable hours to cover the contingent work. However, in the current economic conditions, with a slowdown of transactional work, firms will need a partner to share in the risk. Lawyers recognize this need—with 84% citing managing contingency risk as an important business challenge. 

Legal finance will play a central role in the development of contingency practices because it expands firms’ ability to take on more business without adding to their risk profile; indeed, 73% of lawyers say they will use legal finance to expand contingency practices.

The optimum solution for law firms is a portfolio finance arrangement. By entering into a portfolio financing arrangement with a professional legal finance provider, law firms have access to a large pool of capital when they need it most. Portfolio finance also allows law firms to effectively manage compensation for partners working on contingency by paying a portion of attorney’s hourly rates on contingency matters in real-time and as billed. This means that law firms are able to generate revenue for the entire time a case is pending, and because finance is provided on a non-recourse basis, the firm faces no downside risk.

Conclusion

As in-house lawyers increasingly recognize the value they can bring to their organizations through affirmative litigation, the demand for risk-based practices will continue to rise.

Law firms cannot maintain their complacent traditional fee structures. According to the 2020 Legal Finance Report, most law firm lawyers recognize the urgency to innovate and have identified legal finance as a business-building tool with 78% saying it makes them more competitive in the market and 79% calling it essential for business development.

Therefore, legal finance will be an essential component to building or expanding risk-based plaintiff practices. Those that fail to offer a range of financing options to clients may suffer as companies seek to limit the number of firms they work with in the downturn.

Download Burford's 2020 Legal Finance Report