“England and America are two countries separated by the same language”. So goes the axiom attributed (apparently erroneously) to George Bernard Shaw. The same is true of the business of law: the UK and US are two legal markets separated by a common need for innovation in cost management. Both aspire to innovation but have (so far) achieved quite different outcomes.
At the risk of oversimplifying, the essence of the disparity resides in the extent to which in-house and private practice lawyers in the UK and the US are utilizing available tools to manage legal costs. Given the relative sizes of the two markets, it’s no surprise that the US is for now in the lead, and that it has embraced innovation in cost management in ways that are both more far-reaching and more sophisticated.
The risk for lawyers in the UK—particularly at a time when Brexit uncertainties are creating ever more pressure to keep costs in check—is that the legal savings and cost management needed will not be achieved by old models. Law firms simply can’t offer sufficient discounts on fees to meet client budgets. A new paradigm is needed—and UK lawyers would do well to embrace the best of what has been proven to work in the US.
Clearly, there’s ample need to for innovation. According to a report by Thomson Reuters, in 2015, FTSE 100 companies set aside more cash than ever before for anticipated legal bills: £31.3 billion, up £6 billion over the year prior. That’s £31.3 billion in cash that the FTSE 100 won’t have available to invest in R&D, pass on in savings to customers or return to shareholders. That’s 31.3 billion reasons for better legal cost management.
So where are the gaps in innovating legal cost management in the UK versus the US? No single study has exhaustively compared the UK and the US in the area of legal finance, and reliable numbers are hard to come by given the number of private funders that don’t report any financial performance data. Insights into the market are limited to audited reports from publicly traded finance companies, as well as surveys of what lawyers and clients report about how they use financing tools. Earlier this year, Burford released two research reports based on surveys with private practice and in-house lawyers in both countries, and informed by our seven years of experience in working with leading firms and corporations in both markets. Below we provide an overview of the key points of difference between the UK and the US drawn from these and earlier surveys.
Use of tools to manage legal spend is growing rapidly in the US, alongside increasing awareness of different types of tools
- In the UK, nine percent of clients surveyed in 2014 said they had direct experience in financing litigation.
- In the US, direct use of litigation finance grew four-fold between 2013 and 2016, rising from seven percent to 28 percent. The majority of respondents had used relatively traditional financing tools (single case financing, expense financing), but nearly one in ten (nine percent) said they had taken advantage of portfolio-based financing.
- Why this matters: All financing tools can help clients and their lawyers better manage legal costs—but the more sophisticated tools like portfolio and defense financing offer even greater impact and flexibility. Law firms must be competitive in seeking to help clients on both sides of the “v”—and with the rise of competition litigation, more and more traditional defendants are increasingly becoming claimants.
In the US, lawyers are more likely to talk about cost management tools with their clients
- In the UK, only about a third (34 percent) of private practice lawyers surveyed by Burford in late 2014 said they always make their clients aware of outside financing at the start of every case.
- In the US, in the same period, 41 percent of private practice lawyers surveyed said they always take to their clients about outside financing at the start of every case.
- Why this 20 percent gap matters: Discounted rates don’t equip UK lawyers to meet client needs; outside financing does. Proactively bringing a solution to clients positions private practice lawyers as the trusted advisors they seek to be.
“Corporate finance for law” is still an emerging paradigm—but it is more evolved in the US
- In the UK, according to a report released in early 2016, 72 percent of lawyers said their clients were unaware that they can use litigation assets as collateral for financing. When presented with the idea, however, 91 percent of UK clients viewed financing as an innovative solution.
- In the US, according to the 2016 Litigation Finance Survey, 41 percent of in-house counsel and 53 percent of lawyers at firms view litigation finance is just another form of corporate finance; 39 percent of clients and 58 percent of lawyers said that clients that can afford to pay should use outside financing to pay legal costs and expenses given accounting and other benefits to overall the business.
- Why this matters: Corporates are effectively sitting on an untapped business asset. Unlocking asset value is always a smart choice—but especially so for UK corporates at a time of significant economic pressure.
Make no mistake: in some ways the UK is ahead of the US in legal innovation. In the UK, “alternative business structures” (ABSs) are an emerging type of legal entity enabled by the Legal Services Act of 2007 that have been in use since 2012 and that allow non-lawyer external investors in law firms, whether through private or public offerings. According to research by Arden Partners, the deployment of external capital into the new ABS firms will drive innovation in operating models, efficiencies in service delivery and other competitive advantages that will result in consolidation in the UK legal market with the potential for over £3 billion of revenue changing control. In the US, no such model currently exists.
Legal services account for 1.6 percent of UK GDP, according to TheCityUK, and around ten percent of the global market for legal services—second only to the US. Innovation in cost management will go a long way toward ensuring that this extraordinary business investment grows in efficiency as well as impact, rather that losing out to ongoing pressures to reduce costs.