The 2019 AmLaw 100 rankings show considerable growth: The largest US law firms set new revenue records, and equity partners took home five percent more profit than they did in 2018.
However, for the foreseeable future, capital-constrained clients under budgetary pressure will expect their law firms to do more for less, and law firms will have to get creative to maintain the books of business that brought them to new heights in recent years. Against this backdrop, legal finance will take on a renewed importance.
Clients are looking for ways to reduce costs
In the 2019 Managing Legal Risk Report, 67% of CFOs and finance professionals agreed that they would advocate the reduction of legal budgets if the economy entered a recession. Now that the world faces the very real prospect of a prolonged downturn, given the levels of unemployment and market uncertainty resulting from the pandemic, in-house legal departments budgets are under increasing pressure.
Clients are already requesting billing rate discounts from their external counsel, and the number of clients unwilling or unable to pay their fees on time is likely to rise.
Law firms face major liquidity challenges
This has a knock-on effect on law firm liquidity. In fact, The American Lawyer reported that Citi Bank has seen a 600 percent increase in law firms requesting to increase their credit lines compared to the same time last year.
A number of big firms both in the US and the UK have already announced a series of pay cuts and furloughs. Although the economic shock will eventually spark large-ticket commercial litigation, most companies are shying away from meritorious disputes in the short term, due to the inherent cost and risk. In the last downturn many disputes teams downsized during this lag and when the wave of litigation eventually hit had to rally to rehire lawyers with the appropriate skillsets. Adding an even greater strain on the firm’s balance sheet due to the associated recruitment, onboarding, and retraining costs.
Though law firms will face diminished access to capital in the coming months as clients clamp down on legal expenditures, savvy law firms should look to proactively incorporate the use of legal finance as part of their overall strategy instead of layoffs which often prove more costly in the long-term.
Legal finance is a solution
Legal finance was born out of the last recession as a means of allowing clients to pursue meritorious claims with their law firms of choice, despite reduced access to cash. In its simplest form legal finance provides capital on a non-recourse basis that can be used either to pay for the costs and expenses of ongoing litigation or for other business purposes. Because of the non-recourse nature of the capital, neither the firm nor the client is exposed to downside risk in the event the case loses.
In the last decade, legal finance has evolved well beyond single-case financing for hourly firms. Legal finance also provides law firms with a way to take on more matters for their clients on a contingent or risk-sharing basis. In these arrangements, the finance provider extends a portfolio-based capital facility over a pool of existing or future matters, paying for the legal fees and expenses of the cases in exchange for a portion of the upside upon successful resolution. Portfolio arrangements are also provided on a non-recourse basis, eliminating downside risk of loss.
Conclusion
With the economy now in a steep decline, the revenue records set last year seem like distant memories, particularly as law firms downsize and cut costs. As law firms transition from historic highs to a period of diminished legal activity, it is clear that law firms that become savvy users of legal finance will have a competitive advantage and be better prepared to address the expected economic turbulence ahead. As the world’s leading provider of legal finance, Burford stands ready to help and partner with law firm lawyers in this uncertain economic climate.
