It’s unquestionable that 2020 was defined by the upheaval caused by the Covid-19 pandemic. Entire industries were upended: The hospitality industry suffered significant losses as result of stay-at-home and social distancing measures, businesses transitioned to remote work setups and courts shut down before reopening virtually. But with the first Covid-19 vaccines administered in the US and UK before year-end and with large-scale production expected by mid-2021, the end of the crisis may be in sight.
While some semblance of normalcy may well be on the horizon, the economic repercussions of the pandemic are far from over. The IMF has predicted that the pandemic will result in a cumulative output loss of in excess of $12 trillion by the end of 2021. In order to prepare and plan for a post-pandemic world, companies and law firms must evaluate how they think about managing legal cost and risk.
Companies should look for novel ways to manage expenses and generate cash flow
Cash and liquidity will remain king for businesses as the shape of the recovery remains unclear.
According to Altman Weil’s 2020 annual Chief Legal Officer survey, 66% of CLOs reported a fall in revenue in response to the Covid-19 crisis and 77% reported an increase in workload—accelerating the perennial problem for in-house legal departments of doing more with less. Additionally, 44% of CLOs anticipate that their total budgets will decrease in 2021.
Faced with fluctuating budgets and increased workload, legal departments will have to look for innovative ways to manage expenses and generate cash flow, including:
1. Investing in legal infrastructure
To manage the challenges of rising volumes of legal work and pressure to reduce costs, companies have for a decade or more been investing in internal legal operations teams. In 2020, 50% of all legal departments reported having a professional administrator, up from 46% the previous year. An effective legal operations department focuses on resource allocation, cost control, efficiency and other key performance metrics. By helping to prioritize output, the ops team helps in-house lawyers focus their time, energy and expertise on legal work that has the highest value for the organization.
2. Optimizing legal assets
Legal claims and awards carry huge uncertainty as to outcome and timing—but they also represent vast latent value to an organization, making them multi-million-dollar assets companies may not know they have.
Monetization enables companies to advance the value and manage the risk of pending claims and awards, freeing up cash on an accelerated basis and providing immediate liquidity that can be used for any business purpose.
Increasingly, savvy in-house lawyers are recognizing the opportunity to capitalize on these invisible assets. In fact, the 2020 Legal Finance Report reveals that 75% of GCs cite the ability to generate liquidity as one of the most important benefits of legal finance.
3. Offsetting legal costs
GCs often view outstanding litigation as a liability. But meritorious litigation can also be a revenue-generating asset—especially when companies invest in affirmative recovery efforts. Affirmative recovery programs at DuPont, The Home Depot, Tyco, Ford and others have generated headlines for over a decade (most notably, the $2.7 billion in cumulative recoveries won by DuPont between 2004 and 2013). More recently, research reveals that 61% of in-house lawyers are likely to pursue claims as plaintiffs through affirmative recovery programs to generate cash and offset legal costs in the downturn.
Working with an outside finance provider to either initiate or improve a recovery program shifts risk from the company’s P&L and allows legal departments the opportunity to add quantifiable value to the business. By assuming the cost and risk of litigation, legal finance can transform claims from burdensome expenses to assets with significant upside potential.
Law firms must remain competitive
Recent research by Burford reveals 97% of all lawyers cite the economic downturn and impacts from Covid-19 as the top challenges facing their businesses, with around 50% expecting both client budgets and revenue to shrink in the next year. On top of this, firms can expect an accelerated expense growth in 2021 as employees return to the office.
These challenges will create a more competitive environment for law firms as shrinking client budgets will change the way they purchase legal services. Firms will need to focus on how to deepen and broaden relationships with their existing client base while attracting new clients, perhaps from firms who have become complacent. There are a number of ways law firms can prepare:
1. Develop a diverse practice mix
An annual report by Citibank shows that the law firms that performed the best in 2020 were those with a diverse practice and industry mix and were able to pivot to meet shifting client needs. Looking ahead to 2021, the report suggests firms should view their litigation, bankruptcy and financial restructuring practices as primary drivers of growth.
2. Manage cash flows
As we saw during the early days of the pandemic, access to liquidity has been a key priority for law firms in 2020. In March of 2020, The American Lawyer reported that Citibank’s legal group saw a 600% increase in law firm requests to increase credit lines compared to the same period in 2019.
In an increasingly capital-constrained world, portfolio finance can help law firms manage and improve cash flow. For example, by entering into a portfolio financing arrangement with a legal finance provider, law firms have access to a large pool of capital when they need it most and can foster a special risk partnership relationship with their provider of choice.
3. Retain talent
In the last recession, law firms made cuts to headcount, but those layoffs didn’t start until the rest of the economy had started to rebound. In 2008, at the start of the recession, the industry saw a 3% drop in demand, but lawyer headcount actually grew 4.6%. Law firm layoffs didn’t start in earnest until mid-2009 and continued into 2010 at a rate of 2.4% even as the demand environment began to stabilize. Once client activity picked up, the law firms that made staff cuts were less prepared to serve clients and generate revenue in the recovery when clients were seeking ever more creative solutions to their own business pressures.
While law firms have not yet seen drastic reductions in headcounts, they need to remain vigilant, learn from the mistakes of the last recession and prioritize talent retention. There are now other more effective ways of easing cash flow, such as legal finance. Legal finance equips firms to build and expand contingency practices to meet client demand and provides the working capital and liquidity to out-compete competitors.
Preparing for success post-pandemic
The extraordinary challenges of the past year also provide opportunities for law firms and companies to invest in positive innovation. As organizations chart a full-potential post-pandemic strategy, they must consider novel and inventive ways of thinking about legal cost and risk.