Even a decade after the recession, law remains a buyers’ market and “alternative fee arrangements”—whether that means fees are discounted, fixed, capped, or deferred until success—have become the norm. According to the Georgetown Law Center for the Study of the Legal Profession 2017 Report on the State of the Legal Market, alternative fee arrangements, combined with budget-based pricing, “may well account for 80 or 90 percent of all revenues” at many firms.
As the head of global disputes for an international law firm commented in the 2016 Litigation Finance Survey, “The legal departments are under pressure. The firms are under pressure... Anything that can relieve that tension is a good thing. Litigation finance… takes the law firm out of the firing line.”
It is understandable that law firms should welcome this shift. Law firms are understandably exhausted by unrelenting pressure to defer payment, discount fees, or arguably worse, engage in race-to-the-bottom competitive bids. And due to their cash partnership structure, even firms that provide conditional or contingent arrangements lack the structure to assume an unlimited amount of client risk. They need a way to bridge that gap and take “the law firm out of the firing line.”
Alternative fee arrangements can lead to unintended consequences for law firm clients as well. For example, if a lawyer is skilled enough to have continued demand for his or her services, pushing compensation levels below the market will result either in that lawyer not wanting the client’s work or cutting corners to perform it. While it is excellent to be ferocious when it comes to law firm negotiations, that mindset is generally shortsighted if it sacrifices the result in the case. For commodity legal work it might be fine, but not when confronted with more idiosyncratic, business-critical litigation.
Litigation finance can give firms a better way of keeping the focus on providing clients with top tier service. That may mean talking to a client about third-party financing options for a particular piece of high-stakes litigation or seeking portfolio financing for the firm that will then benefit the client.
To illustrate this point, look to the following case study: A leading law firm wanted to expand its litigation practice, offer more aggressive alternative fees to clients and receive the additional upside for taking risk, but could not afford to take additional alternative fee risk onto its balance sheet. A £45 million going-forward portfolio was created to address this challenge. The portfolio was designed to finance five or more potential matters that would be placed into the portfolio as new case opportunities arose.
The assurance of having financing available for future matters gave the firm a competitive advantage over other top firms offering alternative fee options and ensured the firm would not have to turn down a strong case or new client simply because the firm could not absorb additional risk. As a result, the firm was able to expand its practice and increase its opportunity to earn highly profitable success fees, while limiting its exposure to frivolous use of time and out-of-pocket cash investment.