Given prolonged global economic uncertainty, law firms are under increasing budgetary pressure. Many clients are asking for discounts and extensions on payment terms from their external counsel, and the number of clients unable to pay their fees on time continues to rise.
In the 2008 recession, the percentage of non-standard rates collected by law firms more than doubled from eight percent to 16.4 percent because of increases in discounts, write-downs and write-offs. Applying this lesson to the present downturn, even if law firms maintain their overall number of hours billed, they will face a decrease in returns generated from their billable hours.
A further direct impact on the bottom line is that clients are reportedly asking firms to take more cases on contingency—cases that do not generate any near-term revenue.
To counteract these effects, law firms are taking drastic interim measures to reduce costs. For instance, The American Lawyer reported that, in the immediate aftermath of the pandemic, Citibank saw a 600 percent increase in law firms requesting to increase their credit lines compared to the same period in 2019, and a number of big firms announced pay cuts and layoffs.
While it is clear, some firms are doing better than they thought they would be doing as a of March 2020—with some rehiring laid of staff and restoring pay already—the general consensus is that firms need to be prepared for this downturn to persist and potentially get worse.
Short-term measures are detrimental to the firm in the long-term
Layoffs may seem a quick and obvious solution to increase law firm liquidity, but they can be harmful to the firm in the long-term. Aside from the palpable reputational damage caused by publicly laying off staff, history shows that layoffs can leave law firms ill-prepared for future demand.
In the last recession there was a lag in the increase in disputes as litigants were initially reluctant to head to court due to the inherent costs of litigation. As a result, many law firms scaled back their litigation teams which, once the litigation boom eventually hit, left law firms less prepared to serve clients and generate revenue.
Equally, salary cuts or reductions in partner distributions can have a long-term negative impact on law firm success by causing a mass exodus of the best talent. Top billing partners who are expected to endure a significant reduction in compensation will be lured away to firms that are performing better either because of practice mix or alternative methods of cost reduction. Associates may also move to more stable firms leaving a shortfall in the ability to take on more work.
Monetization portfolios unlock the value of contingent-fee work
In the face of constrained liquidity, many firms have a book of contingent litigation that preceded the downturn or that has been generated since March.
While contingent cases present an opportunity for huge upside, they don’t generate any immediate revenue and represent a big risk of expense and cash loss if cases are unsuccessful. This poses an acute challenge for law firms, which operate on a cash-in, cash-out basis, with limited retained capital—even more so in the current economic environment, with clients increasingly paying late or asking for extensions on payments terms, further reducing cash flow.
To resolve this problem, law firms can work with a professional legal finance provider to accelerate fees from their contingent book of business, generating immediate liquidity and revenue with a monetization portfolio.
A monetization portfolio is a capital facility secured by anticipated fees from an existing pool of contingent matters. The portfolio is often built around high-value litigation matters otherwise known as “anchor cases” and capital can be used for anything including, of course, attorney hours and case expenses.
This type of arrangement allows law firms to generate revenue for the current period while retaining upside as the cases resolve, both freeing up immediate cash and ensuring continued opportunity for the business in the long term.
A solution for now and for the future
Portfolio finance provides a better solution than layoffs and pay cuts. Sophisticated legal finance providers like Burford, with the ability to pay large sums of capital up front in the form of a monetization portfolio, are opportune risk partners—enabling cash-strapped law firms to capitalize on their books of contingent litigation.