One of the stereotypes that comes up time and again in the business of law is the idea that, as a group, lawyers are entirely risk-averse. Although there’s certainly some truth to this stereotype, lawyers that regularly work on a contingent basis have a very different attitude about risk. Far from avoiding it, contingency fee firms take on substantial financial risk in order to help clients win.
But just as being overly risk-averse can result in missed opportunities, taking on too much risk can impede firm growth.
When speaking to lawyers at contingency fee firms about the role legal finance can play in growing their practice, I’m often met with the same refrain: My firm is happy to take on the entirety of its clients’ risk, because that’s what the firm has always done, and because that’s how our business model works.
But based on my experience not only at Burford but also as a practice group managing partner of a leading contingency fee firm, the reality is that a completely risk-based business strategy creates inefficiencies that can hinder firm growth.
Legal finance can help even the most successful contingency fee firms overcome financial inefficiencies and fuel growth in two key ways: (1) Funding client expenses; and (2) expanding the firm’s reach.
Funding client expenses
Case expenses can account for up to 25 percent of a law firm’s annual expenditures—and are generally written off as a cost of doing business. But the true cost of paying for client expenses out of pocket extends beyond the simple outlay of cash. Cash used to pay expenses is taken directly from partners’ after-tax dollars—meaning that partners have to pay taxes on capital they can’t use, have less to split at year-end and have less cash available to the firm. In the best-case scenario, the cash is essentially loaned to clients for a period of years (with a small negative return, given inflation); in the worst case, the matters lose in court, resulting in a total loss of cash.
Legal finance can alleviate this inefficiency through expenses-only portfolios. With expenses-only portfolios, capital may be used to fund expenses incurred throughout the lifespan of a group of cases. Capital typically is provided on a non-recourse basis—meaning that it is repaid only when and if underlying matters are successful.
As a result, law firms are spared the financial burden of providing interest-free loans to their clients and instead have an opportunity to invest capital in future growth—whether that means hiring more lawyers, taking on more cases or investing in technology or firm-wide infrastructure.
Facilitating firm growth
For contingency fee firms that want to be more ambitious with their growth strategies, going forward portfolios are yet another game-changing tool. The going forward portfolio structure allows law firms to obtain capital for both existing and future cases. The capital may be used flexibly, either for costs associated with the underlying matters or for other business purposes unrelated to the litigation.
Savvy contingency fee firms can leverage going forward portfolios for growth in a variety of ways:
- Win new business
Firms can initiate client conversations with capital already in hand, allowing for improved speed to market, risk capacity and flexibility—major competitive differentiators
- Expand or develop a practice area
Firms can offset the cost and risk associated with growing or developing a new practice area—including hiring new lawyers or marketing
- Grow geographically
Because many non-US jurisdictions have restrictions on conditional fee arrangements, legal finance provides firms that operate on a contingency-fee basis flexibility in offering financial arrangements with international clients
Building smarter law firms
Even the most successful contingency fee firms have an upper limit of risk tolerance. Legal finance—and especially portfolio finance—softens that upper limit, allowing firms to approach client problems with greater creativity and fewer constraints, leading to better outcomes for both firm and client. Ultimately, the real value for contingency fee firms is in using legal finance to achieve positive outcomes—and growth—rather than simply avoiding a negative.