Law firm practicum: Considerations for emerging contingency practices

November 16, 2020

Katharine Wolanyk

For law firms, tough economic times reinforce this Darwinian lesson: Success requires not just raw excellence but also the ability to adapt. Even before COVID-19 began disrupting the global economy, the legal industry was becoming ever more competitive, and with clients in the driver’s seat, law firm evolution was a necessity. Although that evolution comes in many forms and degrees, one trend of note saw law firms that historically had billed by the hour beginning to develop contingency fee practices.

This early shift was not defensive or reactive: It was forward-thinking, a tacit recognition of many economic realities, among them the counter-cyclical nature of litigation, the inefficiencies of the hourly fee model and the potential new and higher margin revenue generation available by embracing a risk-sharing model. When 72% of in-house lawyers say they have failed to pursue meritorious claims for fear of adversely impacting the bottom line[1], it’s not surprising that firms are ready to take on that risk and expand their business.

In 2019, Kirkland & Ellis became the most prominent example of this trend when it publicly committed to developing its own contingency practices. In the last year, a growing list of elite firms have further begun to explore or commit to similar efforts, making clear that law firms are considering new ways of working with clients and managing risk to remain competitive.

Given the nature of our work at Burford, we increasingly find ourselves speaking to firm leaders as they begin developing contingency practices. And given that our business is built on managing legal cost and risk, we offer the following short primer on the considerations we raise when talking with these firms. While our recommendations are not exhaustive, they represent essential considerations and advice for emerging contingency practices.

#1: Get buy in and set goals

Every journey should start with a destination, especially a journey as rewarding and potentially transformative as launching a contingency practice. In our experience, law firms do well to establish a simple goal for which they achieve necessary internal buy-in. Developing a contingency practice can be challenging, particularly at large firms with established ways of doing business. A goal can be (and often is) as simple as establishing a percentage of overall revenue target, ideally with a sense of the prospective clients and types of matters and the internal team that may generate that revenue. But it is not enough merely to set revenue targets: Firms must be strategic and develop a collective sense of risk tolerance, a shared idea of how many cases to take on risk and an agreed-upon timeline for achieving benchmarks. Firms that proceed without a clear vision only set themselves up for failure. We strongly advise against firms cherry picking individual cases and calling that a contingency practice, particularly without a formal apparatus for assessing risk.

#2: Educate clients and internal stakeholders

Complacency is the enemy of new business generation, and building a new contingency practice will require a change of habits for firms that have not historically had to serve and pitch clients in that way. Regardless of whether clients are actively seeking contingency arrangements, law firms must be equipped to educate them and to do so proactively. This merits establishing an internal team that will ensure that the right clients know that the firm is ready to take on plaintiff work on a contingency basis. Ultimately, the key is to lead the conversation: If the client is in the driver’s seat, they may start by talking to other firms first, and firms that merely respond risk losing business.

In addition to educating clients, law firms must also educate internal stakeholders, some of whom may be averse to building a contingency practice. For instance, partners, particularly at firms that have traditionally done defense work, must be aware of business conflicts that could arise as the firm takes on more plaintiff work. More generally, partners must be well educated on ethical considerations and how they have been resolved by other law firms—it is critical to provide internal stakeholders with peace of mind.

Legal finance providers, as experts in cost and risk management, can both help educate the firm and present risk-sharing models to clients, enabling firms to fight for more business and more revenue they would previously have turned away.

#3: Create infrastructure to vet contingent matters and model potential financial outcomes

Building a contingency practice also requires building the infrastructure needed to assess and underwrite potential contingency matters. This requires more than litigators saying they can win; it requires the ability to quantify risk—with a particular understanding of expected damages and timing—factors that allow firm leadership to ensure that revenue from contingent matters meets their needs for margin achievement and income realization.

Here, too, legal finance providers can be indispensable. Legal financiers serve as unbiased eyes when diligencing cases, offering analysis on both case merits and economics. This service, which is generally available only at premier legal finance providers, can prove essential to emerging contingency practices that lack experience quantifying risk. Having spent years assessing thousands of commercial matters, a financier like Burford will have amassed extraordinary expertise in quantifying commercial legal risk (as well as, in Burford’s case, over a decade’s worth of proprietary data).

#4: Establish a plan for compensating partners working on contingency

Partner compensation can be complex and is often idiosyncratic, all the more so for a firm working to establish a contingency practice. The firm needs to plan for the reality that a certain number of contingency cases, even strong ones, will lose, not to mention the certainty that many winning cases will take years to resolve. During those years, partners working on contingency matters need to compensated, and firms need to have a clear plan for how to handle those unexpected dips and delays in revenue, and how to manage the cash flow differences inherent in a contingency practice, including timing and amount of cash This is perhaps where legal finance can play the biggest role.

By working with a third-party legal finance provider, firms can support revenue generation, even while taking cases on risk. This is not to say that legal finance providers simply pay firms their standard hourly rates, but rather that finance providers can share risk in a way that allows firms to earn revenue and generate cash, even while their clients enjoy the benefits of contingency arrangements. Having a legal finance partner in place means that firms can take more matters on risk, thereby increasing their odds of success, and creating a more comfortable transition to a contingency practice.

#5: Identify risk-sharing partners

Law firms take the leap of sharing risk with their clients in a contingency practice in order to generate more revenue—and by partnering with a legal finance company, law firms can take on more risk and thus generate more revenue. But—needless to say—it is critical to find the right partner.

Doing so may be all the more challenging given that the legal finance industry has grown and evolved markedly in the last decade—and there are many new and opportunistic players in the space. Firms must carefully consider which legal finance partner can best meet their needs based on a variety of factors such as:

Expertise—A law firm that aims to build a contingency practice needs more than just complex funding structures, it also needs subject matter expertise across a wide range of practice areas and geographies. Thus, firms should seek out legal finance partners with geographic depth and robust experience in diverse practice areas.
Trust—A law firm building a contingency practice is necessarily taking a calculated risk; it is therefore essential for such a firm to work with a financier that is willing and able to serve as a trusted advisor. Firms should look for legal finance partners that offer value beyond capital at all stages of inquiry and investment, including guidance on whether matters are appropriate to take on contingency (and at what pricing).
Scale—Building an ambitious contingency practice requires significant capital inputs, and it often requires them quickly. Firms should thus prioritize finding a legal finance partner with a large team and sufficient capital to make substantive commitments swiftly, as this demonstrates preparedness to serve their needs as well as ensures diversification.

Conclusion

Law firms are mocked for being slow to change. Of course there is a grain of truth, but as a partner to some of the world’s leading firms over the last decade, we are impressed by the ability of many law firms to navigate through hard times by doing just that. And so while we don’t expect the hourly fee model to disappear in the short term, we do expect that clients will continue to push firms to take matters on risk, particularly as the recession runs its course—and we are confident that the savviest firms will get ahead of this trend. We also know that they will almost certainly fare better than their peers who err on the side of inaction.

Regardless of where your firm is in the process, we at Burford stand ready to help.

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[1] Burford Capital. 2019 Legal Finance Report: A survey of law firm and in-house lawyers (October 2019). Available at: http://burfordcapital.com/insights/insights-container/2019-legal-finance-report/.