The United States Law Week

INSIGHT: Legal Finance—From Necessity to Business Development Tool

Feb. 22, 2019, 9:01 AM

For law firms, legal finance was once a reactive tool—sought mostly when a client was unwilling to pay hourly fees to pursue a meritorious matter, and the firm was unable to take the matter on contingency—but now it’s a new business and marketing tool.

From being a tool of necessity, law firms now see legal finance as a tool of choice—one that helps them grow.

This is an important trend: The most recent research suggests that while U.S. law firms have gotten better at managing costs and maximizing revenue after winning clients, they still face ongoing volatility in client demand and an increasingly competitive landscape to generate business in the first place.

The 2018 Litigation Finance Survey reinforces the business-building challenges that law firms are facing. A stunning 96 percent of law firm respondents identify “pressure to be more competitive in bringing in new business” as a critical business challenge—with 53 percent of them calling it very critical, more than any other business challenge identified.

Simultaneously, 48 percent of law firm respondents cite the need to provide clients with new financing and pricing options as very critical—a 41 percent increase since 2017.

Ultimately, legal finance addresses these two critical challenges: It helps law firms and clients find financing solutions—and for law firms, it is an invaluable marketing and business development tool.

Here are five opportunities for law firms to build their businesses using legal finance.

Opportunity 1: Build a Book of Business by Expanding Risk Tolerance

Lawyers often turn down meritorious—and potentially lucrative—cases simply because their firm’s level of risk tolerance won’t accommodate the client’s desired fee structure. This ultimately limits the number of matters a firm takes on, which in turn limits firm growth.

Legal finance solves this problem by allowing law firms to share litigation risk with a third party—enabling them to take on meritorious cases regardless of the firm’s risk appetite or the client’s ability or willingness to pay.

Opportunity 2: Become a Better Business Partner

Increasingly, companies want their law firms to be true business partners.

By beginning a client conversation with legal finance in mind—and ideally in hand—a law firm immediately and implicitly communicates an understanding of their client’s pain points.

When a law firm suggests legal finance, it signals that it can be trusted as an advisor that possesses a range of solutions and stands ready to share risk to meet the client’s needs.

Opportunity 3: Create a Going-Forward Portfolio Earmarked for New Business

Speed to market isn’t a concept regularly discussed in the legal industry—but it should be. Litigation takes time, and clients aren’t always able to wait for law firms to find sensible financing arrangements.

“Going-forward portfolios” solve for this problem by creating a pool of capital that can be drawn upon for current and future matters—dramatically improving the speed with which law firms can approach and respond to clients and finalize agreements for new cases.

In addition, going-forward portfolios enable law firms to expand in two key ways: By allowing them to pursue new practice areas and to pitch existing clients on cases that otherwise would go to different law firms.

Opportunity 4: Utilize Legal Finance to Pursue Market-Based New Business Opportunities

In certain financing arrangements, law firms can even earmark some of the capital for other business development needs, like expanding into new geographic regions in order to take advantage of emerging business opportunities.

Although the ability to use legal finance for non-case-related purposes tends to vary from case to case and agreement to agreement, this kind of flexible financing has become commonplace in certain legal finance portfolio arrangements.

Opportunity 5: Arm Emerging Partners for Growth

Legal finance is a tool, and although it is indifferent to who is using it—and anything else that doesn’t pertain to the merits of the underlying case—it can serve as a critical aid for emerging partners with meritorious cases who are trying to establish themselves at their firms.

These emerging partners are often doubly penalized when cases cannot proceed because of the financial constraints of their clients, namely because these emerging partners need the business far more than better established rainmakers at the firm.

So, in instances where emerging partners have meritorious cases that simply need additional capital to proceed, legal finance can be a critical tool for them to win new business and gain the internal approval needed to pursue strong cases.

As companies continue to scrutinize legal costs, and as the market for legal services becomes increasingly competitive, legal finance will become more widely used. The tool allows law firms to pursue valuable matters without being limited by concerns about risk tolerance or clients’ ability to pay hourly fees.

What’s most important, however, is that legal finance helps lawyers put their clients first, making it an attractive marketing tool that can act as a fulcrum for growth. And if one thing is certain, it is that today’s law firms don’t have the luxury of being complacent about growth.

Author Information

Greg McPolin is a managing director at Burford Capital, focused on originating new business with U.S. law firms and companies. He is based in New York.

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