Law Firm Portfolio Financing: Three Strategies for Growth Amid Economic Challenges
The past year has been challenging for many large law firms. Facing economic headwinds, declining lawyer productivity, and reduced billable hours, several notable AmLaw 200 firms have responded with austerity measures including hiring freezes and layoffs (including smaller scale, strategic reductions to create capacity within other parts of the business).
Firm leaders are looking for alternatives to avoid further cuts, increase market share, and boost revenue. The American Lawyer recently reported that large firms are beefing up pricing teams and increasingly negotiating alternative fee arrangements like fixed and contingent fees. This trend is only expected to increase in both litigation and corporate legal departments.
Law firms are also exploring litigation financing options to free themselves from the limitations of the billable hour and increase firm productivity. Most firm leaders have experience with financing single cases, but they may be less familiar with multi-case or open law firm portfolios. These arrangements offer large scale financing options and generate immediate revenue to increase firm market share, stimulate growth, and mitigate risk.
Increasing market share
A key benefit of portfolio funding is permitting law firm flexibility in structuring fee arrangements for both current and prospective clients. Clients frequently seek alternatives to the billable hour. Providing them with that optionality, including by way of litigation funding, is a critical element of both effective client retention and increasing market share.
The pressure to control litigation costs is especially acute from clients facing the impact of tight economic conditions. If market trends continue, this may encompass the majority of a law firm’s client base. The Conference Board’s widely followed index of leading economic indicators has declined over the past 11 months and continues to point to a recession in the near term. Recent high-profile bank failures and persistent inflation have exacerbated this post-Covid downturn. Indeed, in the first quarter of 2023, the technology sector laid off more than 100,000 workers.
Unpredictability in the market creates uncertainty in cash flow and revenue goals. Law firms that remove some uncertainty, like litigation costs, from a company’s balance sheet will stand out as a forward-thinking partner who has their client’s legal and business goals in mind.
Portfolio financing can help law firms generate business and increase their market share with clients of all sizes and financial means. A law firm’s cost sensitivity is more important than ever for Fortune500 companies with in-house legal departments deploying technology and legal operations specialists to improve efficiency. For small and midsized companies pursuing large commercial claims, fee flexibility is always a priority and large litigation budgets typically presented by top-tier law firms are often cost-prohibitive. In addition, clients facing tight economic conditions are less likely to allocate limited litigation budgets toward even high-value affirmative litigation campaigns.
A law firm with an open portfolio arrangement can distinguish itself from competitors by providing an avenue for clients to bring cases they otherwise might shelve. Portfolio financing advances a portion of fees and expenses related to litigation directly to the law firm. The firm typically retains a partial contingent fee interest in the portfolio case recoveries, thus keeping some “skin in the game” and the opportunity to share in the upside of favorable outcomes. It allows firms to convert what would otherwise be a full contingency into a less concentrated hybrid fee arrangement, with a mix of contingency fees and funder-covered hourly billables.
Investing in the firm’s growth
As with any economic downturn, litigation is likely to spike in coming months. BTI Consulting Group reported in its recently released annual litigation outlook survey, that more than half of the large companies responding plan to increase litigation budgets in anticipation of more complex and higher-risk matters. Unsurprisingly, Omni Bridgeway has recently observed increased interest in funding for litigation involving corporate restructurings. If the usual trend during a downturn holds, insolvency-related claims will likely increase rapidly.
This uptick in litigation will likely occur at a moment when many law firms have just reduced associate headcount. And as many law firms have discovered, reductions in force one year can leave them stunted and unable to capitalize on opportunities when economic conditions improve.
Firms with a portfolio of meritorious contingency claims can avoid these austerity measures and their longer-term consequences by attracting significant, up-front capital investments from litigation funders. The capital secured from a funder can be used to offset lost revenues, pay critical expenses, and even grow the firm strategically.
For instance, proceeds from funding can be used to open a new office in a strategic market or attract a group of lateral partners to establish a new practice or bolster an existing one. An influx of capital from a funder can also be used to assist with retention efforts by financing bonuses to key personnel.
Stronger risk management
A funded portfolio often includes three or more commercial litigation cases with strong prospects of success asserted against parties with the ability to pay judgments and anticipated legal fees. Portfolios can also include a single case with the opportunity to add future mutually agreed-upon cases, known as open portfolios. Both scenarios can be leveraged as risk management strategies for law firms.
A litigation funder can diversify its investment and thereby spread its risk by including several portfolio cases as collateral. This permits the funder to increase the amount of non-recourse capital it can provide and likely propose lower returns compared to a single litigation. This arrangement allows the law firms to mitigate its downside risk on any one large contingent fee case.
Large portfolios provide law firms with flexible, non-recourse funding commitments in the tens of millions of dollars. Armed with this risk-free capital, firms enjoy the financial flexibility to offer new and existing clients a variety of fee arrangements. This helps the firm create a ladder of ongoing hybrid and contingency matters that normalizes revenue.
Law firms can use both multi-case and open portfolios to immediately leverage litigation assets and unlock revenue that might have taken several years to realize. This gives law firms a financial backstop to comfortably cover partner distributions, firm overhead, and other costs. It also decreases the firm’s reliance on bank loans and other recourse forms of financing.
Litigation funding eases another common challenge faced by law firms: managing a budget and executing a long-term strategy in light of unpredictable litigation expenses and income. The recent 2023 Citi Hildebrandt Client Advisory reports that law-firm collection cycles are lengthening. Funding helps smooth out the financial highs and lows of the litigation process with committed, regular payments for expenses and guaranteed income for hours billed.
In the end, firms can use their own litigation assets as collateral to increase profits, maintain headcount and flourish in the current economic downturn.
For more information about how we assist claimants in a variety of commercial disputes, visit our Company Insights. Or contact us for a consultation to learn more about the ways we can help you and your clients unlock the value of meritorious claims.