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Litigation funding: a driver for law firm growth?

Law firms can now use litigation funding as a business development tool to increase the volume of contentious matters flowing into their litigation and disputes departments, says Chris Smith of Vannin Capital.

Litigation funding is an opportunity for business development Twonix Studio

Law firms are faced with a myriad of challenges in the current marketplace. They are expected to grow profits – and, specifically, demonstrate increasing profits per equity partner (PEP) – year-on-year whilst grappling with business model issues including: persistent downward pressure on fees from increasingly demanding clients, how to move away from the billable hour without eroding profitability, intensifying competition to win instructions and the emergence of alternative business models.

On top of this, clients have become more sophisticated. They realise that, owing to the rapid growth of law firms over the past several decades and a recent slackening in demand, it’s a buyers’ market for legal services. As a consequence, law firms can no longer rely solely on their existing relationships or claims of top-tier expertise to differentiate themselves from their competitors and win business.

Selling litigation and arbitration services also requires law firm partners, perhaps more than in other areas, to address clients’ concerns around uncertainty of the final bill. An article in The Lawyer at the end of 2013 entitled ‘Clients rail against botched litigation budgets’ stated: ‘General counsel and other leading in-house lawyers claim that even experienced law firms are often woefully inept at accurately forecasting litigation costs, with the average disparity between budget and the final bill being nearly 40 per cent.’

Litigation funding offers opportunities for law firms

If law firms are able to continue educating their clients about the advantages of litigation funding, there are likely to be significant resulting benefits for those law firms. There are three main benefits:

Increased number of claims in the market

In the absence of litigation funding, claims will only be pursued if there is sufficient budget at the client to do so. Typically only the strongest claims or those that are of most strategic importance to the client’s business will be prosecuted. As a consequence, numerous meritorious claims are never pursued and the client is likely to be losing out financially as a result. 

Rather than increasing budgets and putting more cash at risk, clients can use litigation funding to pursue these potentially valuable claims with no impact on cash flow and no downside risk if the claim is unsuccessful.

 Litigation funding allows clients to unlock the unrealised value in their litigation assets and, as a consequence, delivers an increased flow of contentious matters to the law firms that advise them. It’s a win-win.  

Ability to take market share from competitors

Losing business to cheaper competitors is a constant concern for law firm partners. For clients that are unable or unwilling to pay the level of fees a particular law firm requires, that law firm should suggest that they consider litigation funding. The client benefits in the usual way (i.e. it will not have to outlay any cash and will not suffer any loss if the claim is unsuccessful) and the law firm will be able to charge its hourly rate with payment of its fees guaranteed by the litigation funder. This can be a powerful tool to prevent clients going to cheaper law firms and may even allow a law firm to target its business development and marketing efforts at clients that would not have been able to afford its fees without third party litigation funding.

Reduction of uncertainty on recoverability of fees

Litigation funders have extensive experience of cost budgeting since every case they fund will have an agreed budget drawn up which forms an integral part of the litigation funding agreement. A law firm who works with a litigation funder will benefit from this experience, which increases the likelihood of the law firm recovering its fees – if the law firm sticks to the agreed budget then their fees are guaranteed by the litigation funder. This removes the risk that the law firm cannot recover fees directly from its own clients and goes a long way to reducing the likelihood of cost overruns.

Conclusion

The litigation funding marketing is growing rapidly. Law firms that build productive relationships with litigation funders and educate their clients on the benefits of using third party litigation funding will strengthen their contentious practices to the likely detriment of those that do not. 

For futher information, Chris Smith of Vannin Capital can be contacted at  http://www.litigationfunding.com

Posted by:

Chris
Smith

17 July 2014

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