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Time to think differently
As law firms climb slowly out of the grips of the worst recession that most have ever seen, it is quite right that they look at how they can maximize their fee income and enhance their client base.
The profession has suffered during the economic crisis. According to Begbies Traynor, we are still in financially difficult times and there has been a 61% rise in the number of firms showing financial distress compared with the first quarter of 2010. [1]
Dispute resolution teams are having to consider and review their marketing strategies. Whilst most litigators have been relatively lucky, in comparison to their property-biased colleagues, they have still suffered because their clients have seen a reduction (or even termination) of their available litigation budgets.
The reduction in credit facilities and liquidity for businesses means there has been a lack of available funds to pay hourly rates, and lawyers are having to be innovative in the way they offer to charge for their services. Clients now want lawyers to share the risk by working on a conditional fee basis and other alternatives to the hourly rate, including fixed or capped fees.
In fact, it is just as well that solicitors are now looking at what alternative funding and retainer options there are. Rule 2.03 of the Code of Conduct makes it clear that solicitors are required to consider all funding options with their clients, in particular whether the client's costs may be paid by someone else [2] and to advise on their liability to pay an opponent's costs [3].
The lack of cashflow on the part of clients and their demand for a different approach has encouraged litigators to look at conditional fees. Clients like their lawyers to have an interest in the outcome and for their legal team's interests to be aligned with their own.
However, the difficulty for the lawyers is that whilst acting under a conditional fee agreement ('CFA') means that if you win, you receive an uplift on your base costs, it also means you have to wait until the end of the case to be paid anything. A fully contingent caseload may have its attractions and may allow you to run cases for clients who could not afford your services otherwise, but it does nothing good for your cash flow, quite the reverse. Although, in theory if you run enough contingent claims over a long period, then ultimately they should produce a constant stream of positive cash flow, but we are looking here at teams of litigators who are trying to win clients by changing their approach.
Cases run on a full CFA can be just what the client wants, and they can be rewarding for the lawyers, ultimately. They may solve the problem of attracting clients, but they don't release the financial pressure. Whilst a fully contingent caseload can be rewarding, they are a huge risk and cash flow drain.
The answer to the problem lies in the use of litigation funding from third-party funders. Litigation funding can help the lawyers in several ways. Most litigation funders will require that the lawyers take some risk, so they invariably require the law firm to enter into a discounted CFA where part of the fee is paid monthly and the balance is contingent on success. If the case is won, the lawyers receive the balance of their discounted rate, but also a percentage uplift on the full (non-discounted rate).
From the client's perspective, the issue of who pays that success fee will change post-Jackson, but it is unlikely that the lawyers will forego that success fee when the Defendants are not paying and the clients are.
The profession has suffered during the economic crisis. According to Begbies Traynor, we are still in financially difficult times and there has been a 61% rise in the number of firms showing financial distress compared with the first quarter of 2010. [1]
Dispute resolution teams are having to consider and review their marketing strategies. Whilst most litigators have been relatively lucky, in comparison to their property-biased colleagues, they have still suffered because their clients have seen a reduction (or even termination) of their available litigation budgets.
The reduction in credit facilities and liquidity for businesses means there has been a lack of available funds to pay hourly rates, and lawyers are having to be innovative in the way they offer to charge for their services. Clients now want lawyers to share the risk by working on a conditional fee basis and other alternatives to the hourly rate, including fixed or capped fees.
In fact, it is just as well that solicitors are now looking at what alternative funding and retainer options there are. Rule 2.03 of the Code of Conduct makes it clear that solicitors are required to consider all funding options with their clients, in particular whether the client's costs may be paid by someone else [2] and to advise on their liability to pay an opponent's costs [3].
The lack of cashflow on the part of clients and their demand for a different approach has encouraged litigators to look at conditional fees. Clients like their lawyers to have an interest in the outcome and for their legal team's interests to be aligned with their own.
However, the difficulty for the lawyers is that whilst acting under a conditional fee agreement ('CFA') means that if you win, you receive an uplift on your base costs, it also means you have to wait until the end of the case to be paid anything. A fully contingent caseload may have its attractions and may allow you to run cases for clients who could not afford your services otherwise, but it does nothing good for your cash flow, quite the reverse. Although, in theory if you run enough contingent claims over a long period, then ultimately they should produce a constant stream of positive cash flow, but we are looking here at teams of litigators who are trying to win clients by changing their approach.
Cases run on a full CFA can be just what the client wants, and they can be rewarding for the lawyers, ultimately. They may solve the problem of attracting clients, but they don't release the financial pressure. Whilst a fully contingent caseload can be rewarding, they are a huge risk and cash flow drain.
The answer to the problem lies in the use of litigation funding from third-party funders. Litigation funding can help the lawyers in several ways. Most litigation funders will require that the lawyers take some risk, so they invariably require the law firm to enter into a discounted CFA where part of the fee is paid monthly and the balance is contingent on success. If the case is won, the lawyers receive the balance of their discounted rate, but also a percentage uplift on the full (non-discounted rate).
From the client's perspective, the issue of who pays that success fee will change post-Jackson, but it is unlikely that the lawyers will forego that success fee when the Defendants are not paying and the clients are.
The main areas that a combination of litigation funding and discounted CFAs will assist the law firms are:
Law firms have to adapt and to offer their clients something different from the hourly rate retainer. Those litigation departments that wake up to litigation funding and what it can do for them will prosper.
Nick Rowles-Davies
[1] Begbies Traynor Red Flag Alert report Q1 2011.
[2] Rule 2.03(1) d (ii)
[2] .Rule 2.03(1) f
- Cash flow
By paying fees on a monthly basis, the funder can smooth the cash flow of a contingent based case load for the law firm. It does not remove the peaks and troughs, but rather raises the level of the trough. - Marketing
In an ever increasingly competitive marketplace, offering litigation funding to clients will set the innovative firms apart from their competitors and allow them to offer a range of flexible funding solutions. Litigation funding is a marketing tool. - Expansion
The ability to be paid regularly and the increased offering in terms of retainer solutions will give firms the budget and funds to offer their services to a wider audience and assist the expansion and growth of their client base, and then consequently their business. - Regulatory compliance
Rule 2.03 of the Solicitors' Code of Conduct places an obligation on lawyers to discuss funding options with their clients. If they do not give this advice, they are risking a claim in negligence. The lawyers have a duty to advise on the range of funding options available, one of which is litigation funding. Making their clients aware of the opportunity to use litigation funding, complies with those duties. - Risk management
Using a litigation funder can assist in managing a firm's risk and the client's risk. The funder will give an independent third party review of a case when assessing it. If they offer terms - it means they agree that the case is worth pursuing.
More importantly, they reduce the firm's risk and exposure. If the lawyers run a case on a full CFA they may never be paid at all. With litigation funding, the funder takes the risk and the lawyers are paid a proportion of their fees on a regular basis. That way, even if the case loses, they still cover their overhead and make some profit.
Law firms have to adapt and to offer their clients something different from the hourly rate retainer. Those litigation departments that wake up to litigation funding and what it can do for them will prosper.
Nick Rowles-Davies
[1] Begbies Traynor Red Flag Alert report Q1 2011.
[2] Rule 2.03(1) d (ii)
[2] .Rule 2.03(1) f
