November 12, 2020
Law Firms Building (or Discussing) a Contingency Practice Should Consider These 5 Points
With competition in the legal industry on the rise (among law firms and also between law firms and alternative legal service providers), and changes resulting from the pandemic, lawyers must adapt to stay competitive. Clients now expect that law firms will offer alternative fee arrangements that encourage efficient and high-quality work product, while providing predictability and fairness in overall legal spend. Clients may also want law firms to align their interests and take on some of the risk of litigation. Many law firms are now considering building some form of contingency practice into their litigation business models. Those firms can learn from the litigation finance industry and consider the following:
- Litigation risk does not have to be all or nothing. Just as litigation funders often require the other parties to a funding transaction to put something at risk – whether it be a discounted hourly billing rate for law firms or contribution to expense costs for claimants – law firms considering contingency options do not have to agree to take on 100% of the risk on the cases that fall into this bucket. Rather, firms can seek litigation finance solutions to form a hybrid funding arrangement that allows the law firm to take on some of the legal fee risk, while a funder pays for the balance of legal fees so that the law firm has some revenue stream to “keep the lights on.” Law firms can also consider taking on 100% of the risk of collecting on their legal fees and funding only the out-of-pocket expenses for a litigation. There are countless other permutations that innovative litigation funders can offer to allow claimants and law firms to take on some risk while not exceeding the comfort level of the firm’s executive committee.
- Law firms should survey clients on their interest in alternative fee arrangements in developing a plan for a contingency-based practice that is responsive to what clients want. Ultimately, law firms serve clients. Any significant change to the way law firms provide those services should be made in consultation with clients and in deference to their needs and business realities. With the ongoing pandemic, many businesses may want to limit the money reserved in their budgets for legal spend, so alternative fee arrangements may be a business imperative. At the same time, corporate legal departments may have untapped litigation assets in the form of legal claims that are yet to be brought, and the ability to pursue those claims without having to outlay the capital for legal fees and expenses may be very appealing to clients. Law firms should have these types of discussions with their clients and make sure any new plan that the firm implements is responsive to these needs.
- A contingency fee-based practice requires new training for litigators. Lawyers that have always billed by the hour will need to be trained to understand the business model of a contingency fee practice. For instance, when proposing an alternative billing arrangement, litigators must understand how to price the additional risk that the firm will be bearing. In some cases, law firms may even want to hire dedicated pricing experts to assist with developing fee proposals. Additionally, lawyers who are used to having their performance assessed, at least in part, on the numbers of hours billed, will have to understand how working on contingency fee matters will impact their performance reviews and advancement at the firm. Also, working on a contingency fee matter requires specific project management skills that ensure that budgets are established, tracked, and met to the extent possible. Law firms may want to hire dedicated project managers to track the work and ensure that any adjustments to expectations are factored into pricing for the next contingency fee case.
- Law firms must carefully vet incoming cases to assess risk before agreeing to take the case on a contingency or partial contingency basis. The business model of litigation funding firms relies heavily on conducting effective diligence to assess the risk of litigation before deciding to fund a case. Law firms should consult with funders, many of whom diligence hundreds of cases each year, to develop a comprehensive plan for what should be reviewed and considered in assessing the likelihood of success on a particular litigation. Indeed, the involvement of a funding firm in diligencing the case alongside the law firm can be important validation to both the client and the law firm that the case is worth pursuing and that the risk is reasonable.
- Law firm stakeholders must be educated on the benefits (and risks) of a contingency practice to get buy in and adjust law firm culture. A contingency fee practice can be very lucrative for a law firm. However, key stakeholders must understand that there is real risk and that every case will not be a winner. Any model for risk-taking alternative fee arrangements should look at the total revenue across a pool of diverse cases over several years and not judge the program on an individual case-by-case basis. In addition to the binary risk of a good or bad outcome, there is also duration risk that will require patience from the law firm to see a return on its investment. Finally, a law firm will need to understand and prepare for how working on contingency or partial contingency cases will affect compensation for those lawyers. They may create very little revenue for several years and then significant revenue after a longer period. Law firms must decide how those alternative fee partners will or will not share revenue with hourly partners.
The investment professionals at Curiam Capital would be happy to speak with lawyers considering adding a contingency or partial contingency practice to their law firms. With proper planning and execution, firms can take on a reasonable amount of risk while adding a potentially lucrative additional revenue stream and competing for clients that expect to be offered alternative fee options. Please contact Molly Pease, firstname.lastname@example.org, to discuss further.