Monetizing legal: How CFOs are extracting value from legal assets

Published : 2 months ago, on 20/08/2024

By Jordan Licht

Business disputes have historically been met with scepticism by finance leaders like me: Litigation is seen as a drain on resources and a distraction from core business activities, presenting hefty price tags, unpredictable outcomes and prolonged timelines. That makes litigation a landmine for those of us focused on maintaining financial stability and growth.

However, CFOs are increasingly able to recognize that high-value claims are assets, albeit highly contingent ones. When a business suffers significant financial harm to the tune of scores of millions of dollars, any CFO is going to work with the company’s legal team to ensure the business recovers what it is owed in the most financially advantageous way available. It’s about seeing beyond the nuances of the legal documentation to very real impact of meritorious claims on the bottom line.

The challenge CFOs need to solve along with their GCs is this: As in so many other areas of business, it costs money to make, or in this case recover, money. Litigation is expensive and expected to increase even more in cost in the years to come. According to Burford’s 2024 Litigation Economics survey, 41% of CFOs think litigation spend will increase between 10% and 24% in the next five years, while 32% expect an increase of 25% or more. Another important factor for CFOs to consider when evaluating the significant cost of commercial litigation is duration risk: it can take years for litigants to go through the courts, deal with appeals and eventually get paid. Litigation is a marathon not a sprint, and as CFOs well know, money spent now in anticipation of a recovery at some point in time that may not happen is very expensive money.

Fortunately, businesses now have alternative financing options to recover the value of large and meritorious claims. CFOs are increasingly exploring these options as part of their legal department strategies. By conserving cash that would have been spent on lawyers, businesses can generate value and reallocate funds to other areas of the business. In fact, 37% of finance leaders believe their organization could redirect at least $5 million to other business initiatives through dispute financing.

While the stress of potential liabilities and the fear of damaging financial statements can cast a long shadow over the finance department, CFOs increasingly appreciate that the legal department can be a source of hidden value—generating cash that can be reinvested in the business. Below, I explore what recent research reveals about where CFOs see opportunity in the legal department.

CFOs recognize the potential to create value through the legal department

The majority of CFOs believe cost containment should be a top priority for legal departments. However, a staggering 70% of CFOs also express the need for legal departments to focus on finding new ways to recover value. This indicates a significant desire among CFOs to reframe the legal department from a cost center to a capital source.

This sentiment aligns with the growing trend of formal affirmative recovery programs in many companies. An affirmative recovery program is simply an organized effort by the legal department to recover money from meritorious claims and judgments that would otherwise be lost if the business’s meritorious claims and judgments were left unpursued, and to do so in a systematic, numbers-driven way. These programs aim to identify and pursue litigation and arbitration claims that can generate real monetary recoveries for the company.

Recent research shows that over half of businesses either have an affirmative recovery program in place or are developing one. However, only 21% of in-house lawyers and 16% of finance professionals perceive their organization’s recovery programs as robust. If only one in six CFOs thinks the business’s recovery program is operating at the level needed, that highlights the need for increased attention—and increased involvement by finance leaders.

CFOs acknowledge the value of minimizing cost and risk—and a viable solution

CFOs are increasingly considering alternative funding options for litigation instead of using their own working capital. This is because dedicating resources to litigation and arbitration claims comes with significant risks. Disputes are unpredictable, and CFOs have limited information about their potential outcomes. As a result, CFOs have valid concerns about spending working capital on disputes. These concerns include the high cost of litigation, the risk of prolonged case durations and the opportunity cost of allocating funds away from other business areas like R&D or marketing. To address these challenges, CFOs can reframe litigation as an asset and find ways to mitigate these risks.

Legal finance through the lens of a CFO

According to research, CFOs in particular advocate for innovative solutions like legal finance—which is clearly embraced beyond the legal department as a tool with broad corporate benefits.

Legal finance is the practice of valuing and monetizing legal assets, most often in the form of providing capital to finance meritorious claims to accelerate the expected value of claims, judgments and awards. Some of the most common legal finance solutions are:

• Fees and expenses financing: Legal finance arrangement in which a company shifts to a third party the cost of paying fees and expenses to pursue high value litigation and arbitration claims.
• Monetization: Legal finance arrangement in which a third party accelerates a portion of the expected entitlement of a pending claim, judgment or award, providing the claimant with immediate liquidity, often with a continuing back-end participation for the claimant company.
• Portfolio finance: Legal finance capital facility backed by multiple litigation and/or arbitration matters, which may include claims and defense matters and a mix of dispute types and sizes. Portfolios may be created to provide a pool of capital backed by existing and/or future matters and may offer lower financing costs because risk is diversified.
• Asset recovery: The practice of enforcing and collecting outstanding judgments and awards when the losing side fails to pay, which may be financed on a non-recourse basis (i.e., repayment contingent upon successful resolution or recovery).

Finance professionals are champions of the use of legal finance within their organizations, with nearly half of CFOs (45%) saying they expect legal finance to become commonplace for businesses like theirs in the next 15 years. What’s more, CFOs are consistently slightly more likely to predict increased use legal finance tools than their legal counterparts, suggesting that finance has a big role to play in the conversation about funding.

Research shows that CFOs are interested in exploring the potential value of their legal assets, especially as litigation costs are expected to increase. And since CFOs may have concerns about dedicating financial resources to litigation, legal finance offers innovative solutions to transform litigation into an asset by removing financial risk.