Opinion: External funding is an opportunity that comes at a price

Opinion: External funding is an opportunity that comes at a priceLaw firms are soon to have two separate sources of hitherto forbidden capital to nourish their ambitions. First, the Legal Services Act has opened up the prospect of everything from equity investment in law firms by non-lawyers to flotations – and now judges have started falling over ­themselves to encourage and support non-parties investing in litigation in the form of third-party funding.

In the US, the funders of law firms and the funders of litigation are often the same people. It could never happen here, of course. But if it did, what would the funder be looking for, and what would be the effect of their presence in the legal market?

Will they be looking for law firms resembling “Rome under Nero”, as a ­London divorce court judge described one firm of solicitors recently? Probably not.

Partners of firms involved in public court actions involving heavy ego-driven partner feuds might well wince at the press coverage of their firm, but they may also care to reflect on the damage such cases do to their chances of ever achieving external equity investment.

This is not just down to the fact that most sane funders would actually cross the road to avoid these guys – and they are, of course, almost invariably guys. It is more that, in the land of the partner ego, leadership and management often fear to tread.

A research paper from communications consultancy Spada entitled Towards 2012 – The New Legal Landscape found that two-thirds of respondents felt that ­solicitors lacked the management skills to take advantage of the opportunities ­presented by the Legal Services Act.

The question could, of course, have been put in a different way by asking whether solicitors have the willingness to be ­managed. This gives rise to a variant on the chicken and egg question – namely which came first, the leader or the follower?

There is, of course, no shortage of law firms where partners are unwilling or unable (or both) to follow those ­unfortunate enough to be entrusted with the task of leading them. These ‘leaders to be pitied’ dream of conversations in which their problem partners say things like, “If you think the firm would benefit if I change my ways of working, then certainly I’ll change.” However, flexibility and a ­willingness to embrace operational change is something funders of firms and ­litigation will regard as an absolute sine qua non.

Litigation funders are telling me that a lot of their enquiries come direct from claimants who have become terminally exasperated by their lawyers’ inability to make progress with their claims. ­Litigation funders have an obvious ­interest in ensuring that claims are dealt with by lawyers who can deploy above average competence coupled with ­operational excellence, and who are totally committed to delivering value for money.

If these stalled claims are fundable, there will be a gradual movement of strong causes of action away from the incompetent and towards the effective
– and so the professionalisation of ­litigation marches on.

External funders, whether of litigation departments or the entire firm, are bound to ask searching questions about ­operational effectiveness and efficiency and about how it can be guaranteed that clients will get value for money. This is not just about avoiding the £350 per hour associate doing document collation, but about a ­genuine commitment to high ­levels of basic operational effectiveness and efficiency, and to keeping costs under control.

All aboard, then, for a rough passage powered by external funders to the ­promised land of improved ­operational quality for high street and magic circle alike.