Thriving in the NewLaw economy

The legal industry is changing rapidly. Corporate legal departments are expecting their outside counsel to do more with less. Plaintiffs' firms have become more aggressive in attracting new clients. Artificial intelligence and other forms of technology are starting to disrupt the ecosystem, as are alternative service providers. Legal is increasingly viewed as an asset class, with outside investment making its way in. Clients are changing the way they consume legal services, requiring law firms and other providers to change the way they deliver them. We refer to this as the NewLaw economy.

The NewLaw economy is reshaping the financial landscape for law firms of all types. Corporate legal departments, under pressure to reduce costs and increase efficiency, are demanding alternative fee arrangements and heightened transparency, forcing firms to rethink pricing strategies and to consider adopting new legal technologies. The capital investment required to integrate these fee arrangements and technologies, however, can strain smaller firms and mid-tier players, widening the gap between those who can adapt and those who cannot.

On the plaintiffs' side, competition is intensifying as firms aggressively market to potential clients through digital campaigns, referral networks and traditional advertising such as billboards. These strategies introduce higher upfront costs and greater financial risks.

Financing options are evolving

Just as the legal economy is changing, so is the banking economy for law firms. In addition to typical treasury management services, IOLTA accounts and partner buy-in loans, law firms looking for growth in the NewLaw economy may be seeking capital for a variety of purposes. They may be wanting to amplify their marketing and business development. They may be eyeing new lateral partners or growing the team of non-lawyers responsible for process, technology adoption, software development or other innovation initiatives. They may require investments to cover case costs or fund the firm while awaiting payment on a settlement. And today's law firms have a range of financing options to explore.

Traditional bank loans remain a staple for many firms, offering predictable repayment terms and competitive interest rates. Since these loans often require collateral and personal guarantees, many firms turn to full-service banks that focus extensively on the legal sector. In these banks, relationship managers take a more nuanced approach to underwriting and understand the unique cash flow dynamics, particularly for plaintiffs' firms that rely on contingency fees. They can also offer tailored products and services for legal industry needs.

Another increasingly popular source of funding is litigation finance, where third-party investors provide upfront capital in exchange for a share of the proceeds from successful cases. This option can be attractive to plaintiffs' firms handling high-value or mass torts/class actions, as it allows them not only to pay for discovery, expert witnesses and trial preparation, but also to attract claimants and clients. Similarly, some firms are partnering with private equity investors or exploring mergers with larger, capital-rich firms to secure the financial resources needed to modernize operations or scale their practices. While litigation financing can be more flexible than full-service banks, the funds tend to be more expensive. So, in many circumstances, a hybrid approach may make sense, with a traditional bank providing debt financing up to a certain point (based on underwriting requirements) and a litigation finance partner providing additional capital.

Private equity (PE) funding is becoming an increasingly viable option for law firms looking to secure capital to modernize and scale in the NewLaw economy. Regulatory changes in some jurisdictions, such as the United Kingdom and certain U.S. states like Utah and Arizona, have created opportunities for law firms to explore nontraditional ownership models that include PE investment. Managed Service Organizations (MSOs) can also allow PE-backed entities to handle non-legal operations; affiliate businesses can provide ancillary services like e-discovery or compliance; revenue-sharing agreements allow PE funds for specific initiatives in exchange for future profits; and joint ventures can be established between law firms and PE firms to create co-owned entities targeting specific markets or legal niches. These structures are designed to provide law firms with the resources to modernize and grow while maintaining compliance with ownership regulations.

While the potential rewards of PE funding are substantial, firms must carefully weigh the trade-offs. Accepting outside investment often means relinquishing some degree of control, as PE firms may demand input on governance, decision-making and financial strategies. Additionally, firms must ensure alignment between their long-term goals and the return expectations of their investors. For those willing to navigate these complexities, PE funding offers a powerful way to thrive in an increasingly competitive legal landscape.

While litigation financing and private equity are good solutions in some situations, and a basic understanding of them is de rigueur in the NewLaw economy, most firms simply require a solid relationship with a commercial banking partner that understands the legal industry and its changing landscape.

What has not changed

Law firms are still businesses. As such they must operate with financial discipline and a clear focus on profitability and cash flow. This requires robust financial reporting and strategic planning to ensure sustainable growth and operational efficiency. Tools like 13-week rolling cash flow reports, profitability statements and realization and utilization reports (all of which are standard procedure at most mid-sized or larger businesses) are essential for providing visibility into short-term liquidity and anticipating cash needs. Beyond cash flow management, law firms must adopt practices such as budgeting, forecasting and performance benchmarking. Doing so not only allows firms to maintain stability, weather market fluctuations and position themselves for long-term success, but embracing a business-minded approach also simplifies underwriting and is likely to facilitate more flexibility and potentially better terms from any financial partner.