Litigation has historically been a dirty word within corporate legal departments: It connotes added risk, distraction and expense, conjuring fears of budget-busting costs and broken bottom lines. But affirmative litigation—when it is meritorious and successful—can return significant value (and cash!) to businesses. Starting well over a decade ago, forward-looking legal departments at some of the world's largest companies began to institute affirmative recovery programs, leading to impressive value generation.

New research from Burford Capital suggests, however, that many companies still fail to pursue meritorious claims because of their fear of adding risk and expense to the bottom line. Moreover, many companies don't even recover or enforce judgments they've spent good money to win, with a majority of companies reporting that they leave over $10 million of judgment awards unrecovered every year (more on that below).

But tools like legal finance solve for those challenges—because outside financiers assume the entirety of the upfront cost and the downside risk of litigation. And a new generation of value-driven GCs are using legal finance to pursue meritorious matters that generate cash without adding risk.

Increased use of legal finance comes at a time when returning value without adding risk has new urgency and relevance for at least two reasons. First, an increasing number of GCs are working with affirmative recovery targets. Second, the lurking possibility of an economic downturn means that more and more GCs are already operating under increased pressure to contain costs and manage risk—or soon will be. According to recent research conducted by Duke's Fuqua School of Business, nearly 50 percent of CFOs anticipate a recession by the end of 2019. It's no real surprise, then, that savvy GCs and legal teams are leveraging the right finance tools to fund this affirmative litigation without adding risk or expense.

The in-house evolution. In the almost 25 years that I have been a lawyer—first in practice at an AmLaw 100 firm and then in-house at Monster.com before transitioning to legal services innovation—I have witnessed the slow but steady evolution of the legal department. Once siloed from core business functions, GCs have increasingly become regular and expected contributors to corporate strategy, pulled into the C-Suite and given an increasingly large role in making business decisions.

Corporate legal departments have undergone a marked evolution in recent years. Historically, in-house legal teams were seen as risk managers, cost cutters and compliance centers. But it's hard to quantify a negative or to measure the value of averting a crisis, and in the last decade the legal department's ideal role has shifted increasingly to proactive value generation. As a 2017 Deloitte report on in-house legal departments asserts, “The notion that an in-house legal team should function like an internal law firm is giving way to a vision of the legal department that's a commercial function—a function that drives economic value for the business.” Similarly, a 2017 KPMG report on the evolving role of the GC points out that “the GC's job description has been shifting from purely legal work to more business-focused responsibilities”. Central to both reports is the notion that the legal department, like any other department, must add tangible value to the business.

In the last two decades, a handful of prominent companies have taken the value-centric role of their legal departments one step further: They have instituted affirmative recovery programs. Companies including DuPont, The Home Depot, Tyco and Ford, among others, have generated headlines for such programs, which have in some cases led to eye-popping returns. According to a 2016 presentation to the ACC, Dupont's legal team generated cumulative recoveries of about $2.7 billion between 2004 and 2013. Ford generated enough recoveries in one quarter to offset all of its legal costs for the entire period. Obviously, these examples aren't representative of in-house legal teams generally. But they hint at the corporate assets that legal departments can unlock—with the right tools.

Pursuing affirmative recoveries without adding cost or risk to balance sheets. Despite the evolving role of in-house legal departments and success stories connected to affirmative recovery programs, litigation remains a pursuit of last resort for most companies. This is unsurprising: Litigation is remarkably expensive and uncertain. Worse, when companies litigate, they often do so as defendants, further cementing the notion that litigation is something to be avoided.

At first blush, these views are easy to understand—but they belie two important facts. First, most companies have significant value locked in untapped legal assets. Second, legal finance arose more than a decade ago specifically to enable companies to offload the burden of their litigation expense and risk.

The extent of the value that companies are losing to unpursued litigation and uncollected recoveries is nothing short of staggering. According to Burford Capital's 2018 Litigation Finance Survey, which received responses from 495 in-house and law firm lawyers from the US, UK and Australia, 68 percent of in-house respondents have forgone a meritorious legal claim due to its perceived impact on the bottom line. Further still: 59 percent of respondents report having an uncollected recovery or unenforced judgment valued at $10 million or more. Worst of all: Companies have virtually no need to give up these claims and recoveries—in many cases, legal finance would enable their pursuit.

Companies fail to pursue litigation for a variety of reasons. They may fear that doing so will prove a distraction to their legal team. More immediately, they likely fear the costs of the litigation, its inherent risk of loss and the effects that both the expense and potential loss would have on their income statement and balance sheet. These are perfect examples of the types of problems that legal finance was designed to solve.

When a company works with a legal finance provider, the upfront legal fees and expenses are paid for by the funder and need only be repaid in the case of a successful outcome. So not only can the legal department offload all of the upfront cost to the funder, the non-recourse nature of the capital means that the company owes nothing unless and until the litigation is successful, thereby eliminating all downside risk of loss. Legal finance thus enables GCs and heads of litigation to pursue affirmative recovery programs without adding cost or risk—and it means that companies have the tools to earn risk-free returns on multi-million-dollar assets.

While there's no question that pursuing litigation will demand time and attention from GCs and their teams, working with a legal finance provider can ameliorate even this challenge. First, having more capital available to the legal department can mean more flexibility to add to legal teams. Second, the most sophisticated legal finance partners—much like investment banks—can provide legal and financial risk analysis that help legal departments set priorities and use all of their resources as efficiently as possible. And since litigation finance companies are involved in hundreds of lawsuits at a time, they have invaluable experience in how to best approach a case and maximize a recovery. While outside financiers are passive investors who do not control litigation or impact existing attorney-client relationships, their expertise can put an extra set of (very experienced) eyes on the matter.

It's also worth noting that GCs can finance not only their affirmative recoveries but also their defense matters. Working with a legal finance provider to offload the litigation costs associated with both solves some of the most intractable problems faced by GCs.

The next trend for GCs: Financed affirmative recovery programs. Although it is impossible to say when the tide will change for in-house legal teams to begin pursuing affirmative, meritorious litigation en masse, it's already clear that the legal industry is moving closer and closer to that point. The 2018 Litigation Finance Survey revealed that 70 percent of law firm lawyers who have yet to use legal finance expect to do so within two years. Given that the use of legal finance is most often a collaborative decision between law firms and their clients, this increased use amongst law firms will necessary mean that their clients will also be increasing their use of legal finance. This taken with the sheer volume of meritorious litigation that most companies are not pursuing—and the value contained therein—use of legal finance to realize legal assets will become, in time, a competitive differentiator for the world's savviest companies.

Legal departments have already undergone a remarkable evolution. They've been pulled into business strategy and asked to deliver tangible value. And with millions of dollars locked in litigation that companies now have the financial tools to pursue, it's only a matter of time until legal departments begin to capitalize on it, especially as global competition continues to intensify. Arguably, the next trend for GCs is not merely that more of them will develop affirmative recovery programs—but that more of them will embrace legal finance as a risk-free way to pursue those affirmative recovery programs.

David Perla is a managing director at Burford Capital, a global finance firm focused on law, and is based in New York.