Big Law's Business Model: Balancing Billable Hours and Contingency Fees
Big Law firms have long thrived on a lucrative business model: billing clients by the hour, regardless of case outcomes. This structure guarantees steady revenue streams for law firms, whether their clients win or lose. However, one inherent limitation is that profits are tied to the number of hours lawyers can work.
Expanding Into Contingency Fee Cases
To enhance profitability and keep pace with the booming corporate legal market, some prominent Big Law firms have ventured into contingency fee cases. Kirkland & Ellis, for example, has increased its plaintiff-side work over the past five years. By taking on such cases, firms have the potential to significantly boost their earnings when they secure favorable outcomes for their clients. However, risk-taking is not a core strength of Big Law.
Learning From Smaller Trial Firms
This collaborative, high-stakes vetting process is a luxury that large law firms, with thousands of lawyers and high hourly billing rates, simply cannot afford. For Big Law firms, gathering hundreds of lawyers in a room for just one hour could result in a significant opportunity cost—potentially millions in lost billable time.
The High Stakes of Contingency Work
Kalpana Srinivasan, managing partner at Susman Godfrey, notes that her firm approaches risk differently. "For us, it's more about the other opportunities we could have pursued. We're not focused on hourly time as the baseline."
The Role of Litigation Funders
To mitigate risk, many large firms have turned to litigation funders. These third-party entities can cover some of the law firm's upfront costs, allowing firms to pursue contingency cases without bearing the full financial burden. However, working with litigation funders can come at a cost, as funders take a portion of the final award.
William Farrell, cofounder of litigation funder Longford Capital, notes that larger firms are increasingly considering contingency fees but are still hesitant to fully embrace the risks. "Many firms are only dedicating about 5% of their work to contingency fee cases, and some try to reduce that risk even further by relying on funders," he said.
Challenges With Partner Compensation
One of the biggest challenges facing Big Law firms, as they integrate contingency fee cases into their practices, is partner compensation. Most Big Law partners expect consistent, stable income based on hourly billing. However, contingency cases produce revenue sporadically, meaning partners must be comfortable with fluctuating earnings. This can create tension within firms, where partnership dynamics may resist the unpredictability of contingency work.
Charles Agee, CEO of Westfleet Advisors, highlights this difficulty. "In many cases, the internal politics or partnership structures of Big Law firms make it hard to integrate risk-based practices."
Developing the Skill to Pick Winning Cases
Ultimately, firms must be confident in their ability to choose winning cases if they are to succeed in contingency fee work. Firms like Susman Godfrey have honed this skill through years of risk-taking, while many larger firms lack the same track record. Agee believes firms like Susman have a sharper ability to select winning cases than even some litigation funders.
"I would bet that Susman has a better track record at picking successful cases than any litigation funder," Agee said.
The Future of Contingency Work in Big Law
As the legal landscape evolves, more Big Law firms may explore contingency fee work, but significant hurdles remain. For now, only a small fraction of their work involves taking on such risk, and the role of litigation funders will likely continue to grow as firms seek to balance opportunity and risk in the pursuit of higher profits.
