Portfolio Advisory Service
Changing the Paradigm
The “Business” of Litigation
As litigation become an ever-present aspect of corporate life, the number and scale of legal claims has grown to represent an increasing part of overall business activity. Many companies are as much in the “business” of litigation as they are in their native industry sector.
Today, billion dollar corporations often count the number of outstanding legal claims under administration in the multiple hundreds. And the aggregate value of those claims would be a surprising portion of overall enterprise value if they were all brought on balance sheet. It would not be an exaggeration to describe legal liability as “the off balance sheet elephant in the enterprise value room” for many companies.
Portfolio Management Possibility
But while lawsuits are increasingly managed as a portfolio from a legal perspective, it is less well appreciated that these claims provide opportunity for asset and liability portfolio management from a financial economic and even an investment management perspective. And while for most companies this would fall mainly onto the liability side of the balance sheet, the increasing prevalence of company-as-claimant, patent litigation and plaintiff recovery programs brings the portfolio problem squarely into the realm of asset and liability management.
However, litigation portfolios have resisted more conventional business management practices and the risk-return scrutiny to which all other branches of corporate endeavor are invariably subject. We may speculate as to why this is the case, but several reasons suggest themselves:
- The intangible nature of contingent legal claims
- The imperative of legal prudence in claim decision-making, and
- Perhaps the still old fashioned notion of a judicial objective trumping a financial objective
The Limits of Old Technology
But the bigger reason has been the limits of financial technology. When claims can only be measured in terms of their trial adjudicated outcome, there is not really very much that litigants on either side of a dispute can do from a financial management point of view.
SettlementAnalytics™ has changed all that. Using advanced quantitative models of litigation and claim settlement, litigants can now examine, measure and manage legal portfolios from a financial economic and even an investment management perspective. Real portfolio management becomes possible.
Financial and Investment Metrics
Once legal disputes are examined from a more complete asset-liability and risk-adjusted return perspective, important portfolio metrics can be assembled that permit claim and portfolio management decisions from a financial and investment management point of view. The following quantitative analyses become possible across the entire litigation portfolio:
- Quantify aggregate claim portfolio asset/liability value (as distinct from aggregate trial value)
- Compute and graphically visualize total portfolio variance using Monte Carlo simulation
- Measure aggregate portfolio legal “cost capital” at risk
- Evaluate the return on legal “cost capital” at risk
- Examine the evolution of portfolio variance over time
- Consider the add/drop effects of individual dispute settlement on the entire claim portfolio risk and return characteristics
- Quantify portfolio informational return on investment (“IROI”)
Legal Investment Management
Armed with better contingent liability metrics and a financial and investment management picture of the litigation portfolio as a whole, better management decisions can be made with respect to:
- Resource allocation – where to best “invest” the legal budget?
- Claim settlement – portfolio considerations in individual claim settlement
- Managing towards a quantitative legal-economic portfolio risk target
- Optimising portfolio return on the legal budget employed
The Bigger Picture
By injecting these ideas into the management of litigation portfolios, companies can make a better tradeoff between the old world imperatives of legal prudence / trial maximisation and the new world considerations of return on investment / claim value maximisation.
Moreover, these technologies and this more rounded managerial paradigm, when applied, can promote a better dialogue and consensus between senior management, internal and external counsel. Carefully considered, better objectives can be established for both individual claims and claim portfolios.