Today’s market for alternative legal service providers (ALSPs) has become larger, quickly growing and more broadly adopted by clients looking for more nimble or lower cost options to law firms alone.
In response to clients’ needs, ALSPs are leveraging different business models, emerging in all shapes and sizes from the Big Four accounting firms to small, tech-savvy disruptors, according to a new report on the sector from Thomson Reuters Legal Executive Institute, in partnership with Georgetown University Law School’s Center on Ethics and the Legal Profession, the University of Oxford Saïd Business School, and legal research firm Acritas.
One of these new formations — captive ALSPs — has seen law firms seek to regain their competitive edge in the market by essentially creating in-house ALSPs that can allow the firm to pitch a wider range of services to clients and offer oversight of the work while keeping costs low. Indeed, this was the first year the report measured the impact of captive ALSPs, and it found that the new model was making “headway among law firms of all sizes in both the US and the UK.” Further, when captives are included in ALSP market totals, “the scope of the alternative legal services model and market expands significantly,” the report notes.
Lisa Hart Shepherd, CEO of Acritas, said captive ALSPs were included in the report totals this year because they’ve grown very quickly and are becoming quite commonplace within the market. “Among the large law firms, if they don’t already have an in-house ALSP, then they are looking at having one,” Hart Shepherd says. As part of the report, Acritas conducted telephone interviews with representatives of 35 ALSPs located in the US, UK, and other countries. While law firms were not willing to release the revenue or growth figures for their captive units, some noted that the units had staff that numbered in the hundreds of employees.
Creating a Captive ALSP
During the interviews, Hart Shepherd says she discovered many law firms realized that by creating their own in-house captive ALSPs, they were able to bring in new processes, new technology and new talent without disrupting the traditional practice-centric model of the firm. “I think that many law firms find it quite challenging to radically change the way established practice areas work,” she says. “By creating a new separate division that was free from the constraints of ‘how things have always been done,’ it meant that they could press ahead and try new things.” This often allowed the law firm to secure new types of resources, collaborate more openly, and, importantly, start to invest in new technology. “It was kind of like establishing a safe place where firms could use its resources to invest and pilot something new.”
Of course, securing that kind of “safe space” within a law firm — especially if that space is going to need resource dollars and additional personnel — is not an easy sell at many law firms. Lawyers by nature are quite risk-averse, and this attitude presents a significant roadblock to the creation of a captive ALSP and a significant challenge to this new business model. Still, there is a strong case to be made for pursuing an ALSP initiative because of the technological benefits and potential for new business that a captive ALSP could bring.
Part of making that case, Hart Shepherd says, is finding a way to incentivize the partners around the creation of a captive ALSP. “Partners are rewarded for their billable hours,” she says. “Why would they then give a chunk of their hours to a lower cost center?”
However, proponents could point out, for example, that the captive ALSP could become a testing ground for the firm’s legal tech adoption and workflow management processes, as well as a way for the firm to address change management issues within a smaller, confined space. Many law firm partners recognize the significant value of these concepts, but too often do not have the time themselves to devote to their execution. A captive ALSP could offer a viable path to implementing certain initiatives that could pay dividends for the entire firm.
“Building support for a captive ALSP is quite a big challenge for firms, and it could really constrain them,” she adds. “Whereas outside ALSPs don’t have that kind of constraint.”
Interestingly, Hart Shepherd says that in many cases, the creation of a captive ALSP originates with the idea of having the captive do one or two specific legal tasks. Often, she explains, these captive ALSPs come out of one of two different work trajectories: i) a set of back-office functions that evolve into doing legal work; or ii) a new operation set up only to do legal work in a specific area such as contract review, due diligence, etc. “These captive ALSPs tend to start in one area and because they are having success, they then start to migrate into other areas.”
Overall, UK law firms are more likely to implement the captive model than US law firms, the report found, with one-third of large UK law firms using captives to offer project management services, and almost one-fourth using captives for intellectual property management and for document review or coding services. In the US, 15% of large law firms use captives for project management services, 12% for intellectual property management and 17% for document review or coding services.
Giving the Clients What They Want
Much as the bigger market for ALSPs is driven in large part by clients’ desire for better, quicker and cheaper legal service delivery, so too is the market for captive ALSPs. The twist is, however, that now it’s the law firms that can offer clients the same speed and efficiency at a lower cost by harnessing the power of their own in-house ALSP. This is an important development, and it allows law firms a way to hang onto the business and the clients it might otherwise lose to ALSPs.
In response to clients’ needs, ALSPs are leveraging different business models, emerging in all shapes and sizes from the Big Four accounting firms to small, tech-savvy disruptors.
“Having a captive ALSP means that a firm can compete against some of these other ALSPs coming into the market if the law firm can now offer that same service,” Hart Shepherd says, adding that demonstrating to clients the firm’s own embedded technology and data savvy can be a strong differentiator. “Clients care a lot about what technology can bring to the legal service delivery equation,” she explains. “Not just in terms of cost saving, but also in terms of digitizing some of the legal work, giving management new information and creating a digital baseline from which the firm can work smarter in the future.”
Utilizing a captive ALSP in this way can greatly enhance a law firm’s standing in regard to new business or continuing client relationships, Hart Shepherd notes, and that could be a boon to an industry that has seen its margins eaten away by smaller competitors and more stringent client demands.
“I think this puts law firms back in the game in terms of getting back into some high-growth parts of their business again,” she says, adding that law firms have a built-in advantage in the eyes of clients because of their ongoing trusted relationships. “If law firms can develop the same strong, tech-enabled, low-cost, and resource-enabled offerings as existing ALSPs, they will have a strong competitive advantage because of the relationships that already exist with clients.”