Just two years ago, many in the legal profession could credibly claim that they didn’t quite understand what alternative legal service providers (ALSPs) did, nor why they were important. No more.
A recently released study by Thomson Reuters Legal Executive Institute; the Center on Ethics and the Legal Profession at Georgetown Law; the University of Oxford’s Saïd Business School; and UK legal research firm Acritas found that ALSPs are quickly becoming mainstream, even as established players and new entrants continue to jockey for position. Further, adoption rates of ALSPs are increasing quickly, as are the range of uses for which ALSPs are being leveraged.
Perhaps the most remarkable attribute of ALSPs noted in the report has been their steady and impressive growth. In just two years since the last study, the market has grown to $10.7 billion, up from $8.4 billion, representing a compound annual growth rate of 12.9%. ALSPs expect that growth to accelerate: In interviews with leaders of 35 ALSPs, they forecast median growth rates of 24%.
Growth is being generated on multiple fronts, and new providers see an attractive, fast-growing market. ALSP leaders point to mergers and acquisitions as well as geographic expansion. And there’s organic growth closer to home: Once a law firm or corporation begins using an ALSP, they often look to integrate that provider into additional facets of their organization.
The ALSP market can be divided into five segments. Independent legal process outsourcing (LPO) firms make up the majority of the market, with about $7.4 billion in revenues. The Big Four audit and accounting firms bring in about $1.2 billion, followed by contract and staffing services, managed services and captive LPOs.
As ALSPs, the Big Four audit and accounting firms bring important strengths: strong brands, existing relationships with the C-suite, global footprints and the ability to invest in technology. Half of ALSPs specifically cited the Big Four as key competitors, but the Big Four also compete directly with law firms for client business. Some 23% of large law firms said that in the past year they have lost business to one of the Big Four.
Projections from corporations and law firms support ALSPs’ optimistic growth expectations. This year, in four out of five of the most frequent use cases, actual use on the part of corporations exceeded projections by corporations, sometimes by a wide margin. In 2016, 20% of corporations thought they would be using ALSPs for litigation and investigation support two years later, but in 2018, nearly double that share — 38% — were using ALSPs for this reason.
More recent projections of future use are even higher. This year, 25% of corporations say their ALSP use will increase, compared to just 16% two years ago. Similarly, the number expecting that use will decrease has halved, to 5% from 10%.
Law firms’ projections for ALSP use are more measured, but law firm use of ALSPs is at least partially driven by clients. Those clients are increasingly likely to ask their law firms to work with ALSPs: 23% of corporate legal departments did so this year, compared to 17% two years ago.
Meanwhile, ALSP adoption is becoming more widespread. Each of the top five use cases is cited by at least one-third of corporations; two years ago, for most use cases, that number was less than 20%. There’s a similar dynamic on the law firm side, with more than half of the largest law firms, and more than one-third of midsize ones, citing ALSP use for each of the top five use cases.
Offering Access to Expertise
Multiple forces encourage the use of ALSPs, but this year access to expertise was the single biggest driver. The industry has moved beyond its early perception of ALSPs as a less-expensive way to accomplish low-value work. Instead, 74% of the law firms that use ALSPs for litigation and investigation support say that access to expertise is the most important reason to use them. And half of law firms — of all sizes — say ALSPs can help them scale and expand their business.
Recognizing this potential, many law firms are embarking on formal partnerships and other collaborations between firms, clients and ALSPs. In some practice areas, such as intellectual property management, about half of law firms that use ALSPs do so through a formal partnership. Law firms are increasingly partnering with multiple ALSPs to deliver a combined solution to clients. Large law firms are most likely to embrace this strategy, although more than one-third of midsize law firms also partner with multiple ALSPs.
Corporations, too, are experimenting with different ALSP strategies. In litigation support, where ALSP use is particularly high, corporations are variously using multiple ALSPs, either using one ALSP at a time or divvying up their work between law firms and ALSPs.
This year, 25% of corporations say their ALSP use will increase, compared to just 16% two years ago.
Other law firms are establishing their own ALSPs as affiliates. Among law firms that are using or say they are likely to use ALSPs over the next five years, about one-third expect to pursue this strategy.
Moving Up the Value Chain
Building on their specialized expertise, ALSPs are steadily moving up the legal value chain, and see their ability to leverage technology as key. They’re looking to offer more diverse, up-market services, such as managed legal services, legal operations management and legal advisory work.
ALSPs are also recognizing the importance of legal technology’s impact on workflow and process management. About one-quarter of ALSPs say they are already using artificial intelligence tools, and another one-third are actively evaluating its potential. Indeed, the Big Four are particularly well-positioned to make substantial investments in technology.
Electronic discovery remains the top use case of ALSPs among law firms. Legal research — long considered a quintessential law firm skill — and litigation and investigation support are right behind. The latter are also two of the top use cases among corporations.
Globally, clients are demanding a slightly different set of services than they are in the US. The largest UK law firms are more likely to be using ALSPs for legal drafting services and show more even use of ALSPs across litigation and transactional matters than their US counterparts. If projections are correct, within five years, use of ALSPs will be about equal in the US, the UK and Canada. But it’s helpful to remember that in this market even the most optimistic projections have been easily surpassed.
You can download a copy of the 2019 ALSP industry trends study here