May 4, 2023

Are Alternative Legal Service Providers an Ally or a Threat to Law Firms?

I.            Introduction

This article challenges the belief that only traditional law firms can provide legal services and legal advice. Those who think that “traditional” means the impossibility to change should ask themselves how and when the law firm emerged in the first place. Hence, it’s time to accept that a new era in the provision of legal services has occurred, but the question here is whether the new business models in the sector represent a threat or a possibility for law firms. This article will discuss the new players, in particular Alternative Legal Service Providers (ALSP) and how they are changing clients’ expectations regarding costs, time, and the processes and technology used to provide services that satisfy legal needs.

II.            Evolution of the Provision of Legal Services

People who think that law firms are the most natural form of the provision of legal services usually forget that a law firm is a relatively new model, if we compare it with the history of the legal profession. 

Pinansky mentioned in his 1986 article “The Emergence of Law Firms in the American Legal Profession” that it was until the nineteenth century that these law firms emerged. They differed from the traditional “two-man office” that rarely had formal partnership agreements, not only in this aspect but also in the number of lawyers working together under the same structure and the profit percentages that were set. 

According to Pinansky, the first law firms to appear in the early nineteenth century were considered vanguardists because they transformed how legal work was organized. By 1872 just four big cities already had large law firms with at least four members: New York, Chicago, Milwaukee, and Cincinnati.

As we can observe, the story of Law Firms has less than 200 years, so if the legal service provision has evolved with time (slowly but constantly), how can we be so sure that Law Firms as we know them will still exist the next 100 years?

III.            The Emergence of New Business Models in the Legal Sector

With all the online information, lawyers can no longer monopolize their legal knowledge. The clients have become more sophisticated, pushing law firms to reduce costs and respond quickly. In addition, there are two main pain points in the lawyer-client relationship: the uncertainty in the final price of their services and the complexity in their processes and vocabulary, which creates a distance between lawyer and client. However, in the era of “customer-centric models,” the companies can be served by other organizations, such as “a New Law” or an ALSP, reducing the amount of work sent to traditional law firms.

“New Law” is a broad term but, in general, it represent a law firm with new forms to work internally and to collaborate with clients, with a “customer-centric” approach and a different mindset that allows them to embrace the change. Alternative Legal Service Providers (ALSPs) are companies that satisfy their client’s legal needs but differ from Law firms in their business model, structure, staff, and even in their mindset and culture. Usually, ALSPs, are focused on solving just one type of legal challenge, like “document review,” e-discovery,” “litigation support,” or “legal research,” and many many others. This specialization allows them to develop specific methodologies for the problem and to hire multi-disciplinary staff (i.e., data scientists, anthropologists, engineers, etc.), not only lawyers, who can perform these activities well with cost-efficiency supported by the use of technologies. 

Some technologies like data analysis, automation and machine learning have been used to increase capabilities of the ALSP. In the era of the data-driven decisions and User Experience, the use of new technologies and methodologies can help ALSPs and visionaries law firms to take the advantage, since many law firms are not doing the same. According to a Intapp research most law firms around the world recognize the importance of using technology but just a few of them are actually investing on it.

Without the “Law Firm tag,” ALSPs feel free to innovate and even take risks using disruptive technologies to provide their services. They are profitable despite having fixed prices, usually below the law firm’s rate. They don’t make the clients pay for low-value activities because they recognize that not all legal work should be tailor-made using the advantages of standardizing or simplifying processes.

Diversity is important for innovation, not only in professions but also in gender, so ALSPs have offered a door to equality. In a traditional law firm, sometimes, maternity leave is a penalty for women in the partner’s track since, in these structures, lawyers compete about billable hours. In contrast, the ALSPs are more focused on collaboration. An example is Spain, where the ALSPs market is dominated by female-founded startups such as Lawyers for projects, Afiens, and Legal Army.

IV.            Value of the ALSP Market

According to a Thomson Reuters Institute report, the ALSPs market has reached a size of approximately $20.6 billion US dollars. Since the first report in 2015, their market value has increased by 145%, reflecting an acceleration in use since 2020 due to the pandemic. The market value by 2023 is divided as follows:

  1. Independent ALSPs account for 87% of the market size, representing 18 billion USD in revenue;
  2. The ALSPs owned by a Law Firm (the fastest-growing of the groups) represent 1 billion USD in revenue;
  3. The Big Four ALSP strategy has reached 1.5 billion USD in revenue.

The same report highlights that Law Firms in the USA harness the ALSP’s capabilities in four areas: e-discovery, legal research, litigation & investigation, and document review & coding. The trend is here to stay since 26% of respondents from Law Firms plan to increase their spending on ALSPs. According to the aforementioned survey, the ALSP service that is more used by clients are “Regulatory risk and compliance services” along with “Legal research services in the USA, while in Europe the most widely used services are “Electronic discovery services.”

Besides, the regulation adapts to the new era, allowing non-lawyers to enter the scene. For example, in the UK, since 2007, the Legal Services Act has allowed non-lawyers to hold ownership and management positions in law firms.

V.            Reactions of Law Firms

Law firms across the USA, UK, Canada, Europe, and Australia are taking different approaches regarding these new players, for example:

  1. Ignoring the ALSPs. Hence, they are still focusing on the needs where they have advantages, like solving complex and highly specialized matters.
  2. Collaborate with ALSPs in some tasks or subcontract them for simple law value activities which are time-consuming.
  3. Acquire or invest in an ALSP.
  4. Create an ALSP through incubators inside the Law Firm or generate a spin-off of the Law Firm that can work as an ALSP so they can harness another market niche (like startups) that otherwise, they couldn’t attend. 
  5. Transforming the entire Law Firm into a New Law or an ALSP or just creating a new business line that mimics an ALSP.

VI.            Conclusion

The division between a Law Firm, a New law, a LegalTech company, or an ALSP is now blurred. Hence, most important than using the right name for the type of legal provider is to understand that the legal market has changed. Now the clients are more sophisticated and more demanding. Still, the good news is that the ways to address the client’s legal needs have increased due to innovation in processes, business models, technology, and forms of work. 

The emergence of ALSPs provides new opportunities to Law Firms, from collaborating with them, mimicking their practices, or even transforming themselves into ALSPs. Law Firms can learn from ALSPs how to be more data-driven and when to implement automation of processes and templates. Despite the fierce competition among law firms to get clients, they now have many other possibilities to offer their legal knowledge to existing or new clients who otherwise couldn’t afford the service.

For the folks in Law Firms, remember that not making a choice is already a choice, so if you ignore the emergence of ALSPs, you can miss some opportunities outside. So even if you prefer doing anything so far, I recommend you keep a close eye on them. That way, you can see when the wave is so close to you so you can react on time instead of just being swallowed by the tide.

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About Rosa Rascon
Rosa Rascon is a lawyer focused on technology law with a Master's Degree in Innovation and Entrepreneurship. She is a European Legal Technology Association (ELTA) member and works for a multinational LegalTech company. She helps in-house teams, and Law Firms in Latin America adopt the technology they need to adapt to the new era.

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