Alternative Legal Services Providers: Changing Buyer Perceptions

A common perception of today's legal services industry is that buyers of legal services have many more choices because legal services are disaggregating and unbundling. No longer are law firms the only option for clients with legal work; they now have a wider menu of providers from which to choose.

But what are the contours of that Alternative Legal Services (ALS) market? How are these new providers being used by corporate clients and law firms? What's driving that usage? And what does it mean for traditional law firms?

To answer those questions, Thomson Reuters Legal Executive Institute partnered with Georgetown Law School's Center for the Study of the Legal Profession and Oxford University's Saïd Business School to research this growing subset of legal services providers. The research was conducted in two phases, an extensive online survey and a set of 38 in-depth interviews. The result was The 2017 Alternative Legal Service Study: Understanding the Growth and Benefits of These New Legal Providers.

What are Alternative Legal Service Providers?

This research casts a wide net. We realized early in the process that there are non-law firm providers involved in many aspects of the delivery of legal services. So our definition was purposefully broad — we considered Alternative Legal Service Providers (ALSPs) to encompass activities performed by non-traditional legal services providers, (including independent affiliates of law firms) that are directly related to the provision of legal services. The definition excludes other non-legal activities that might be outsourced, such as accounting, IT support, HR management, etc. It also excludes companies that provide legal-related software only rather than services.

The list of services provided by these companies is diverse. It includes: electronic discovery services; document review and coding; litigation and investigation support; specialized legal services; intellectual property management; due diligence services; contract management; regulatory risk and compliance services; and legal drafting.

Three Important Findings

The final research report is full of insights on the use of ALSPs, but there are three big findings that we think show that these companies have firmly taken root in the legal ecosystem:

1. The decision to use an ALSP is no longer only about cost, it's about access to specialized expertise. Because a large segment of this market involves the use of offshore labor that has a lower cost, cost savings has always been assumed to be the primary driver for buyers. If that was once the case, it's no longer true. Certainly, in more routine services such as document review, cost is still a big driver — 85% of our respondents cited costs as the main driver when hiring document review firms. But corporate buyers, in particular, are looking for expertise rather than strict cost savings — of the top four services for which corporations engage ALSPs, access to expertise is the primary driver, not cost. And over half of the law firms choosing e-discovery services providers do so because of their access to specialized expertise rather than cost.

2. There is increasing recognition that ALSPs represent opportunity for law firms, not competition. Law firms are under pressure to cut costs, to be sure. To this end, ALSPs give them a path to do just that in many cases — over 55% of our respondents said that ALSPs can help them mitigate price pressure from clients. In addition, however, 41% said that ALSPs can help them scale and expand businesses. For law firms, the ALSP services most often used are e-discovery services (34%) and document review (31%).

I think this is surprisingly low, but may reflect a reluctance to use ALSPs due to poor service from providers in the past. But 31% of firms using external e-discovery services and 39% of those using them for document review indicate that they plan to increase their spending, a sign that more are seizing ALSPs as an opportunity to build out their businesses. In the survey interviews, many firm leaders said that they see partnerships with ALSPs as a way to disaggregate services and build out their own array of services under a “general contractor” model, leveraging ALSPs to help provide various service components.

3. Future growth is likely to come from the application of increasingly sophisticated artificial intelligence technology. Many ALSPs work with large data sets and large-scale, repeatable processes. They are already incorporating technology into those workflows, particularly in e-discovery, but also in growing areas such as contract management and risk and compliance. In the interviews, when asked what the future of ALSPs might entail, many respondents mentioned AI as a likely future direction. They see ALSPs providing the resources, process improvements, and technological muscle that they might not have in their own organizations. Buyers of ALSP services have high expectations for technology here.

Other Key Findings

More than one-half of law firms and corporations are using at least one category of alternative legal service providers. Fifty-one percent of law firms and 60% of legal departments in corporations are currently using an ALSP in at least one service category. A further 21% of law firms and 14% of corporations plan to use an ALSP in the next year. Motivations for use vary by service category, with access to specialized expertise, controlling costs, and meeting peak demand as top reasons.

ALSPs are being used for more than e-discovery. While law firms are more inclined to use litigation support services (e.g., e-discovery, document review, litigation, and investigative support), corporations are more likely to use services in specialized areas (e.g., regulatory risk and compliance services, specialized legal advice, legal research, and IP management). Areas of growth in usage align with services now being used.

Both law firms and corporations are concerned about quality of service. Law firms and corporations both cited concerns about quality of service as a reason for not using an ALSP, and need convincing of the value proposition relative to traditional service models. Law firms are also more concerned about data security and client confidentiality relative to corporations.

Who Are They?

This is still a developing, fragmented market. Thomson Reuters has identified five main types of providers and an estimated market size in the table below. In addition to the legal process outsourcing companies and e-discovery service and document review service providers that form the largest segment of the market, we see in-sourcing and staffing companies and the Big Four accounting and audit firms as large parts of the market. Smaller shares of the total $8.4 billion market are accounted for by law firm-owned affiliates and an emerging set of Managed Legal Services providers.

How Are Buyers Deciding When to Use an ALSP?

The reasons for choosing to engage an ALSP are almost as varied as the services provided and the specific contexts in which they are used. The fact that decision criteria vary in that way is a sign of a maturing market, in which buyers are applying business logic to buying decisions and weighing risks among various alternatives. Here are some of the primary criteria in various contexts:

There is an expectation of lower cost. Although our primary finding is that getting access to specialized expertise is more important than cost, both law firms and corporate legal departments expect that ALSPs will be more cost-effective than using traditional law firm resources. ALSPs are assumed to be higher risk relative to law firms, which requires cost justification. For law firms working under fixed-fee arrangements, there also needs to be demonstrated contribution to profit margins. The one area of exception would be specialized advisers who offer expertise, including combinations of legal and other services, not otherwise available through law firms.

Quality of output is most important for high-volume tasks. For high-volume tasks such as document review and routine contract drafting and management, both law firms and corporate legal departments assess quality based on the accuracy of the output. While the experience of those conducting the work might be considered, the quality and accuracy of the work product are of primary concern. When comparing such services from an ALSP to how a law firm traditionally would complete such tasks, most corporations recognized that firms will utilize paralegals and/or junior associates for these tasks. With this in mind, it is logical that evaluation of such services when provided by an ALSP would place an emphasis on quality of output over the credentials of the people doing the work.

Accuracy and timeliness are important criteria for compliance services. For services linked to compliance, accuracy and timeliness are important criteria in assessing alternative services. These services tend to involve automation of filing or other processes, and decision makers want to ensure that filings are completed on time, in the proper manner.

Reliability is important for critical business processes. For critical business processes (e.g., management of routine supply chain contracts) that could involve both software and service elements, the reliability of the supplier becomes a more important factor in decisions. Corporate legal departments want to ensure that the provider will be available to support the solution and provide service levels to ensure quality and continuity.

Specialized expertise is valued for certain services. In some instances, specialized knowledge offered by the service provider becomes more important as a decision criterion. This includes technical expertise in areas such as e-discovery, as well as process or industry knowledge in areas such as regulatory compliance or M&A consulting.

For specialized legal services, individual credentials and experience are more important. Where legal staffing agencies or other service providers are used for customized legal work or advice, the individual credentials of the person delivering the service becomes more important. In these cases, the expectation is that the resource assigned will be an experienced, qualified lawyer from within the country of service, possibly with training from a large law firm.

Conclusion

We believe that this data shows that ALSP providers have become an integral part of the legal services supply chain. While the market is somewhat fragmented, usage rates have increased and are expected to grow. More important, however, are the signs in this data that show buyers bringing a strategic perspective to ASLPs, seeing them less as competition and more as a complement to their own services and a way to efficiently expand their own service offerings.

*****
David Curle is the director of Market Intelligence at Thomson Reuters Legal, providing research and thought leadership around legal technology developments in the changing legal services industry.

A common perception of today's legal services industry is that buyers of legal services have many more choices because legal services are disaggregating and unbundling. No longer are law firms the only option for clients with legal work; they now have a wider menu of providers from which to choose.

But what are the contours of that Alternative Legal Services (ALS) market? How are these new providers being used by corporate clients and law firms? What's driving that usage? And what does it mean for traditional law firms?

To answer those questions, Thomson Reuters Legal Executive Institute partnered with Georgetown Law School's Center for the Study of the Legal Profession and Oxford University's Saïd Business School to research this growing subset of legal services providers. The research was conducted in two phases, an extensive online survey and a set of 38 in-depth interviews. The result was The 2017 Alternative Legal Service Study: Understanding the Growth and Benefits of These New Legal Providers.

What are Alternative Legal Service Providers?

This research casts a wide net. We realized early in the process that there are non-law firm providers involved in many aspects of the delivery of legal services. So our definition was purposefully broad — we considered Alternative Legal Service Providers (ALSPs) to encompass activities performed by non-traditional legal services providers, (including independent affiliates of law firms) that are directly related to the provision of legal services. The definition excludes other non-legal activities that might be outsourced, such as accounting, IT support, HR management, etc. It also excludes companies that provide legal-related software only rather than services.

The list of services provided by these companies is diverse. It includes: electronic discovery services; document review and coding; litigation and investigation support; specialized legal services; intellectual property management; due diligence services; contract management; regulatory risk and compliance services; and legal drafting.

Three Important Findings

The final research report is full of insights on the use of ALSPs, but there are three big findings that we think show that these companies have firmly taken root in the legal ecosystem:

1. The decision to use an ALSP is no longer only about cost, it's about access to specialized expertise. Because a large segment of this market involves the use of offshore labor that has a lower cost, cost savings has always been assumed to be the primary driver for buyers. If that was once the case, it's no longer true. Certainly, in more routine services such as document review, cost is still a big driver — 85% of our respondents cited costs as the main driver when hiring document review firms. But corporate buyers, in particular, are looking for expertise rather than strict cost savings — of the top four services for which corporations engage ALSPs, access to expertise is the primary driver, not cost. And over half of the law firms choosing e-discovery services providers do so because of their access to specialized expertise rather than cost.

2. There is increasing recognition that ALSPs represent opportunity for law firms, not competition. Law firms are under pressure to cut costs, to be sure. To this end, ALSPs give them a path to do just that in many cases — over 55% of our respondents said that ALSPs can help them mitigate price pressure from clients. In addition, however, 41% said that ALSPs can help them scale and expand businesses. For law firms, the ALSP services most often used are e-discovery services (34%) and document review (31%).

I think this is surprisingly low, but may reflect a reluctance to use ALSPs due to poor service from providers in the past. But 31% of firms using external e-discovery services and 39% of those using them for document review indicate that they plan to increase their spending, a sign that more are seizing ALSPs as an opportunity to build out their businesses. In the survey interviews, many firm leaders said that they see partnerships with ALSPs as a way to disaggregate services and build out their own array of services under a “general contractor” model, leveraging ALSPs to help provide various service components.

3. Future growth is likely to come from the application of increasingly sophisticated artificial intelligence technology. Many ALSPs work with large data sets and large-scale, repeatable processes. They are already incorporating technology into those workflows, particularly in e-discovery, but also in growing areas such as contract management and risk and compliance. In the interviews, when asked what the future of ALSPs might entail, many respondents mentioned AI as a likely future direction. They see ALSPs providing the resources, process improvements, and technological muscle that they might not have in their own organizations. Buyers of ALSP services have high expectations for technology here.

Other Key Findings

More than one-half of law firms and corporations are using at least one category of alternative legal service providers. Fifty-one percent of law firms and 60% of legal departments in corporations are currently using an ALSP in at least one service category. A further 21% of law firms and 14% of corporations plan to use an ALSP in the next year. Motivations for use vary by service category, with access to specialized expertise, controlling costs, and meeting peak demand as top reasons.

ALSPs are being used for more than e-discovery. While law firms are more inclined to use litigation support services (e.g., e-discovery, document review, litigation, and investigative support), corporations are more likely to use services in specialized areas (e.g., regulatory risk and compliance services, specialized legal advice, legal research, and IP management). Areas of growth in usage align with services now being used.

Both law firms and corporations are concerned about quality of service. Law firms and corporations both cited concerns about quality of service as a reason for not using an ALSP, and need convincing of the value proposition relative to traditional service models. Law firms are also more concerned about data security and client confidentiality relative to corporations.

Who Are They?

This is still a developing, fragmented market. Thomson Reuters has identified five main types of providers and an estimated market size in the table below. In addition to the legal process outsourcing companies and e-discovery service and document review service providers that form the largest segment of the market, we see in-sourcing and staffing companies and the Big Four accounting and audit firms as large parts of the market. Smaller shares of the total $8.4 billion market are accounted for by law firm-owned affiliates and an emerging set of Managed Legal Services providers.

How Are Buyers Deciding When to Use an ALSP?

The reasons for choosing to engage an ALSP are almost as varied as the services provided and the specific contexts in which they are used. The fact that decision criteria vary in that way is a sign of a maturing market, in which buyers are applying business logic to buying decisions and weighing risks among various alternatives. Here are some of the primary criteria in various contexts:

There is an expectation of lower cost. Although our primary finding is that getting access to specialized expertise is more important than cost, both law firms and corporate legal departments expect that ALSPs will be more cost-effective than using traditional law firm resources. ALSPs are assumed to be higher risk relative to law firms, which requires cost justification. For law firms working under fixed-fee arrangements, there also needs to be demonstrated contribution to profit margins. The one area of exception would be specialized advisers who offer expertise, including combinations of legal and other services, not otherwise available through law firms.

Quality of output is most important for high-volume tasks. For high-volume tasks such as document review and routine contract drafting and management, both law firms and corporate legal departments assess quality based on the accuracy of the output. While the experience of those conducting the work might be considered, the quality and accuracy of the work product are of primary concern. When comparing such services from an ALSP to how a law firm traditionally would complete such tasks, most corporations recognized that firms will utilize paralegals and/or junior associates for these tasks. With this in mind, it is logical that evaluation of such services when provided by an ALSP would place an emphasis on quality of output over the credentials of the people doing the work.

Accuracy and timeliness are important criteria for compliance services. For services linked to compliance, accuracy and timeliness are important criteria in assessing alternative services. These services tend to involve automation of filing or other processes, and decision makers want to ensure that filings are completed on time, in the proper manner.

Reliability is important for critical business processes. For critical business processes (e.g., management of routine supply chain contracts) that could involve both software and service elements, the reliability of the supplier becomes a more important factor in decisions. Corporate legal departments want to ensure that the provider will be available to support the solution and provide service levels to ensure quality and continuity.

Specialized expertise is valued for certain services. In some instances, specialized knowledge offered by the service provider becomes more important as a decision criterion. This includes technical expertise in areas such as e-discovery, as well as process or industry knowledge in areas such as regulatory compliance or M&A consulting.

For specialized legal services, individual credentials and experience are more important. Where legal staffing agencies or other service providers are used for customized legal work or advice, the individual credentials of the person delivering the service becomes more important. In these cases, the expectation is that the resource assigned will be an experienced, qualified lawyer from within the country of service, possibly with training from a large law firm.

Conclusion

We believe that this data shows that ALSP providers have become an integral part of the legal services supply chain. While the market is somewhat fragmented, usage rates have increased and are expected to grow. More important, however, are the signs in this data that show buyers bringing a strategic perspective to ASLPs, seeing them less as competition and more as a complement to their own services and a way to efficiently expand their own service offerings.

*****
David Curle is the director of Market Intelligence at Thomson Reuters Legal, providing research and thought leadership around legal technology developments in the changing legal services industry.