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The evolution of alternative legal service providers

Sometimes we don't understand the topography of our own backyards. Alternative Legal Service Providers (ALSPs) fit this metaphor. ALSPs, or New Law companies, have been a vital component of the enterprise legal services market for many decades, but as lawyers we still don't fully understand how to use them to our benefit.

Awareness of New Law in the middle market is growing but remains low. The Thomson Reuters  State of the UK Legal Market 2022 report found less than twenty percent of the in-house respondents surveyed were aware that a selection of prominent New Law companies offered legal services. Much of the growth in awareness over the past year is attributable to the Big Four, with an understanding of other purpose-built New Law companies tracking lower than all the Big Four.

Given this, it may surprise you that another recent study from Thomson Reuters found that ALSPs already serve 79 percent of law firms and 71 percent of in-house legal teams. The reason for these apparently contradictory statistics is simple. Until now, New Law companies have been built and marketed almost exclusively to enterprise clients. This is about to change.

Being flexible, cost-effective, and tech-proficient allowed New Law companies to carve out a share in the enterprise legal services market. New Law companies primarily provide legal services that a) can be automated and commoditized and b) have a waxing and waning demand. Think eDiscovery, document review, contract management, litigation support, investigation support, legal research, and IP management. Law firms engage them for short periods to fill a gap in resources - generally high-volume, low-value, project-based work that lawyers want taken off their hands.

A decade ago, being able to staff up quickly and manage a legal team was a critical component of what law firms wanted - legal expertise on demand. The pioneering alternative legal service provider LOD started out by providing better, more creative and flexible ways for legal teams to manage their increasing workloads through secondments. In 2021, LOD saw an opportunity to introduce legal technology consulting company SYKE into the group, bringing together two of the world’s foremost independent alternative legal services providers to offer the world’s biggest legal transformation and support business.

As technology plays an increasing role in the delivery of legal services, this is a move that others in the space will surely seek to replicate. A significant change is occurring to the fabric of New Law companies, and that is their evolution from a people business to a people + tech business.

“Our clients want to see us trying new things and being innovative, enabling us to tailor our service to provide a bespoke solution to fit any team size and budget," says James Kenney, Head of Legal Operations & Tech for APAC at Lawyers on Demand. "

Litigation is a good example. Ten years ago, an eDiscovery project for a large client could have quickly required a team of fifty lawyers to conduct a first-level review of all the in-scope documents within the court’s timeline. Running a project in this way today would be unthinkable as eDiscovery platforms instead use machine learning. This allows a much smaller team to code a sample and then extrapolate their decision-making across the whole set. It’s also much more cost-efficient and, therefore, accessible.

It hasn’t been feasible for mid-market in-house teams to engage a New Law company as they don't have the volume or budget to make it worthwhile. There are fixed costs in designing and implementing a process to commoditize any aspect of a legal task, such as consulting time or software fees. This means that the lower the volume of work, the higher the per-unit cost.

At low volumes, it is typically just as efficient to complete work manually using a traditional law firm as it is to set up a system to commoditize it. Smaller companies usually don’t have the volume of work that would be efficient to send to a New Law company, so they are better off engaging a law firm to complete the work manually.

The principle that cost reduces at a higher volume is called economies of scale, and it holds true across many industries. To understand how this concept applies to the legal industry, it’s helpful to think about it differently. A good analogy is the cost of transport.

If you had fifty people who needed to get to and from the same place, it would make sense to hire a bus. Because the bus would be full, the per-person cost of the trip would be low. If the number of people dropped and you only had five people on board, the cost of hiring the bus would not change, and so the per-person cost of taking the trip would be ten times higher. We can apply the same reasoning to outsourcing legal tasks. For low-volume legal projects, the fixed cost of setting up a system is often prohibitively expensive on a per-unit basis.

However, the software industry is growing, and the cost of building legal technology is dropping every year. As cloud-hosted software as a service has become more prolific, the basic building blocks to create technology are becoming easier to access. As more legal teams use legal technology solutions, the per-unit cost for a vendor providing them will drop. Ultimately, New Law services will become more accessible for smaller teams.

New Law companies have a unique opportunity to proactively expand their client base to include smaller clients. New Law companies don’t need vast armies of junior lawyers on speed dial anymore to compete in this space. They do need a good understanding of the types of technologies available and how to use them effectively to commoditize legal tasks that are common for many of their clients.

If they can achieve this, they can aggregate the purchasing power of many smaller clients to make commoditizing legal tasks feasible for a whole new market.

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