The ALSP Marketplace

Remember the days of inserting a CD into a drive on your computer in order to install software? It wasn’t long ago, within the last ten years, when that was commonplace. Today, CDs are considered a quaint antiquity. Almost universally, we now utilize software hosted on a remote server accessed through the “cloud.”

As the rapid shift to cloud computing occurred, the industry that engineered the transformation in software delivery, led by modern-day tech titans such as Salesforce, became widely known as “software as a service” or “SaaS.”

The evolution of SaaS from upstart to mainstream is reminiscent of the pattern of disruption that occurs in almost every industry. Change—the relentless pursuit of more efficiency, effectiveness and value—is constant. The legal industry is going through a similar transformation.

As buyers of legal services have demanded more value from legal services providers over the last 25 years, the market has shifted. No longer is there one mode of delivery (traditional law firms) in the legal industry. Now, there are many alternatives to law firms, known as alternative legal service providers (“ALSP”), who provide solutions up and down the legal services supply chain. And, of course, as in any industry undergoing transformation, there is considerable discussion as to what comes next.

Legal industry media stalwart Law.com is attempting to dissect that question in a fascinating new series called “Breaking Tradition: How New Law is Challenging Big Law.” Here is a description of the ground Breaking Tradition intends to cover:

“As clients adapt the way they source and purchase legal services, competition and collaboration among new and traditional providers is increasing. In the decade since the Great Recession, when alternative options really came onto the scene with the promise of offering a better way, the numbers and types of providers have exploded. Over the next year, we aim to bring clarity around who those alternative providers are, what they are offering, who they are representing, where they get their talent and what piece of the market they have and could attain.”

As Law.com rightly points out, the Great Recession was a significant catalyst of growth for ALSPs. As the economy contracted, corporate legal departments, in particular, sought alternative solutions that offered greater value for their legal spend. A decade later, COVID-19 is serving as a similar accelerator of change. As Law.com observes, in light of rapid developments in the legal industry, “there are many questions left unanswered about where New Law entrants fit into the preexisting legal space.”

In this article, we highlight a few of those questions and share a bit of perspective about what we’re seeing and experiencing in the legal marketplace.

What is the Next Phase?

Decades ago, the service offerings that most corporate legal departments first sampled from companies that came to be known as ALSPs, were forms of e-discovery and document review services and/or technology offerings.

The increased utilization of ALSPs for such services—which were traditionally performed by law firms—resulted from corporate buyers looking to create more value and efficiency from their procurement of legal services. They shifted from a “one-stop shopping” approach to one in which they viewed the delivery of legal services as part of a supply chain.

Today, corporate legal departments continue to look for ways to unbundle legal services and direct legal work to the provider best suited for the task. Legal matters, even highly complex ones, are increasingly seen as projects that consist of discrete tasks, and more value can be derived by allocating those tasks across a spectrum of legal services providers with unique skill sets.

In “Why ALSPs Are In a ‘Unique Position’ to Aid Today’s Legal Departments,” Law.com posed several “what’s next for the ALSP market?” questions to Connie Brenton, Director of Legal Operations at NetApp Inc. Commenting on where she sees ALSPs falling on the value chain of legal services provider in the next 5-10 years, Brenton said: “ALSPs are in a unique position to develop staffing models, hire broad sets of talent, build and acquire diverse talent and combine people, process and technology solutions to organize their delivery models and offerings to meet client needs.”

Just as the Great Recession ushered ALSPs into the mainstream of legal services, the COVID-19 crisis has affirmed their standing and reinforced their value. In fact, Brenton speculates that the “A” (for “Alternative”) will eventually be dropped from “ALSP” as ALSPs become fully immersed in the industry. “In the long run, many of the bigger players in the legal services industry will all be ALSPs—or just LSPs,” Brenton said. “Over time, the term ‘alternative’ will fall away and you will just have a diverse set of providers with various strengths and weaknesses in terms of talent, capabilities, technology offerings and sophistication, staffing options, etc.”

Clients Desire Global Solutions

Another theme that runs through Law.com’s reporting is the continued expansion of service offerings by ALSPs. The driving force behind this expansion is a desire by clients for global (alternative) solutions to the legal challenges they face—across an enterprise and around the world. While the Great Recession may have led more businesses and law firms to sample ALSP offerings, the urgency and impact of the COVID-19 crisis is driving the desire for (among clients) and delivery of (by ALSPs) more comprehensive solutions.

Our experience at Lexitas is consistent with these broader trends. Client demand has driven the expansion of our service lines and our capabilities with various technologies. We also commonly begin a relationship with a client with a discrete matter, such as document review, for a specific business unit. The relationship then expands into new service areas, such as commercial contract outsourcing or staffing, across the organization. Today, what has changed is the fervent speed at which client relationships branch into new areas.

One of the interesting questions explored in the Breaking Tradition series is: “[Whether,] as Alternative Legal Service Providers begin to embrace more complex legal work and expand their ranks to include the types of experienced attorneys who were once the exclusive domain of firms, can they continue to maintain the same cost advantages?”

Our take: As long as ALSPs maintain laser focus on refining and optimizing their people, processes, and technologies, they should be able to create tremendous value no matter the complexity of work and maintain their cost advantage.

Continued Investment in New and Existing Providers in the ALSP Space

According to projections from market research firm Arizton, the ALSP industry is anticipated to reach annual revenues of $19 billion by 2025. It’s no surprise, therefore, that ALSPs—both existing companies and new market entrants—are receiving substantial interest from investors. Law firms, themselves, are building out ALSP solutions in an effort to compete for market share.

As in all emerging markets, winners and losers will become clear as the market matures. Many ALSPs must go through a process of identifying and refining the right business model and market niche. It’s an industry in its relative infancy with massive room for growth—hence the investment and acquisition opportunities. As Connie Brenton observed, ALSPs are “in a position to leverage VC funding as needed to make some big bets.”

Observing how those bets pay off over time will be fascinating as ALSPs continue “breaking tradition” in the legal industry.