As the ALSP market continues to grow, it's already showing signs of a maturing market, including a lean towards consolidation
The market for alternative legal services providers (ALSPs) has been growing strongly, as documented by the Alternative Legal Services Providers 2023 Report, produced jointly by the 成人VR视频 Institute, the Center on Ethics and the Legal Profession at Georgetown Law, and the Sa茂d Business School at the University of Oxford.
Yet the growth rate shown in the most recent report still came as a bit of a surprise: a 20% compounded annual growth rate (CAGR) for the past two years, resulting in a current market size of $20.6 billion. In interviews with leaders from more than a dozen ALSPs, respondents said they expected standout growth in the sector to continue, and survey data from the client side supports these expectations. Among respondents from the largest law firms, 26% said they plan to increase spending on ALSPs, while only 3% said they expect their spending to fall. Within corporate law departments, 21% expect to be spending more on ALSPs in the future, with just 8% expecting spending to drop.
Interview respondents consistently referred to the ALSP market as 鈥渙pening up鈥� over the past two years, citing a variety of catalysts: changes wrought by the global pandemic, the impact of the Big Four auditing and accounting firms, and the shrinking size of many corporate legal departments, among others. ALSPs are taking advantage of those changes to greatly expand their service offerings; and while the industry is young, a number of ALSP leaders said they鈥檙e beginning to see a trend more commonly associated with mature industries: consolidation.
More growth ahead?
A sales director at a U.S.-based ALSP says that ALSPs have moved through the very early stages of the growth curve associated with any new innovation and are now poised for accelerated take-up. Among customers, the innovator and early adopter segments of that base have been using ALSPs for years, and their positive experiences are clearing the way for a wider mass market. 鈥淎ll of a sudden, people will say, 鈥極kay, it鈥檚 safe now,鈥欌�� the sales director says, 鈥渨hich will lead to even more expansion.鈥�
He also pointed out that the traditional legal market leaves behind a lot of unmet demand. 鈥淐lients simply cannot afford all of the legal and regulatory advice they need to buy,鈥� he says, especially if law firms remain wedded to the billable hour. 鈥淭here鈥檚 this latent demand out there, and if you change your model, you can grab more market share, because [clients] just cannot afford to buy answers by the hour.鈥�
The Big Four have also had a positive effect, says the founder and CEO of a U.S.-based ALSP, admitting that 鈥渢his is going to sound strange.鈥� The Big Four have convinced many general counsel, CFOs, and CEOs that business and law shouldn鈥檛 be so separate, the founder explains. 鈥淲e found that the Big Four moving into the space has actually just opened up the top of the funnel 鈥� it鈥檚 so much larger now.鈥�
ALSPs also get a boost from the fact that corporate law departments are shrinking 鈥� even though their workloads are not. A founder of an independent U.K.-based ALSP echoes that sentiment. 鈥淥ne of the things we see is that a bigger client doesn鈥檛 mean a bigger law department,鈥� the founder says. 鈥淚nside legal counsel and inside legal operations are shrinking.鈥� Meanwhile, he adds, inside teams have too much work, or work that isn鈥檛 a good fit for their capabilities. Legal departments are even bringing in procurement professionals 鈥� a relatively new part of the legal landscape 鈥� to try to close that gap in a cost-effective way.
Not surprisingly, the pandemic had an impact as well. 鈥淭he stigma of offshore support has worn off,鈥� says the vice-president of a U.S.-based ALSP. 鈥淲e all ended up working from home, and we learned it doesn鈥檛 matter where the person is that you鈥檙e talking with.鈥�
New opportunities
Together, these trends mean opportunities for ALSPs. The largest seems to be in regulatory & compliance work and advisory work, as well as in technology consulting. ALSPs are also looking to expand into specific service areas, such as labor & employment law, and into new geographies.
The impact of regulations such as the General Data Protection Regulation (GDPR) in the European Union and the California Consumer Privacy Act (CCPA) have produced 鈥渁 huge focus鈥� on privacy, says a U.S.-based ALSP leader. His firm is partnering with a technology company to provide faster and more focused data breach review. They鈥檙e also spending 鈥渁 significant amount of time鈥� helping clients update their contracts to reflect the new laws.
The new regulations are especially hard to navigate for those organizations that do business across countries and regions. 鈥淚t鈥檚 increasingly complex to operate businesses in multiple jurisdictions and try to manage all of them,鈥� explains the CEO of a law firm captive ALSP in the U.S. 鈥淔or a lot of our clients, some of their biggest needs are just better use of some of the tools that exist that make it easier to have a good lens on the range of matters our clients have in different jurisdictions.鈥�
Technology consulting, as mentioned in the ALSP 2023 Report, is also a growth area 鈥� one that overlaps significantly with legal operations. A partner at a law firm ALSP says his firm is regularly asked to weigh in on matters such as how to manage work, how many lawyers to hire, and where those lawyers should be located. On the technology side, his clients want advice about which technology solution to buy, how it should be implemented, and how it can be made to work best for them. The partner described a typical request as one in which clients say: 鈥淚 bought some technology, and it鈥檚 crap, and it doesn鈥檛 work. Help me, because I鈥檝e spent half a million pounds on it, and I can鈥檛 admit it doesn鈥檛 work.鈥�
Growth through acquisition
As ALSPs grow, it鈥檚 not surprising that they become more attractive acquisition targets, fueling consolidation. 鈥淚n the early stage of this industry we were trying to say, 鈥榃ho do we acquire?鈥欌�� says the co-founder of a U.S.-based ALSP. 鈥淭here was nobody of any size to acquire. They were all tiny.鈥� Another ALSP founder expects consolidation to continue, as companies that are strong in one service area 鈥� for example, discovery 鈥� look to buy a competitor that is strong in a complementary area, such as legal operations.
A partner at a law firm ALSP is already noticing that his competitive set is smaller. 鈥淔our or five years ago, I think there were 10-plus providers in the market. There might still be, but you certainly don鈥檛 see them. You probably see three or four at the most.鈥� Now, he鈥檚 finding his clients are using ALSPs quite heavily, and hire just a handful of providers. His diagnosis of his market segment could just as well apply to the ALSP market as a whole: 鈥淚t鈥檚 grown up,鈥� he says. 鈥淚t鈥檚 matured as a service offering.鈥�
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