There have been two distinct waves of foundings of alternative legal services providers (ALSPs): one from 1999 to 2007, including outsourcing companies such as Integreon, Axiom, Relativity, Consilio, Exigent, Pangea3 and Lawyers On Demand; and then another from 2010 to 2015, including the new wave of tech companies such as Neota Logic, Ravel Law, ROSS Intel and Kira Systems.
The gap between these two waves is likely due to the financial crisis and Great Recession of 2007–08 – as is, I would suggest, the second wave itself, which rapidly developed in response to the widespread demand for better value from corporate clients following the recession.
Yet today, according to the Thomson Reuters 2017 Alternative Legal Service Study, alternative legal services provision (“non-law-firms” basically) is an $8.4 billion industry worldwide – and that figure doesn’t include companies that make legal technology to carry out legal tasks, which is probably at least another couple billion and change. So we’re talking about a sector that has generated tens of billions of dollars over the last couple of decades, at least 1 per cent of global legal spend annually, from a standing start the year Titanic was released.
I think that’s pretty impressive. And like many people, I’ve not seen much reason why this sector couldn’t continue to grow just as fast in the years to come. Yet there’s at least some data out there to suggest that that growth has stalled recently. Why so?
The limits of disintermediation
The steady rise of the ALSP since the year 2000 – the legal process outsourcer, the flex-lawyer platform, the managed legal services company, and advanced legal software – has enabled the movement of millions of hours’ worth of routine, straightforward legal work off lawyers’ desks and out of law firms. That work has migrated into both ALSPs and law departments themselves, where it is performed faster, less expensively, and often to a higher degree of quality and reliability.
The cost savings cannot be underestimated: Ray Bayley, founder of Novus Law, famously observed that for every dollar his company makes, law firms lose four. It’s not just that this routine work left law firms – it’s that it was streamlined, structured, and shrunken on the way to its new home.
This result is a testament to the fact that law firms were carrying out mind-boggling amounts of legal work inefficiently, haphazardly, and wastefully. It was work that didn’t really belong in law firms anymore and that is no longer part of many firms’ inventory (as unemployed would-be associates and poorly leveraged partners can both ruefully attest). Twenty years after it first emerged, the ALSP sector no longer has to prove itself. Disintermediation of routine work from law firms has been a success.
But how much longer can it continue? How much more work of this type is there to disintermediate? Probably there’s still a decent amount – many corporate clients have yet to take advantage of what ALSPs have to offer. They haven’t moved far enough along the Rogers Diffusion Curve, or they haven’t accepted the fact that unless they ask for better options, they’re not going to get them. It’s possible that the lowest-hanging fruit has now been picked, and that clients who want better deals on their legal services spend are going to have to stretch themselves to reach it. I do think that will happen, in fits and starts, over the next several years.
The consequences of disintermediation
But what about all the legal work that has not been disintermediated, that remains behind in law firms? Because some work will remain – I don’t know anyone who really believes that everything law firms do can or should be bled off to ALSPs or “robot lawyers” or whatever. Some quantum of legal work requires skilled, trained, sophisticated lawyers to do it properly. Those companies in the ALSP sector are helping us define the quantum – whatever they can siphon off isn’t part of it – but they’re probably not going to be angling to get it. Law firms will be the default provider – but there’s good reason to think that they won’t hold that position for long.
Because the foundation of the traditional law firm is exactly all the routine, repeatable, hours-burning work that ALSPs are taking away. Law firms aren’t set up to perform only high-value, highly sophisticated work. Law firms are dependent on leveraging lower-cost labour – not just associates anymore, but also non-equity partners and even some junior equity partners – to carry out lower-value work. That’s the whole point of leverage. That’s where the partners’ profit is, and always has been. The sale of hours is the lifeblood of law firms – but the kind of work that could sustain 2,000 hours of lawyer effort every year is leaving the building. ALSPs aren’t just siphoning basic work from law firms; they’re siphoning off the lower levels of the law firm pyramid.
The problem is not that law firms are losing all the work they were overqualified to perform. The problem is that law firms are keeping all the work that requires highly skilled lawyers working in close collaboration using sophisticated tools on a multi-disciplinary platform to generate high-value outcomes for a previously agreed price. That, ironically, is the type of work that many law firms always say they aspired to do. But that sort of platform is not what most law firms are. And it is not what most law firms can easily transition to become.
Two legal supply sectors
It looks to me, then, like the supply side of the legal market has broken into two segments.
Routine legal work. This segment is occupied by alternative legal services providers using technology and processes to disintermediate basic legal tasks from complex, expensive law firms – in many cases, the kind of work lawyers really shouldn’t be doing. When the flow of that work from law firms to ALSPs finally dries up, we’ll have reached the effective end of disintermediation. The ALSP sector will have matured, consolidation will set in, and sector giants will eventually emerge. That will be an amazing event, an historic correction to the legal services market and a major victory for the legal consumer.
Complex legal work. This segment is devoted to more complex, higher-value work – tasks that need good lawyers to perform – but it’s occupied by traditional law firms still reeling from the splitting of the supply side of the market. They are finding themselves increasingly bereft of their inventory and unsure of their future. How will they cope? And if they can’t cope, who will perform all the important and sophisticated legal services that require a lawyer’s attention, but that can no longer be effectively served from the traditional law firm?
Ten years after the financial crisis, we may have reached “the end of the beginning” of legal market change. ALSPs, young and vibrant and exciting, are solidifying their grip on the routine legal work market. Law firms, older and disoriented and vulnerable, are eager to obtain the high-value work, but are struggling to figure out how they can perform it sustainably and profitably with their existing structures and systems. More than a few ALSPs, it should readily be admitted, will fail and fall apart in the churning waters of their new market segment. But more than a few law firms, equally, will fail and fall apart because they’re just not built to deliver what their newly demanding market wants.
And if these law firms do fail, who – or what – will replace them? New and better law firms, designed for the new market to be the kinds of platforms described above? I sure hope so – that’s what I’ve spent the last several years trying to encourage, at any rate. But there’s no guarantee that a new and better platform will arise to sustain lawyers in this segment of the market. And I don’t think anyone knows what will happen if they don’t.
Jordan Furlong, based in Ottawa, Canada, is a leading analyst of the global legal market and forecaster of its future development. His Law21 website and blog is at www.law21.ca. Email jordan@law21.ca. Twitter @jordan_law21.
