Quietly and inconspicuously, Alternative Legal Service Providers (ALSPs) are increasing their share of the global legal market.
According to a Thomson Reuters study the ALSP market is worth over $10 billion in revenue with an annual growth rate of over 10%*.
So what is driving corporate legal departments to use ALSPs versus law firms? Why are law firms now integrating ALSP models within their own structures?
It all comes down to the billing model.
In a traditional law firm model, services are billed to the client on a time spent basis.
Now billing legal services by time spent does not sound unfair – the law firm gets paid for the exact time their legal minds worked on the legal issue. If the client doesn’t like a firm’s hourly rate, then they’re free to look for another firm with a different rate.
Of course, the problem is not the rate – clients know that upfront – but rather the amount of time it takes to complete the project and the number of people who work on the matter. This means the client doesn’t have cost certainty and law firm fee estimates are… well, estimates.
One of the main problems from a client perspective is the lack of incentive for the service provider to perform their work in less time. Why would the firm wish to leverage techniques such as process design or introduce new tools and technology? In fact, the incentive is reversed – the more time the provider spends on the task and the more complex they make it, the more they earn.
Let’s be clear; this doesn’t mean law firms are intentionally making legal problems more complex than they are, nor are they adding extra hours to the bill. What it means is that providers lack the incentive to optimize their productivity.
If drafting a standard employment agreement takes five hours – and that’s how it’s been done for the past 50 years – why invest time and money in finding ways to bring that down to four hours?
Throw in the economic model of a law firm where every penny invested in modernization is less earnings for the partners and it’s easy to see why ALSPs are the ones driving change in the market rather than the firms themselves.
Now that the situation is being challenged, many law firms are catching up and building their own ALSP or partnering up with existing ones. Whether the cost benefit of these actions ends up in the client’s pocket rather than partner profits remains to be seen.
Change is not an overnight matter; although we are seeing the green shoots of progress driven by the growth of ALSPs, billions of dollars’ worth of legal work remain billed by the hour.
ALSPs already appeal to forward-looking clients open to alternative and innovative delivery models.
But bringing about an ideal future where most of legal work is billed on a fixed-fee basis can only happen if the legal sector becomes more amenable to change.
For now, it remains just that, an ideal.
*Thomson Reuters Legal Executive Institute, Alternative Legal Service Providers 2019: Fast Growth, Expanding Use and Increasing Opportunity, Jan. 2019