The end of the beginning

I’d like you to consider the following list. It’s a compilation of several prominent alternative legal services providers (ALSPs) and the year they were founded.

  • 1999: Integreon
  • 2000: Axiom
  • 2001: Relativity
  • 2002: Consilio
  • 2003: Exigent
  • 2004: Pangea3
  • 2005: Novus Law
  • 2006: UnitedLex
  • 2007: Lawyers On Demand
  • 2010: Neota Logic
  • 2011: Elevate
  • 2011: Radiant Law
  • 2012: Ravel Law
  • 2014: Premonition
  • 2014: ROSS Intel
  • 2015: Diligen
  • 2015: Kira Systems

You’ll probably notice a couple of things here. One is that there are two distinct “waves” of foundings, one from 1999 to 2007, and then another from 2010 to 2015. 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. This list of ALSPs is far from comprehensive, of course, but even as a blurry snapshot of new legal services providers, I think it’s interesting.

The second thing worth noticing, from my perspective anyway, is that all these companies are young. None of them is even old enough to legally drink in the United States. (Y’all need to come north across the border.) Compare that list with this one:

  • 1998: Google
  • 2002: LinkedIn
  • 2004: Facebook
  • 2005: YouTube
  • 2006: Twitter
  • 2007: iPhone
  • 2010: Instagram
  • 2010: iPad
  • 2011: Snapchat

UnitedLex is the same age as Twitter. Neota Logic is as old as Instagram. Half the ALSPs on that first list are younger than the iPad. This entire segment of the legal market flat-out did not exist 20 years ago.

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 many tens of billions of dollars over the last couple of decades, at least 1% 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.

In an important post last month, Ron Friedmann noticed an apparent disconnect between the conventional legal industry wisdom about ALSPs and the actual data about client spend. The conventional wisdom is that ALSPs have cracked the code of the legal market: they’ve seen how the traditional law firm’s archaic approach to producing and delivering legal work creates gaping market inefficiencies begging to be exploited, and they’ve figured out how process improvement, technological investment, labour arbitrage, and system overhauls can enable that exploitation. There are 8.4 billion reasons to think this is a pretty persuasive case.

And yet, Ron points out that the Altman Weil 2017 Chief Legal Officer Survey asked respondents to estimate the percentage of their total legal spend allocations according to type of provider: internal, outside law firm, and non-firm vendor. Here are the results:

Whoopsie.

“Spending on non-firm vendors, which includes alternative legal service providers, remains in the mid single digits with a shrinking share since 2014,” he wrote. “Many reports and commentators says ALSP is growing absolutely and taking share from law firms. Yet, the only time series data I have seen that asks about actual spending (not intent to spend) is [in this chart].”

Ron notes that this is hardly a definitive disproval of the theory of the Unstoppable Alternative Provider. We don’t have as much spending data as we’d like, to help us establish a case either way. But he also notes that ALSPs received the lowest rating from Altman Weil respondents on the question of which type of provider possesses the best “knowledge and understanding of the challenges of leading a law department.” So there’s at least some reason to ask whether ALSPs have maintained and can maintain their initial launch angle into the legal market. And if ALSPs’ growth in market share has in fact slowed or even stalled out altogether, we should try to figure out why.

Here’s one possibility. It might be that we’re nearing the end of the legal services disintermediation process. It might be that the supply side of the legal market has now broken, irreparably, in two.

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.

John Lithgow > Gary Oldman. Don’t @ me.

Two legal supply sectors

It looks to me, then, like the supply side of the legal market has broken into two segments.

1. 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.

2. 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.



6 Comments

  1. Mike O'Horo

    Insightful analysis, as always, Jordan. Since we’re playing with crystal balls, I’ll take a stab at mine.

    I think the percentage of high-value “lawyer-brain” work will continue to shrink as technology (cognitive computing, AI, whatever else emerges) becomes smarter. Also, the disintermediation has produced another side effect: clients are breaking large matters into smaller and smaller subsegments. As these tasks become more discrete and less complex, they will be subject to fulfillment by technology-assisted solutions. As each of those succeeds, it will make it easier to get even more granular with subtasks, eliminating even more complexity. Just as software replaced ledgers to make sure payroll was accurate, and then more intelligent solutions became able to advise how much you should pay various employees, it’s logical that technology will continue to dig deeper into components of law solutions, eventually reaching the point of independent performance at the granular level.

    As clients finally recognize that the buyer plays the tune and the supplier dances, they’ll exercise their buying power to the “or else” degree, and begin enforcing the changes that until now they’ve merely whined about wanting law firms to deliver, but have for inexplicable reasons tolerated not getting. Along the way, antiquated concepts such as the prohibition of non-JD ownership and revenue sharing will go away because it doesn’t align with what clients want.

    Enter the law corporation. When the “lawyer-brain” work shrinks in volume, I foresee a ferocity of competition that lawyers can’t now comprehend, but that their clients are used to. Law firms will compete on price because that’s all they know. The resulting margin shrinkage will bring about even more drastic bimodal lawyer compensation that will look more like professional sports, where a very small percentage of star players reap huge pay, and everyone else’s continually declines.

    Law firms will be forced to adopt their clients’ structure and methods, i.e., a corporate structure where lawyers are employees, subject to a prevailing market wage that will be much, much lower than it is now. $180k for a newly-minted lawyer with no practical capability? Laughable. These law corporations will operate more like enterprise software companies, where lawyers are individual technical contributors, like software engineers — respected and valued for their skills, and well compensated, but with no say in the operation of the company, and non-voting ownership shares only via stock purchase or award. The company’s product will be integrated legal service delivery, in the way that CLOC defines it. Professional managers will run the company, and professional marketers and salespeople will take the legal-service-delivery product to market, competing with other law companies’ professionals — just as lawyers’ clients do now.

  2. An Trotter

    Agree this is insightful analysis. What I find particularly interesting is that the ALSP waves correspond to the 1st and 2nd waves of the legal ops role being created. Wave 1 (late 1990s – 2010) 50-150 or so legal ops heads and informal regional/industry ops groups created. Wave 2 (2010-2015) National legal ops associations launched (CLOC and ACC Legal Ops section) and the legal ops role grows to 1000. In other words the emergence of ALSPs and of ops professionals to deploy their services effectively are symbiotic.

  3. Andrew Jardine

    Possible that I am misunderstanding the list but I think quite a few of the companies are not ALSPs but in fact technology companies. In particular Kira Systems, Ross and Neota are definitely tech firms that are used by law firms and ALSPs alike, they don’t provide legal services themselves.

  4. Hugh Perry

    Interesting and thought provoking as to what the long term result will be. As law firms become international and spread their wings the Company/Employee structure seems highly likely to develop further and is likely an end result However smaller personal service firms will survive just as small shops still exist against the international retailers The law firm structure will follow suit and national firms will spread internationally bit it will not be the end of small personal providers they will just have to be business savey to survive and earn a living

  5. Mark Guay

    There does not seem to be any mention of small law firms or boutique spin-off law firms. So I disagree with the premise that the legal market is carved up into two baskets of big firms and ALSPs. And the hourly rate model is also being challenged by the fixed rate model. So I think that there is a false choice fallacy being described here as the only paradigm for legal services. Without more data on other customer choices the conclusion is less supportable.


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