Alternative Legal Service Providers: How are Law Departments Using Them?

The 2019 HBR Consulting Law Department Survey found that corporate law departments are shifting their focus to adopting innovative legal service delivery practices, such as the increased use of other service providers, including alternative legal service providers (ALSPs). For those who use those, spending increased by 11% in 2019.

Over the past decade, ALSPs have become an important pillar in the corporate law department delivery model – supplementing in-house staff and outside counsel and climbing to an over $10 billion industry. In more recent years, HBR has observed that many of our clients are no longer using ALSPs solely to outsource low-cost, high-volume commodity work to offshore locations. ALSPs have now moved up the value chain for corporate law departments and are being assigned more complex, higher-value legal work.

Given this significant market shift, we decided to drill deeper into this topic during a recent series of roundtable events across the country, where we shared our 2019 Law Department Survey with corporate legal operations professionals and in-house counsel at Fortune 1000 corporations. At each of the five roundtables hosted on the East Coast, Midwest and West Coast, we conducted a “flash survey” of over 35 participants to ask them more detailed questions regarding their companies’ experiences with ALSPs.

Our flash survey results illustrated the extent to which ALSPs have emerged as a viable alternative to the traditional models for legal service delivery:

• Seventy-eight percent have used ALSPs. Of those, one-third have engaged with a variety of providers, understand their offerings and regularly leverage them. The remaining two-thirds have used ALSPs for a few engagements, but do not regularly leverage them. An additional 17% have not used ALSPs but are exploring the landscape.
• Of those companies that have used ALSPs, one in three are now directing two to ten percent of their total external legal spend to these alternative providers – shifting work away from outside counsel who account for the remaining external spend.

Additionally, the flash survey indicated companies were most likely to turn to ALSPs to supplement internal staff during peak times or to leverage as temporary staff when internal staff depart. It comes as no surprise that, by a large margin, the number-one factor in deciding which ALSP to use is cost, followed by substantive legal experience and process orientation.

Despite growing adoption, flash survey participants identified several barriers that continue to create challenges for ALSPs in their efforts to win additional business from corporate law departments. Two items tied for the biggest hesitation: concerns with quality and limited use cases that align with the department’s needs. These two factors were closely followed by a lack of awareness amongst practitioners to achieve buy-in for outsourcing.

The roundtables’ flash survey results and the 2019 Law Department Survey results support HBR’s takeaways for corporate law departments and law firms (and even ALSPs):

• For corporate law departments, there is an opportunity to explore how ALSPs can create flexibility and be a source of potential cost savings. Those already using them may consider expanding the types of work assigned to ALSPs to include more complex legal assignments, as ALSPs expand their capabilities. Beyond document review, an ALSP service of which most are aware, some of the areas where ALSPs are providing assistance include contracts and commercial support, corporate governance, M&A support, IP and regulatory compliance. The traditional principles of using the right resources for the right work still apply – it is just that now the range of available resources is growing.
• For law firms, there is an opportunity to differentiate themselves with clients. Firms can evaluate the work ALSPs are doing and how it fits with their strategy.. That may mean developing partner relationships with trusted ALSPs that could help firms cost effectively serve their clients. It may also mean evaluating whether there are creative opportunities for the firms themselves to do the work at a lower cost, for example, through associated entities, to take advantage of the confidence that clients already have in firms and their work quality. Regardless of their strategic choices, firms should be proactive in their ALSP-related strategy, differentiating themselves by leading the conversation with clients before they raise it. The most important consideration for firms should be how to best deliver value to clients in the most effective manner.

To overcome the usage barriers identified in the survey, ALSPs may want to better highlight how their offerings align with their clients’ needs, particularly in substantive areas. This, coupled with further awareness among practitioners that lower cost does not necessarily mean lower quality, could help effectively rebrand ALSPs as the more sophisticated providers they are increasingly becoming. The entry of the Big 4 into the market and their capitalization on their existing reputations emphasizes the importance of brand: stand-alone ALSPs will want to keep up.

Law departments are likely to continue leveraging ALSPs for cost-effective services with the right level of expertise and efficiency. This shift in spend profile by corporate law departments is quickly reshaping the landscape for how legal services are acquired and delivered, a trend that requires the attention of legal professionals in both corporate and private practice.

The HBR Law Department Survey provides a wide range of benchmarking information that law departments can leverage as they strategically plan for operational effectiveness. To participate in HBR’s 2020 Law Department Survey, click here.