The corporate legal landscape is witnessing significant changes as legal departments increasingly turn to alternative legal service providers to address mounting workloads and compliance obligations. These changes are driven by the need to enhance efficiency, streamline resource allocation, and tackle complex regulatory challenges.
Following the 2008 global financial crisis, there was a considerable shift in legal work in-house, facilitated by the emergence of in-house teams. Recent events, however, have driven firms to reduce operating costs and improve service delivery efficiencies.
This has resulted in a notable trend reversal, with General Counsels (GCs) increasingly turning to ALSPs. According to The Law Society Gazette (learn more), ALSPs have acquired significant momentum in the legal scene by promoting themselves as efficient and cost-effective tools for document-heavy activities.
The ALSP Market of Today
While data is still being collected, it is quite likely that the COVID-19 pandemic accelerated the adoption of ALSPs, offering new prospects and improved market access. While using ALSPs is still considered “alternative” in the sense that it differs from typical hourly rates offered by law firms, it has already become an increasingly common option.
According to Thomson Reuters ALSP 2021 Report (learn more), 79% of law firms and 71% of enterprises have used ALSPs.
A survey conducted in 2022 (learn more) revealed that 93% of corporate legal departments in U.S. companies with over $500 million in revenue had outsourced work over the past three years. Moreover, nearly half of the surveyed corporate respondents anticipated a greater demand for legal technology and corporate compliance providers in the next three to five years.
In 2023, corporate legal departments face a multitude of challenges, including the ever-growing complexity of local, state, and national regulations across industries. These challenges result in increased workloads and employee burnout.
To combat these pressures, outsourcing has emerged as a viable alternative to hiring new full-time employees, as it enables legal departments to delegate time-consuming tasks and free up in-house employees to focus on more meaningful work. Outsourcing offers benefits such as increased productivity, reduced processing costs, and shorter project completion timelines.
Why ALSPs are Here to Stay
According to corporate executives surveyed, regulatory risk and management take center stage as the primary areas driving outsourcing activity. Given the ever-increasing regulatory stress imposed by ESG issues, data privacy mandates, and cybersecurity risks, legal departments seek specialized expertise to navigate this intricate landscape.
Additionally, entity management, due diligence, and business licensing needs are substantial drivers, especially for organizations with a global footprint.
According to the report conducted by Thomson Reuters (learn more) the ALSP market skyrocketed to a shocking $13.9 billion by the end of 2019, representing a $3.2 billion increase in only two years. The data offers a persuasive depiction of a market that witnessed a stunning 30% jump, equating to a 15% compound annual growth rate.
Additional research reveals that the most notable rise has occurred among ALSPs founded as captive subsidiaries by law firms themselves. Despite being the smallest section of the ALSP business, it is growing at an astounding pace of around 30% each year.
Law firms are adeptly adopting a hybrid approach, strategically using the benefits of ALSPs while keeping total control, resulting in cost savings for the clients they represent.
M&A in ALSPs
Many believe that M&A (Mergers and Acquisitions) plays a big part in the alternative legal service market. The volatility in equity markets fuels a surge in M&A activity across various industries in 2023. Chief legal officers predict that M&A work, corporate spin-offs, and major transactions will demand the largest allocation of time and resources.
Buyers grapple with recouping valuation gaps in underperforming deals, navigating a challenging marketplace, and the rise of earnout structures. These are all areas where an alternative legal service can be useful for both firms and clients.
All in all, Outsourced providers are increasingly being used by corporate legal departments to manage responsibilities and regulatory challenges. They can distribute tasks and concentrate on vital roles through outsourcing. Regulatory risk, entity management, due diligence, and business licensing are key drivers of outsourcing.
M&A transactions also add to the need for outsourcing. Cost, experience, and security are all important considerations when choosing a vendor. Legal departments may optimize resources and guarantee effective service delivery by establishing strategic outsourcing agreements on a proactive basis.