ALSPs Become Critical to International Expansion, Shaking up Legal Industry
While it’s certainly true that COVID-19 burdened many businesses with an entire year’s worth of crisis management and unfamiliar risk mitigation, the pandemic also forced the extreme acceleration of an already-imminent digital transformation revolution. Digital solutions, such as virtual communication tools and automation software, went from being attractive new alternatives to absolute necessities — seemingly overnight. Their ability to break geographical barriers to international business and legal relationships revealed itself with more clarity than most would have anticipated.
As the global economy opens up in anticipation of a post-pandemic return to normalcy, many Big Law firms and corporations are continuing on with their aggressive international expansion campaigns. Alternative legal service providers (ALSPs), which are rapidly growing in prevalence among legal teams (and beyond), appear to be playing a major role in making these globalization initiatives effective.
But for legal professionals, the pandemic’s aid in speeding up international expansion efforts has become something of a double-edged sword. On the one hand, their long-conceived globalization initiatives have been helped along by the shifting emphasis on technology and digital solutions. Yet, on the other hand, they are wary of the success of their non-firm ALSP competitors, who often boast superior digital know-how and an inclination toward innovations in technology. The difficulty now becomes establishing the true nature of the relationship between law firms and their ostensible competitors: will the two eventually become integrated, or perhaps could they end up even more opposed than some had initially imagined?
International Expansion and ALSPs Both Trending
Whether it relates to goods or services, one doesn’t need to look very hard for evidence of globalization. Over two decades old, the trend of globalization predates both COVID-19 and current technological capacities by a long shot. In the years leading up to the pandemic, important trade agreements such as the EU-Japan Economic Partnership and the African Continental Free Trade Agreement (2018), as well as the maturation of the internet since as early as 2001, have both served as incubators for the explosion of international expansion activity that we are currently witnessing.
What we know for sure at this point is that both international expansion among Big Law firms and the use of ALSPs represent observable trends within the legal industry. As reported by Law.com, in 2019 Am Law 50 firms downsized their domestic ranks by 3000 workers while adding nearly 9000 international attorneys to their teams. What these numbers mean is that 35% of the lawyers from the U.S.’s largest firms are working from international offices — a more than 10% increase from the previous year. Now, after a brief respite in activity due to the pandemic, firms in the U.S. and around the world are picking up right where they left off in 2019, with more international hires and a sharp uptick in mergers and acquisitions. In fact, it seems that rarely a day goes by without the announcement of a new significant expansion, such as the UK-based firm Kennedys launching an office in Oman, or mega-firm Deloitte absorbing a boutique maritime law operation in Italy. In short, globalization is very much alive and still a serious priority for most big firms.
As for ALSPs, they had already been exploding in popularity over the past few years and soared even higher during the pandemic, which was likely a result of widespread remote work and an emphasis on digital and virtual solutions across industries. The fastest growing segment of ALSPs are “law firm captive,” meaning they were formed by law firms as subsidiary companies. Captive ALSPs are growing at close to 30% each year, according to the Law.com study, and although they currently remain the smallest segment of the study group, their rapid growth indicates that legal professionals are increasingly comfortable utilizing these tools, albeit without always having to deal with an independent service provider. But independent providers are also growing steadily, at about 15% per year, and account for $12 billion of the nearly $14 billion market value of ALSPs.
Growth of ALSPs Suggests They’re Far from an “Alternative” Approach
As multiple outfits are now pointing out, ALSPs appear to have transcended their original designation as “alternative” solutions in the legal field. According to a study by Thomson Reuters Institute et al, ALSPs now represent a nearly $14 billion industry — and their continued growth shows no signs of slowing down any time soon. The emergence of ALSPs was initially an unwelcome event in the eyes of many corporate legal teams and Big Law firms. Their relatively low costs and emphasis on digital solutions, including the use of automation software and artificial intelligence, seemed to pose a real threat to the livelihood of legal professionals. However, time has revealed the fundamental value of ALSPs: they are powerful tools for increasing efficiency and fostering growth. Rather than adversaries, ALSPs are unexpected allies of legal organizations.
As described by Thomson Reuters, many legal organizations are “awakening” to the various advantages of utilizing ALSPs as collaborators, and it is reasonable to conclude that an increased demand for digital solutions brought about by the pandemic is, at least in part, responsible for this radical shift in perspective. What was once a pernicious development in the tech space threatening the very livelihood of attorneys is now starting to look like a surprising yet invaluable asset to legal teams.
The Arizona Ruling
In January of 2021, a ruling by the Arizona Supreme Court went into effect. This ruling removed a former ethics rule that prohibited non-lawyers from sharing fees with legal professionals or investing in the economic interest of law firms. No matter how one interprets it, the ruling has monumental implications for the future of ALSPs, as well as “alternative businesses” in general, and could have a huge impact on the nature of legal work if other courts begin to follow suit.
With the elimination of the aforementioned ethics rule, legal services in Arizona can essentially be combined with any other business, such as accounting firms or tech consultant agencies. Such organizations present a challenge to the common “billable hours” model of most legal firms, allowing for the cost of legal representation to be absorbed into the broader scope of services an organization provides. Again, if similar rulings were to occur on a wider scale, it could potentially add an additional layer of competition to the legal industry. Big Law firms with an eye toward expansion might have to adapt their business models even further in order to avoid alternative businesses cutting into their growth and revenue.
For better or worse, ALSPs appear to be significantly shaking up the legal industry. The acceleration of digital solutions throughout the pandemic has clearly revealed their advantages in the context of international expansion, and their rate of growth among law firms and corporations alike reflects a clear willingness within the industry to embrace collaboration with ALSPs. Going forward, it will be interesting to see if rulings similar to that of Arizona become a trend, adding momentum to a rapidly evolving new facet of legal work both globally and domestically.
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