Trend

Seismic shift in the legal market: alternative is becoming mainstream

The rise of alternative legal service providers is now an established fact. Whereas in 2008, innovation in the legal sector was rare, hourly rates for bulk and specialist work were often the same and the term ‘paralegal’ was virtually unknown in the Netherlands, the situation is now completely different, as international studies have confirmed.

Text Michiel Rohlof Photos Geert Snoeijer

A decade after Legadex was established, the legal market has fundamentally changed. Corporate legal departments are now structured in a much more process-led way and different types of work are increasingly sourced from a range of service providers. This has woken up the legal sector and law firms have been trying for some time to diversify their own services and fee structures. But the biggest innovations are coming from newer players: alternative legal service providers, or ‘alternatives’ for short. These disruptive companies are now an established part of the legal landscape.

The biggest innovations are not coming from law firms, but from newer players

Growth potential
A recent study by Thomson Reuters Legal Executive Institute/Georgetown Law Center for the Study of the Legal Profession and Oxford University shows for the first time how a group of relative newcomers have changed the face of the Anglo-Saxon legal market. The study, entitled 'Alternative Legal Service Providers’, describes the trend as a seismic shift. 51% of the 554 law firms and 60% of the 271 corporate legal departments that were canvassed in the United Kingdom, United States, Canada and Australia said they now used alternative legal service providers. Law firms use them for tasks such as e-discovery and litigation support, while corporate legal departments usually want help with implementing legislation and regulations and specialist legal work. So the use of alternative legal service providers is growing, but still shows signs of a market in its infancy with, consequently, an enormous growth potential.

Because developments in the US and UK legal markets often foreshadow what's likely to happen in the Netherlands – since the bigger size of companies and law firms in these countries mean that many innovations can be rolled out faster there – it's interesting to look at the status quo in the Netherlands. Here too, there has been a sharp rise in the use of alternative legal service providers; just think of suppliers of smart legal software or the way in which due diligence processes are now structured. Companies use paralegals working for alternative legal service providers as a flexible pair of legal hands, since they generally have a detailed knowledge of business processes and are good at understanding systems and work processes. There has also been a growing tendency in the last few years to outsource legal entity management and contract management in the form of managed services. Data analysis and artificial intelligence, for instance, are now used to support M&A and preparatory due diligence processes, making the work of company lawyers and attorneys much simpler.

Huge amounts
Cost savings and cost efficiency are naturally also key drivers. This presumably partly explains why US and UK law firms and corporate legal departments have made the switch more quickly. Countries such as the US are spending huge amounts on legal services: the combined annual fee income of law firms in the US is 275 billion dollars, compared with a total estimated annual fee income of 700 billion dollars for law firms worldwide. Innovations in the US legal sector therefore have a much greater savings potential, and the need to work more efficiently is often client-driven. The open market structure there also encourages a high level of commercial enterprise geared to smarter, better and more cost-effective developments.

That said, the cost aspect is only a small part of the explanation. In the Netherlands, it is quality that is the decisive factor: if it were only a question of hourly fees, every company lawyer or attorney would be going to a temporary staffing agency to book legal support. A higher level of specialisation often appears to be the deciding factor. Quality is the guiding principle, with the ‘horses for courses’ philosophy more important even than cost: what skills do I need to get specific processes running more efficiently? After all, a lawyer who charges a higher hourly rate may not always be better at a particular task; sometimes the opposite is true.

Compared with the rest of continental Europe, the Netherlands has a relatively fresh approach to the market: the use of alternative legal service providers appears to be more established here than it is in the countries around us. This may be partly due to the long-term presence of leading US and UK firms in the Netherlands, and our high concentration of head offices of global multinationals, together with the open market that has characterised our country since the 17th century. In Germany, by contrast, the legal services market is nearly entirely dominated by law firms, while in Belgium and France the pressure to innovate is also much less than it is in the US and UK.

The use of alternative legal service providers appears to be more established in the Netherlands than it is in the countries around us

Compared with the 700 billion in combined annual fee income of law firms worldwide, the US researchers put the market share of ALSPs at an estimated 8.4 billion dollars. This may not seem much, but given how much ALSPs have grown in recent years, it's safe to predict that this market share will experience further strong growth in the years ahead.

Limited use by law firms
Another conclusion reached by the US study is that law firms make less use of alternative legal service providers than corporate legal departments. The same trend can be seen in the Netherlands, where companies have diversified their use of external legal service providers for much longer than law firms, which only appear to want to make limited use of them. One explanation could be that for many years law firms have tried to win market share by offering their own subsidiary and independent legal services, efforts that have never got off the ground. At the moment, law firms are mainly interested in using smart search functions to support litigation and fraud cases, and for due diligence processes.

So whereas in the US and UK the duties that law firms do and above all don't focus on have more firmly crystallised, their Dutch counterparts are still feeling their way and the real seismic shift may not have taken place yet. However, this caution on the part of law firms now appears to be fundamentally changing. The arrival of a number of new firms from the US and UK is encouraging the further professionalisation of the Dutch law sector. Larger law firms in particular realised long ago that they should only be concentrating on specialist services charged at high hourly rates and outsourcing the more basic tasks to innovative external service providers. Their clients are increasingly unwilling to give them bulk work or work with a high legal tech content, especially in view of the high fees they charge and their lack of experience with new working methods. The fear of losing a share of their income is still a major factor for such firms, but if they work with alternative service providers they will win more confidence from their clients. This is something they are increasingly realising.

Developments are moving fast
As an alternative service provider in the Benelux market, Legadex is a prime example of just how much has changed over the past decade. In 2008, it began offering corporate housekeeping and contract management services from its offices in Amsterdam, at a time when much of the market was not yet ready for them. The company was told it wouldn't succeed in rolling out these services on a large scale because corporates wanted to retain them in-house. Yet today, the Legadex corporate team handles legal entity management for multinationals in dozens of countries. Corporates moreover increasingly want to fully outsource these activities in the form of managed services.

Developments relating to preparing transactions have also progressed quickly, largely due to the availability of artificial intelligence software. If you think how much time smart software can save – and how much easier this makes the work of young lawyers – it's difficult to believe the traditional approach to due diligence has much of a future. Alternative service providers now play a crucial role in preparing corporate data and optimising due diligence reviews. Legadex has grown from an ad hoc service provider in 2008 to a structural alternative service provider for corporate legal departments in many different areas today. The fact that the legal sector itself is increasingly calling on companies such as Legadex is an indication that the market for alternative legal service providers is increasingly coming of age, including in the Netherlands.

Smart AI applications
Returning to the US study on alternative legal service providers, if for the sake of argument we assume that the Dutch legal market is likely to follow in the footsteps of the US and UK, what specific developments can we expect in the future? Continued growth in the use of alternative service providers for high-volume tasks, to start with. Until the use of external innovative service providers has become widespread in the legal sector, this growth will mainly be in high-volume activities (bulk contracts, due diligence reviews).

Other areas where further disruption is likely are solutions with a legal tech aspect, such as smart AI applications that can extract the maximum amount of information from a dataset and draw conclusions from it. Legadex recently used such applications to support the transfer of substantial mortgage portfolios in which data extending back 20 years was stored in a range of different systems. Algorithms were programmed to recognise specific patterns and gradually become smarter. The use of artificial intelligence immediately made the portfolios much more transparent and able to be presented cohesively, which was vital for a successful completion of the project. This is one of many examples in which an alternative legal service provider outperforms a traditional player.

Further segmentation
Company lawyers and attorneys are faced with so many new developments, from legal tech to privacy and from skills shortages to class action suits, they simply can't source all the expertise they need from a single external service provider. The Dutch legal sector will probably also see rapid further segmentation, in emulation of those in the US and UK. This will create huge opportunities for alternative legal service providers with technical knowledge and the ability to streamline services both for the corporate and legal sectors. It will be interesting to see how quickly this trend continues to gather momentum in the Netherlands and in other European countries.

Company lawyers and attorneys are faced with so many new developments, they simply can't source all the expertise they need from a single external service provider