An interview with Cornelius Grossmann, EY Global Law Leader, and Eric Laughlin, EY Global Legal Managed Services Leader, addressing the use of alternative legal service providers (ALSPs) and new operating models legal departments are considering.
Both the EY Law practices and Thomson Reuters Legal Managed Services, prior to its acquisition, conducted surveys that included how ALSPs were being used by in-house legal functions. What results really stood out for you?
Cornelius Grossmann: The “Reimagining the Legal Function Report 2019” was fascinating across a number of key subject areas, but one of the most significant findings was the increased interest in ALSPs. Results showed that while 33% of businesses are already outsourcing a wide range of legal function processes, a further 41% would consider doing so. This indicates a sizeable proportion of in-house legal functions looking to modernize their operations.
Eric Laughlin: This is reinforced by the findings of the Thomson Reuters report “Alternative Legal Services Providers 2019,” which saw US corporate legal departments using ALSPs in an expanded and more diverse way. In some cases, those businesses have already exceeded the 2021 projections for ALSP usage that they gave in the previous report in 2017.
It is perhaps no surprise, then, that with this increased interest, we saw revenues for ALSPs grew from $8.4 billion in 2015 to around $10.7 billion in 2017.
What do you think is driving this change?
CG: There are a number of key interconnected factors that are leading businesses to consider the use of ALSPs. Notable among these are cost pressures – the need to “do more with less” – with 82% of respondents planning to reduce legal function costs over the next 24 months.
There is also concern that the legal function is struggling to best utilize talent, with more than a quarter of total hours spent conducting routine compliance and low-value tasks. This was even more significant in larger legal functions.
EL: In addition to cost savings, which are always likely to be a driver, organizations are also gravitating to ALSPs for other key benefits. In both 2017 and 2019, the Thomson Reuters report found that corporate legal departments and law firms cite access to specialized expertise as a leading driver behind their use of ALSPs, along with the need to use resources more efficiently and strategically.
So, how exactly are ALSPs being used by corporate legal departments?
CG: It naturally varies from business to business, but there appears to be a general appetite for outsourcing a number of legal activities, such as contract life cycle management, legal entity management and compliance, document review, due diligence, litigation and investigation support and regulatory response work.
EL: It’s also worth noting that incorporating new technology into service offerings is high on the agenda of ALSPs, particularly as rapid changes in technology are causing more organizations to look for guidance in technology selection. ALSPs also see technology as a catalyst for migrating up the value chain in legal services. In the most recent report, they cited contract management and process-mapping tools as the most commonly used technologies.
What’s more, around a quarter of the ALSPs interviewed reported using technologies that involve an element of artificial intelligence (AI), and an additional one-third were in the process of evaluating AI’s potential. Experience shows it’s this cutting-edge aspect that is proving very attractive to the in-house legal function.
Do you feel, then, that corporations view ALSPs differently than they did in the past?
EL: Historically, the ALSP market has been viewed as nascent, and as a shot across the bow of the traditional legal model. It has matured significantly in recent years – organizations such as EY have been refining processes for 15 years now, and clients have learned to trust the model.
In the US, attitudes about ALSPs – especially concerns over security of data and quality of work – have shifted over the past two years. These concerns are diminishing as corporations and law firms become more receptive to the advantages ALSPs can bring. As a result, more corporations are encouraging their outside counsel to leverage ALSPs, and more law firms are using ALSPs to differentiate, scale and expand their business, and retain client relationships.
What forecasts did the surveys reveal? And does the increased use of ALSPs look set to continue?
EL: The ALSPs interviewed expect to grow an average of 24% a year, and the research supports that high-growth expectation. The number of law firms and corporate legal departments that expect their spending on ALSPs to increase far outnumber those who expect it to decrease.
The survey indicated that businesses are already exceeding their own predictions of how frequently they would use ALSPs, and that is a trend that looks set to continue. Across US corporate law departments, about 25% say they will be spending more on ALSPs in the next five years – this compares with only 16% two years ago.
So what do you believe are the strategic benefits of using ALSPs?
EL: As I mentioned earlier, technology adoption marks an important attribute of ALSPs. Technology-enabled services allow them to provide higher value and take on different and more complex tasks. ALSPs also help bear the burden of technology selection and deployment, while still allowing legal departments to receive the benefits of its use. ALSPs often rely on third-party technology to select the best of class tools for their clients; others are developing proprietary systems in search of sustainable competitive advantage.
CG: Legal departments aren’t islands – they are part of the business and its end-to-end processes. They can play a critical role in helping organizations achieve their strategic objectives, including by turning legal data into actionable business data. As such, if ALSPs can help optimize business operations, they shouldn’t be ruled out as a matter of course.
Experience shows that having the right people in the right place, carrying out the most appropriate work as part of an overarching legal operating model – as opposed to something that is contemplated on a project-by-project basis - can translate into a competitive advantage. Businesses that recognize this may well find themselves ahead of those that don’t.
Will General Counsels be surprised by any findings in the surveys?
CG: Larger enterprises have often felt that they can do things better and cheaper than outside legal counsel. It can take General Counsels some time to come to the realization that they can work with other trusted partners to obtain a valuable, predictable legal service without having to pay top law firm rates on a time-spent basis.
It is clear from responses to the EY survey that legal functions are reaching a critical point. As a result, it may benefit General Counsels to look widely for ideas to help reshape the function, and that can include ALSPs.
What action do you believe the legal function should be taking? Whether they are already using ALSPs or not.
CG: In light of the responses received and the trends that emerged in “Reimagining the Legal Function Report 2019,” it is believed that boards and senior management could consider specific actions in order to ensure that their legal functions remain fit for purpose.
These include: putting the legal function alongside other functions when senior management is discussing strategic value derived, and enhancing participation in company-wide transformation initiatives; transforming the legal function to one digital operations platform, starting to collect and harvest all the data a legal functions has access to, recognizing that legal function talent needs to be more effectively deployed; and utilizing alternative providers and operational thinking to ensure the legal function provides maximum strategic value for the wider business.
It was telling that, despite an increased interest in and use of ALSPs, there were still 26% of respondents who indicated they would not consider outsourcing. EY teams would ask those businesses about their strategies to modernize in order to deal with increasing future demand.
Are we heading towards a “new normal” for the corporate legal function?
CG: The evidence certainly seems to point towards a major shift towards the use of ALSPs by the in-house legal function. While there are clear drivers, such as access to specialized expertise, cost savings and talent deployment, the surveys also demonstrated that there is a bigger picture around the need to modernize the legal function. This includes the need to innovate through the use of technology and data as well as being adaptive in a shifting regulatory environment.
There were differences in the surveys across geographies, by sector and by size of company, so it is clear that one approach may not fit all. But it certainly seems that the in-house legal function will look very different in five years’ time.
EL: Organizations may be stopping short if they assume that the benefits of outsourcing certain legal tasks constitute the full extent of efficiency gains the legal function can obtain. We have found that without rethinking the operating model, short-term efficiency initiatives miss out on unlocking the strategic value for the wider business that the legal function can deliver.
By taking a look at precisely how both law firms and corporate legal departments are using ALSPs, it becomes clear that ALSPs are working their way up the value chain.
Study conducted by Thomson Reuters, Georgetown University Law Center on Ethics and the Legal Profession, University of Oxford Saïd Business School, and UK-based legal research firm Acritas. EY, while not party to the study, has permission to use the study and underlying data as part of its acquisition of Pangea3 Legal Managed Services from Thomson Reuters.