Talk of disruption dominated the last decade. In 2021, widespread change in legal markets appears elusive. Will this time be different?
Today’s post (219) is Part IV of #GreatExpectations for the #GreatReset, a 5-part series on the post-pandemic legal market landscape. Part I (216) covered a historical retrospective to the last recession, with emphasis on how the socioeconomic context around the legal industry is changing. Parts II (217) & III (218) provide a data-driven foundation for today’s discussion, in which I venture a few narrow predictions about what the post-pandemic future might look and feel like for the enterprise legal market.
Three hypotheses for 2026
Today’s primary theses are that we will see significant structural change in the next 5-year timeframe, in the following specific ways.
- ALSPs are poised to cross the chasm to penetrate mainstream markets, implying 2x to 3x growth in both wallet share and market share by 2026. See Post 52 (summarizing breakdown of markets into five distinct subsegments based on affinity for innovation).
- Law firms will continue to experience intensifying competitive pressure. This will likely manifest in continuing consolidation in all its various forms, up to and including dissolution of underperforming firms and re-sorting in the talent market. I believe those pressures will also lead to accelerating investment by the survivors and winners into the modernization of legal practice & service delivery.
- Corporate legal departments will likely need to increase investment in internal infrastructure across talent and systems, with the aim of building and stabilizing a more diversified supply chain.
As I noted at the outset of this series, the intent is not to make lucky guesses about what the future might hold. Rather, the goal is to provide useful framing and analysis of our shared problems in service of more intentional action toward shared solutions and sustained progress.
On their face, these are not particularly bold statements. Rather, they all represent a continuation of trends that are observable today. However, it’s worth noting that the change we see in 2021 remains largely due to the pioneering efforts of the innovation-minded minority, who laid the foundation during an incubation period that is now more than two decades old (and thus imperceptible to many). If ALSPs are indeed able to achieve the extent of widespread uptake described above, the second- and third-order impacts on the state of play will be huge.
A. The enterprise market is (already) an interconnected ecosystem
The below graphic provides a conceptual and simplified summary of four key themes discussed in depth in previous posts in this series. It also attempts to frame how these themes translate to varying impacts and implications for four distinct subsegments that participate in today’s enterprise legal market: (a) corporate legal departments; (b) incumbent law firms; (c) invading new entrants across ALSP and Big 4 categories; (d) legal tech companies (which we’ll cover in greater depth in Part V).Red and pink boxes indicate generally negative implications, while blue boxes indicate favorable conditions. The banded boxes indicate that external forces are likely to manifest differently for individual players within each category. The diagram also runs roughly from left to right, on the premise that the choices and actions of corporate buyers will largely dictate the range of optionality for all supply-side players (an important point which we’ll discuss in greater detail shortly). Similarly, the choices and actions of law firms will materially influence the windows of opportunity and barriers to entry for ALSP and Big 4 competitors (such is the privilege of the incumbent and the risks-reward tradeoff of entering new markets). Cf. Post 213 (Zach Abramowitz describing how a good number of large firms are successfully exploiting their superior market position). Lastly, the addressable market opportunity for legal tech remains dependent on corporate law departments, law firms, and “NewLaw” service providers.
(i) Time is a flat circle & only clients can break the wheel
Sustained pressures on the corporate legal function are well documented (to reduce spend, to establish budget controls, to demonstrate ROI); it is somewhat obvious to point out that these pressures translate directly to the competitive context for primary outside suppliers. However, the interdependencies across these groups are well worth exploring.
[C]orporate legal departments are in danger of missing an important opportunity. Far too many of them are looking for relatively small, short-term savings, and doing so in a way that could critically damage key relationships. Corporations should aim higher.
The above quote is from a Harvard Business Review article on the imminent transformation of the corporate legal function. It was published nine years ago. (I will pause here for the collective 🤦♀️🙄 🤦🏽♂️).
The article continues on: “This is a once-in-a-lifetime chance to do four significant things: (1) Assign legal work to the providers best suited to a particular task, rather than paying a premium for one-stop shopping; (2) lower legal costs without sacrificing quality; (3) create greater transparency and accountability; and (4) derive greater value from in-house counsel.” See Danny Ertel & Mark Gordon, “Points of Law: Unbundling Corporate Legal Services to Unlock Value,” Harv Bus Review, July-Aug 2012.
Regardless of the cynicism you might feel at revisiting well-worn strictures or calls to action, the observation remains as true and relevant today as it was in 2012. Apart from being wrong on the “once-in-a-lifetime” bit, the article is well worth your time to revisit in full — but first let me offer a dose of relief for your change fatigue hype hangover.
It’s true many of us feel trapped in an endless repetitive loop of talking about change that never happens, but there are good reasons for this, and good reason to remain optimistic. Firstly, meaningful changes to complex systems happen gradually and take time to diffuse across a market (often much more time than we want or expect). Cf. Post 008 (foundational diffusion theory model). Secondly, the extent and progress of change remains unevenly distributed across the population: in other words, change happens but not at the same pace or in the same way for everyone all at once. See Post 052 (key graphic below); see also Hype Hangover in Big Law, Slideshare.net, April 10, 2018, and “Current State of Play: Everything’s Not Awesome,” August 2019.
Put differently, it’s accurate and fair that the four goals set forth by Ertel and Gordon nine years ago remain elusive for the majority of the enterprise market. It’s equally accurate, however, to note that a non-negligible proportion of corporate legal clients have broken much new ground since that time in experiments aimed at these broad and ambitious objectives. In short, we need to persist to sustain commitment to good ideas that are no longer new as well as aspirations and imperatives that take a long time to bear fruit.
That said, widespread adoption is required for innovations to extend their benefits to more market participants. This forms the crux of my hopes and beliefs for the future: that the hard-earned lessons of innovators and early adopters might more quickly and meaningfully change the lived experience of the more conservative majority.
To make that happen, we need corporate law departments to take a leading role. Unlike product businesses, legal services comprise a complex and fluid set of interactions between buyer and seller. Particularly in the enterprise market, buy-side decisions and capabilities in procurement & consumption remain tightly bound to how providers sell and deliver their services. Enterprise legal buy remains a shared endeavor, and it’s simply not possible for providers to package, price, and deliver services differently without clients willing and able to buy and use those services differently. Cf. Post 040 (Casey Flaherty making point BigLaw and in-house lawyers have undergone the exact same socialization process). This applies in equal force, whether to the much-maligned incumbent law firms, cf. Post 054 (noting that law firm partners have other priorities besides change and disruption, such as a heavy load of paid client work), or the often lionized disruptors in the NewLaw category.
(ii) “More with less” in perpetuity hurts everyone in the market
The primary reason for my belief that ALSPs will hit the tipping point soon is because they must. Corporate clients face a problem of scale, not efficiency. This is a problem that requires collaborative investment in complex human systems rather than ad hoc accommodations to disparate pain points. See Post 210 (Jason Barnwell of Microsoft outlining the new infrastructure needed to scale legal production by factors of 10x or more). The actual demand for legal solutions to business problems are growing exponentially, while the isolated efforts of providers can only result in incremental gains to cost efficiency (often at the expense of declining quality in client experience). See Posts 216 and 218 (offering analysis and theories on how and why corporate demand for legal services is growing, not contracting).
The most pressing imperative for corporate legal departments is to ingest and deploy “elite executive and business management skills” (though for a much more myopic purpose than outlined Barnwell’s ambitious and wide-ranging discussion). I posit that the most valuable skill that every corporate law department needs in 2021 and beyond is the executive art of the business case.
The reasons for this are many, but I’ll give just one: This is a task that cannot be outsourced. Without the ability to secure the budget and investment required by the demands on the function, corporate clients will remain forever trapped in a never-ending cost-cutting exercise, to the detriment of everyone involved. Worse yet, sustained strain on the corporate legal function and its outside supply chain introduces net-new risk — legal, financial and compliance risks — not only for the enterprise but for the social system to which we all belong. See Post 216 (summarizing the second- and third-order impacts of corporate wrongdoing).
If more corporate clients can attract and properly direct the executive sponsorship and funding implied by the type of experimentation and progress seen at Microsoft, Cisco, Liberty Mutual, and other leading corporations, the build and testing of scalable, one-to-many legal solutions will accelerate.
B. Hockey stick growth is within reach for ALSPs
Regardless of whether the corporate legal wallet expands or contracts, ALSPs face a can’t-miss window of opportunity in the post-pandemic reality: to further erode the near-monopoly held by the legacy law firm model in the enterprise market.
(i) The market opportunity for ALSPs
To recap, the last downturn provided corporate law departments with a market-wide repricing opportunity. Facing immense headwinds in the form of unprecedented budget scrutiny and buoyed by the conviction that the artisan guild across BigLaw had functioned as a price-fixing cartel for at least two decades, clients applied across-the-board pressure to law firm rates.
That playbook is likely to result in diminishing returns in the post-COVID recovery, for two reasons.
- The widening performance dispersion across Big Law has concentrated watershed levels of revenue and profit growth to the benefit of a few firms. See Posts 217 (demonstrating K-shaped recovery in effect in AmLaw 200 performance since 2007) and 218 (providing various analyses of divergent financial outcomes for specific firms). Despite the headlines of perennial BigLaw prosperity, I suspect a surprising number of firms operate from year to year at real risk to financial health and short-term viability. Ironically, intensifying price pressure from clients — particularly on an across-the-board basis — will disproportionately hurt the firms that have already absorbed significant erosion to their margins, and as noted in Part I (216) of this series, this cohort is large.
- The single most critical factor underlying client ability to negotiate rates down is the credible threat of walking away. After the last recession, clients successfully established their willingness to vote with their feet and their dollars, by means of more frequent displacement by competing firms as well as building the in-house workforce to insource entire tranches of work. In many practice areas, it’s my belief that current prevailing rates and prices offer limited potential to press down further. Insourcing is a key lever for most corporate buyers of legal services, but it is a limited in both scope and applicability. Some tranches of work (e.g. episodic needs that occur intermittently or unpredictably) remain simply unsuited for insourcing, especially in environments of elevated austerity and budget scrutiny.
The clash of corporate legal’s “more with less” challenge and the growth imperative for law firms to seek safety in size and scale likely cannot be resolved without a pressure valve. ALSPs offer a viable pathway to relieve those pressures, even in the New Austerity, because they are built differently from law firms in three important ways.
(ii) How ALSPs are different & how they can win
Firstly, ALSPs are built to handle both flow-oriented and episodic mandates; regardless of law firm claims that they excel at both, I persist in believing that most law firms are better suited for the latter. ALSPs share the market-making attributes of a law firm platform to match their own talent supply with market-wide demand for services. However, they are able to maintain a sizable standing workforce at much more favorable cost structures (via wage arbitrage intrinsic in near-shoring and off-shoring to lower-cost markets) relative to both corporate legal and incumbent law firms. Bench depth is often a challenge even for large law firms. The execution burst and coordination cost required to flex up a large team to meet peak load demand make new matter intake and new client onboarding perennial friction points in client experience (as well as a significant deterrent to market efficiency by means of imposing stiff switching costs for corporate clients). ALSPs are designed from the ground up to perform better in these tasks. See Jae Um for Thomson Reuters, “Is Thomson Reuters Pangea3 the Original ‘Law Company?‘” Feb 2019 (Q&A with Ed Sohn and Joe Borstein on differentiators of the managed services model).
Secondly, most leading ALSPs in the market today have technology enablement and process orientation built into their ethos and DNA. While many law firms are making valiant and sustained efforts to bolt on these critical capabilities, they are simply geared to maximize other capabilities that are scarce, intrinsically valuable and very expensive (e.g. blindingly pedigreed and specialized legal expertise). This leads to much higher marginal costs (in hard dollars and in social/political capital) for law firms to play catch-up.
Thirdly, as new entrants, LPOs and ALSPs have had to build or buy advanced sales and marketing capabilities. This is especially crucial to driving adoption of new methods of procurement and consumption of services. Particularly in situations calling for a fit-for-purpose team that offers a trifecta of “process rigor with metrics for performance, a  talent model built for scale and specialized expertise, enabled with the latest and most appropriate tech,” consultative sales capabilities are a must. See Post 034 (explaining consultative sales capability as a key driver of innovation diffusion).
Lastly, ALSPs offer something that law firms and the Big 4 will find near impossible to muster: enviable clarity of mission and disciplined focus thrust on them. Although many ALSPs are backed by private equity, most ALSPs remain unencumbered by legacy investments and stakeholder dependence on a long tail of too many clients spread thinly across the practice, geography and sector matrix. These are invisible but very real deterrents to agility for both Big Law and the Big 4. The primary reason I favor ALSPs as the more likely insurgent to take share from incumbent law firms is that law remains a non-core segment for the Big 4, whose incursion into the legal market will likely favor (a) regions with relatively lower regulatory barriers like Europe and APAC and (b) practices directly adjacent to anchor service lines across tax and transactions. The legal market will likely remain non-core for the Big 4 simply based on relative size of the total addressable market, and while the global accountancies have the right capabilities and footprint to pose an existential threat, they also have a track record of dabbling and retreating as their own strategic priorities flex over time. ALSPs, on the other hand, are built for purpose and singularly focused on the legal market.
(iii) ALSP position in the current state of play
In the most up-to-date study of ALSP penetration available, Thomson Reuters estimated the size of the global ALSP market at $11 billion as of 2017, with a projected 25% rate of year-on-year revenue growth for most ALSPs. Both sound fairly aggressive to me, although a global revenue figure in the $12 to $14 billion for 2020 would not be out of the question. To provide a frame of reference, a directionally reliable size for current global market for all legal services hovers at around $750 billion, with incumbent law firms occupying about 55% of share; estimates of market penetration by adjacent categories LPO and Big 4 stand at about $7 billion and $1 billion respectively, while legal tech companies likely add up to about $3.5 to $4 billion.ALSPs have definitely landed, and their primary focus is to expand, firstly wallet share within the current client base and secondly market share at each customer segment/service line intersection. See Casey Flaherty & Jae Um, “ALSPs: Already Here & Looking Upmarket,” Law.com, September 20, 2018 (key graphic reproduced above, breaking down responses from 2017 Altman Weil CLO survey). A compilation of snapshot surveys of corporate buyers from Blickstein Group, CLOC, Altman Weil and ALM since 2017 suggest that at least 60% of corporate clients have at least experimented with ALSP adoption, although sustained entrenchment and meaningful displacement of wallet share is likely much lower, around the 30% to 40% range. On balance, ALSP adoption is likely much higher among very large corporations with fairly large in-house teams.
To drive market-wide shifts to improve increasingly strained client-firm dynamics stemming from the sustained budget pressure on corporate legal and pricing pressure for law firms, “mainstream” ALSP adoption would likely need to cross the $35 billion dollar milestone. This would likely require sustained multi-year expansion of wallet share with a majority of mega-cap corporations and 40-50% among large-cap companies. These are goals that are well within reach.
C. BigLaw strikes back: the incumbent response
Many law firms have expanded and diversified their practice mix in the past decade with the goal of building a full-service platform. This growth bubble did not happen in a vacuum; rather, it was at least in part a defensive maneuver that was motivated by in-house behaviors that indicated a preference for “one-stop shopping” decried by Ertel & Gordon in their 2012 HBR article.
This has led to many negative second-order effects: the ever-frothier lateral market is now a self-sustaining appendage to the legal market. The walls of partnership have become more porous in many law firms to accommodate a revolving door of lateral partner hires and departures, with adverse impacts on law firm culture as well as service continuity and supply chain stability for corporate clients. Meanwhile, the promise of “anchoring” and “institutionalizing” large client accounts by means of cross-selling and cross-practice collaboration still eludes most firms, attracting the fair critique of running “hotels for lawyers.” See, e.g., Bruce MacEwen, “A One-Firm Firm or Legal Co-op?,” Adam Smith, Esq., July 19, 2013 (coining and defining term); Post 190 (noting that few lawyers have ever experienced firsthand a true team-based environment with its corresponding cultural and commercial benefits and advantages; thus the settle for the inferior hotel model).
All this, of course, represents BigLaw’s attempt to secure and expand wallet share. BigLaw’s investments into captive ALS arms likely represents an extension of that strategy and a sign of willingness to invest in experimentation and evolution as much as a direct response to the ALSP threat. See Post 218 (key graphic reproduced below, showing AmLaw and Global 200 firms with captive ALS investments by size and RPL).
Deciphering Big Law investments into diversified models requires a micromarket view
Although there will be exceptions, I suspect that most BigLaw ALS arms are built for the primary intent of unbundling existing services to improve cost structures and margin. In that sense, expansion into different labor and service delivery models are to be commended. However, I remain relatively less bullish about the pace and extent of market-wide benefits of BigLaw’s captives. To clarify, a well-executed and operated captive ALS extension will certainly accrue to the financial performance of that particular firm and likely deliver benefits to the clients serviced by those teams.
However, I think that service model innovation at scale will elude most BigLaw firms at least for the foreseeable future, and that’s no slight to these firms. Managing multiple models within a partnership structure presents a very, very advanced challenge. In order for success to even be possible, law firms must be firing on nearly all cylinders in the tactical, operational, and strategic aspects of management and planning.
The graphic below attempts to set forth the mission-critical fundamentals of law firm management. As against the pressures law firms face in the current environment, the blue boxes are non-negotiable capabilities for any AmLaw 200 firm, and in 2021, most of these firms perform well enough. To elevate competitive strategy to diversified business models requiring drastically different approaches for go-to-market, financial and operating model, and talent management, successful firms will need “best in breed” command on both sides of the P&L (expense controls & profitable revenue).
For the majority of firms across BigLaw, the implied costs and distraction from managing the core is likely reason enough to favor partnering with ALSPs rather than competing directly with them. Certainly, a handful of global firms come with the requisite scale, operating platform, and financial leeway to experiment and succeed. A&O, Reed Smith, and Baker McKenzie fit this mold. Narrow-line specialists like Ogletree or Akerman face different types of opportunities and incentives to experiment with captive ALS, but that does not position them at direct odds with new entrants. For the most prestigious brands shown above, like Paul Hastings, Cooley, Orrick, King & Spalding, a key motivator might be to retain and extend control over consistency and seamlessness of the client experience in rapidly commoditizing aspects of complex legal mandates.
Rather than chase an illusory path to differentiation, many incumbent firms who do not fit naturally into these categories may be better served by focusing on improving performance and client satisfaction in core areas, modernizing the practitioner experience by investing in core rather than frontier tech, and in optimizing some of the management fundamentals in the graphic above.
An interconnected and interdependent system must evolve together
These observations and recommendations address a narrow slice of the legal market, in an attempt to weave together a cohesive narrative on how the competitive choices and commercial behaviors of one part of the market inevitably affects the functioning of the supply chain. As a corollary, I hope the above discussion also gives some sense of why innovation and strategy buzzwords often play out differently and to widely varying results for market players occupying differing positions in the current state of play.
In Part V, we zoom back out to a broader market-wide view, with focus firmly on the potential for legal tech to change the board for all players.