Even in the US, the neat line between law firms and ALSP is starting to blur.  Nonetheless, the opportunities are only growing.

This post shares some of the most frequently asked questions I receive as a law firm consultant with expertise in ALSPs.  I am sharing this information because I believe that if more people understand how to leverage and/or mimic the most effective aspects of ALSPs, the adoption of ALSPs and new business models will accelerate.

What is an Alternative Legal Service Provider (ALSP)?

“ALSP” is an umbrella term used to describe a wide variety of businesses in the legal industry that are not law firms, but which provide legal or related support services. ALSPs usually leverage low-cost labor, technology, and efficient processes to perform certain types of work more quickly and less expensively than many law firms can perform it.

Because ALSPs emphasize function or task, the term “NewLaw” is often used to refer to the ALSP sector or, alternatively, to describe a more functional/task-based approach to legal work that can be adopted by traditional law firms.  See, e.g., Post 206 (David Cunningham noting that ALSP/NewLaw business model “can, in theory, [be] adopt[ed]” by “any legal service provider”); Post 253 (Anusia Gillespie defining and summarizing the NewLaw approach).

As you’ll read later, the definition of ALSP is loose and has overlap with other business structures, like the ABS, but unlike an ABS, there is no license for operating as an “ALSP.”

How are ALSPs and law firms different?

Put simply, a law firm is a business entity formed by one or more lawyers to engage in the practice of law.  An ALSP is a business that is not a traditional law firm in structure but can serve as an alternative provider of many of the same or related services.  ALSPs can perform work in a paraprofessional capacity under the oversight of the licensed attorneys who engage them. See Post 285 (discussing how ALSPs operate solely within the very large Lawyer to Lawyer (L2L) sector and thus are not subject to the Rule 5.4 prohibition on fee-splitting).

Decades ago, when ALSPs were more narrowly focused on offering one or very few specific services, such as discovery, they were known as “pure-play” legal process outsourcers (LPOs). Today, however, many ALSPs provide an array of services including business process (BPOs), knowledge management (KPOs) and technology-related security (MSSPs).

This post’s lead graphic provides a generalized comparison between law firms and ALSPs. Granted, this comparison table was more relevant when these entities offered services that were more distinct in the U.S., which was up until late 2020.

What happened in 2020?  Certain states started to relax restrictions around the business and practice of law. As law firms modify their ownership and management structures, and other organizations offer services that may have formerly fallen under the purview of lawyers, the defining lines that separate law firms and ALSPs are going to blur.

In August 2020, Arizona approved outside ownership of law firms for firms and Utah launched a regulatory sandbox pilot program allowing nonlawyers to offer certain services that have traditionally been considered legal services, such as:

  • Filling out Chapter 7 bankruptcy forms
  • Preparing uncontested divorce paperwork
  • Disability claims
  • Immigration petitions
  • Unemployment hearings
  • Uncontested probate document preparation
  • Forms-based estate planning

Other states such as New York, California, and Florida have investigated deregulation (but so far none have approved it).

And deregulation is spreading across North America: in August 2021, Canada (Ontario and BC) followed in Utah’s footsteps. See Sam Skolnik, “Canada Joins U.S. in Nonlawyer Legal Service Ownership Tests,” Bloomberg Law, Aug 21, 2021.

What is an Alternative Business Structure (ABS)?

Such deregulation has allowed a new breed of business entity to emerge from the U.S.: the Alternative Business Structure (ABS).

According to the Arizona Supreme Court, “an ABS is an entity that provides legal services and has nonlawyer ownership, managers, or decision-makers in the business. Nonlawyers could have economic ownership (an equity stake) in the business, but only lawyers and other individuals licensed or certified by the Arizona Supreme Court are permitted to provide legal services.”  Arizona Judicial Branch, “Legal Services Reforms: Alternative Business Structures (ABS) Questions and Answers,” accessed Feb 16, 2022.

The ABS license may be new in the U.S., but it has been around for over a decade in the U.K. Following the Legal Services Act of 2007, in 2012, the Solicitors Regulation Authority (SRA) issued the first ABS license with the objective that this would encourage increased innovation, growth, and profitability of service providers while also improving access to justice and ensuring effective and transparent regulation in the industry.  See Centre for Strategy and Evaluation Services, “Impact Evaluation of SRA’s Regulatory Reform Programme: A Final Report for the Solicitors Regulatory Authority,” April 2018.

A law firm can be an ABS (e.g., Singular Law Group). So can a law company that is part of the NewLaw/ALSP sector (e.g., Elevate). So can a unit of a legal technology company (LZ Legal Services is a unit of Legal Zoom). As we see more overlap in structural elements and service offerings among law firms and ALSPs and ABSs, the more traditional distinctions between them are fading, too.

Nomenclature matters less than performance. Ultimately, what matters is which business model is the highest-performing relative to its purpose.

Should we become an ABS or, alternatively, create a captive ALSP?

Although ABS is new, at least to the US, many US law firms have already taken the step of creating their own captive ALSP. See Baretz+Brunelle, Home Court Advantage: The AmLaw 100 Moves into Alternative Legal Services (2022) (estimating 35% of firms in AmLaw 100 have captive ALSPs).

Whether you should do either of these things is not something I can address in this piece. But it’s certainly a good question.

By evaluating whether you have a business case to do either of these things is the first step we take in getting the answer. Failed initiatives can damage employee morale and consume valuable and limited firm resources that could have been better applied elsewhere, so it’s good to find solid footing before going any further down these paths.

We’re most interested in becoming an ABS or creating a captive ALSP so we can seek outside investment. What do you think about that?

If you are interested in selling a technology application and related services, creating an entity that is partially owned by the firm plus outside investors may help you develop, test, sell, and scale your technology offerings more quickly than if you tried to do this purely within your firm.

That said, even if you create a separate entity for this purpose, “ALSP” may not be the right moniker; calling it a “legal technology” subsidiary or affiliate might be more apropos.

Firms intrigued by the ABS structure because of its ability to raise capital need to ask themselves how they will use the money to do anything differently. All investors seek returns on their investment. Some firms want to build something innovative or purchase new technology they otherwise could not afford. Outside investors are one option.  So is long-term debt, albeit the collapse of Dewey Ballantine revealed that the risks of real.  See Sara Randazzo, “Law Firms Take Shears to Debt Loads,” Wall St J, July 15, 2015. A third is merging with another firm that has greater resources.

Regardless of the path you choose, you should have a solid business case and a strategy with an execution plan before you embark.

Who else has tried this ABS structure?

Lawyers love precedent, and we can learn how other firms that have adopted the ABS structure have fared since.

In 2014, the Solicitors Regulation Authority (SRA) in the UK issued its first report on “how ABSs are ‘doing things differently’, and how this may lead to future impacts on the legal services sector.” SRA, “Research on alternative business structures (ABSs),” May 30, 2014.  Among their findings, reasons businesses have applied for the ABS license include:

  • To allow more non-lawyers to direct and manage the business,
  • To improve firms’ succession planning, and
  • To receive outside investment which they typically applied toward technology, marketing, delivering legal services in new ways.

Here’s one case study I call “The Parable of Parabis Group”:

Parabis Group was once a top legal and professional services firm in the UK. In 2012, Duke Street invested in Parabis, thereby becoming the first private equity investor to invest in a U.K. solicitors’ firm. By 2015, Parabis experienced a dramatic collapse, with the firm being broken up and sold in pieces.  Legal Business, “Update: Parabis Group enters £50m pre-pack administration,” November 23, 2015. There’s a lot of information I am not including here, but part of Parabis’ downfall was due to “reforms and a new fixed-fees regime for personal injury claims, both of which came into force in April 2013, reduced average revenue per case from £2,300 to £850.” John Hyde, “Parabis: unsecured creditors set to lose £46m as scale of collapse laid bare,” Law Society Gazette, Jan 6, 2016.  The firm also suffered from making acquisitions without integrating multiple case management and accounting systems, which created an inefficient and burdensome infrastructure.

Lesson to be learned? Whatever your source of capital, you need to be laser-focused on improving and streamlining your infrastructure, operations, and services.

The ABS structure has some disadvantages and limitations. For instance, to operate as an ABS one must operate where ABS is recognized. The success of the ABS, according to both the regulators and the licensed ABSs, is varied. Eight years ago, the SRA concluded that “[m]ore research is also needed to understand whether ABSs are driving new innovations in the delivery of legal services.”  SRA, “Research on alternative business structures (ABSs),” May 30, 2014.  The same is true today, suggesting that this market may take a full generation or longer to evolve into a relatively mature form. Cf Post 235 (Bill arguing that the one-to-many legal market will likely take decades).

If you’d like to learn more about ABSs, I suggest you check out this 2018 report by an independent consultant on the impact of the SRA’s regulatory reform “programme.” You can find the U.K.’s directory of ABS licensees here: SRA | Register of licensed bodies (ABS) | Solicitors Regulation Authority; and Arizona’s ABS directory here: ABS Directory February 2022.pdf (azcourts.gov).

Some law firms are ALSP clients. How are law firms using ALSPs?

I created the table below using publicly available information about some law firms that use ALSPs (not all firms that use ALSPs advertise the fact).

Note how these large firms are using large ALSPs.  A common lament I hear from midsize and smaller firms is that they do not feel like they are a priority to the larger ALSPs. But that’s OK: there are many midsize and smaller ALSPs that will bend over backward to serve these other firms.

What is the minimum project size I must have to work with an ALSP?

Usually, this minimum is a dollar value. On the low end, some ALSPs will extend an offer for a free, small trial project, or you could hire a smaller ALSP to perform a one-off project like industry research for as low as $200. Other ALSPs request a minimum project or annual spend of $50,000-150,000 but will nonetheless offer an introductory project at loss leader pricing if they think your firm might make a larger commitment for future work.

Remember, regardless of the project size, you will invest time establishing a relationship and communicating work expectations.

How much of the market for legal services do ALSPs command?

This is not an easy calculation to make.  The reasons include, but are not limited to the:

  • Dearth of publicly available financial information,
  • Various offerings and markets served by ALSPs,
  • Loose definitions within the industry of ALSPs and legal technology companies, and
  • Fact that one must identify the limitations of any market one cares to understand,

Invariably, a meaningful answer involves well-defined parameters and assumptions combined with available data.  Here, both conditions fail.

However, building upon what’s available, Bill Henderson has published one of the best methodologies I’ve seen with respect to estimating the US market for lawyers’ services, measured in revenue, by type of client. See Post 285. If we triangulate this information with other publicly available information such as survey data from Thomson Reuters’ Alternative Legal Service Providers 2021 Report, we can surmise that ALSP adoption is improving as ALSPs increasingly appeal to more stakeholders: The clients who use them as well as the legal and business talent gravitating away from the traditional law firm track and towards employment with ALSPs.

How do ALSPs avoid unauthorized practice of law?

The definition of what constitutes the practice of law varies by jurisdiction. However, to completely avoid the issue, all the ALSP lawyers, paralegals, and work in a paraprofessional capacity under the authority of a licensed attorney. This attorney — employed by a law firm or legal department — is responsible for their work.

As for lawyer services sold by an ALSP, I’ll pull a quote from professional ethics expert, Lucian Pera of Adams and Reese, from an article we co-authored:

Beginning with a 1988 ABA ethics opinion, the services of lawyers can legally and ethically be sold directly to clients by a staffing company owned by nonlawyers. Those staffing company-employed lawyers have to be supervised by other lawyers—in-house lawyers or outside law-firm lawyer for the same client. Done right, there’s no attorney fee-sharing or unauthorized practice of law involved.”

Lucien Pera & Yvonne Nath, “What If… Chambers Ranks Law Firms Alongside ALSPs?” LawVision Blog, Aug 20, 2020.

Are ALSPs secure?

When it comes to information security and data privacy, you’ll read here that Some ALSPs are More Secure than Most Law Firms.  However, your firm or legal department should do its diligence and audit the security measures any ALSP has in place before you decide to work with them. Many ALSPs are willing to conform to meet your standards.

Is it ethical to charge our clients for ALSP assistance above what we pay the ALSP?

Fortunately, this one has a clear and definite answer.  “For nearly thirty years, the U.S. Supreme Court has consistently recognized that paralegals, law clerks, and other paraprofessionals’ services may be billed (and reimbursed by the prevailing party) at ‘prevailing market rates’ verses at the rate actually paid to the paraprofessional.”  LawClerk, “The Business & Ethics of Using Freelance Lawyers,” accessed February 16, 2022 (citing Missouri v. Jenkins, 491 U.S. 274 (1989); Richlin v. Chertoff, 553 U.S. 570 (2008)).

Remember that when you provide contract support with resources they need to perform the work, you are adding value to what they bring to the table. An upcharge is a reasonable way to cover the expenses of those additional resources you’re providing.  In general, it is a good idea in your engagement letters to discuss your use of resources and the rates at which you are billing for them.

Do ALSPs run conflict checks?

The good ones do.

Editor’s note:  This essay was Yvonne Nath’s last post as a regular contributor to Legal Evolution, as she announced her retirement from the legal industry in Post 308.  As a legal industry colleague, Yvonne has been one of a kind.