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The perfect storm for legal outsourcing: M&A activity in the ALSP sector

By Zohar Fisher (Adv.)

2021 year-end reports estimate that the Alternative Legal Services Provider Market has exploded into a $14 billion industry. With an eye towards what the ALSP Market has in store for 2022, let’s review the notable trends that emerged in 2021.

First, the significant increase in ALSP adoption by mainstream law practices will likely lead to ALSP’s being considered mainstream themselves, and not alternative. Before the COVID-19 pandemic began changing how the legal industry operates, ALSP’s were already carving out their share of the market through providing outsourced e-discovery services and alternative staffing services.

ALSP companies have demonstrated their value to the legal industry, and numerous investors have rushed into the ALSP industry to participate in the value creation. The coronavirus pandemic has not slowed down ALSP’s growth and others’ appetites to invest in them.

In fact, it appears that 2021 was one of the most prolific years for ALSP profits, growth, and outside investment. This could be the result of 2021 producing record revenue for law firms, but it could also be the official acknowledgment that ALSP’s have matured into their own role within the legal industry.

In 2021, ALSP’s value was acknowledged by law firms and private equity companies alike. For example, private equity firms such as Blackrock, Inc., K1 Investments, and J.P. Morgan invested in ALSP’s during 2021.

Receiving funding from private equity firms, ALSP’s themselves capitalized on the opportunity to acquire smaller ALSP’s that complemented or expanded their existing business models. Possibly sensing pressure from external funding flowing into the industry, some established ALSP companies chose to also go on an acquisition spree during 2021.

Some reasons for the phenomenal growth seem to be that ALSP acquired companies that matched the need of their clients, such as international risk and compliance solutions, practice management improvements, and increasing the scale of legal consulting services.

Assuming the absorption of an acquired business goes well, growth through acquisitions is a proven business model that fends off competition while growing the business.

Law firms may have also contributed to ALSP industry’s hyper growth of 2021. In fact, the fastest growth among the ALSP industry has been ALSP’s that were established by law firms themselves, as captive subsidiaries. These captive subsidiaries have seen their growth explode by 30% a year.

When a law firm creates their own ALSP, it provides their clients the cost reduction benefits while allowing the law firm to retain full control over the ALSP; a win-win solution for law firms worried about quality control or external ALSP expenses.

Although law firm ALSP’s make up the smallest portion of the ALSP industry, if their growth rate continues then non-captive ALSP’s cannot ignore them much longer. This realization may have also contributed to the prolific merger and acquisition activity the ALSP industry experienced in 2021. Another trend that cannot be ignored is the rate of technological innovation within the legal industry.

Technological innovation has disrupted many industries, and law firm practice management has been disrupted, too. Lawyers no longer must submit handwritten briefs to clients, nor do they have to calculate expense accounts or personally review every document during the discovery phase of litigation.

The ALSP industry by showcases the purchase and acquisition of numerous companies that are primarily software companies. As the legal industry fully embraces technological solutions to problems faced during the COVID-19 pandemic work environment, the line between technology companies, consulting companies, and ALSP becomes increasingly blurry.

To recap, ALSP were sitting on cash stockpiles in 2021, private equity investments got involved, law firms began operating their own ALSP companies, and technological innovation is forcing the legal industry to evolve. The result was a merger and acquisition frenzy in 2021. Where does the ALSP industry go from here?

Despite growing concerns regarding undiscovered economic uncertainty from the COVID-19 pandemic and geopolitical tensions, the ALSP industry appears primed to continue its rapid growth. In January 2022, Mitratech continued its acquisition spree by acquiring Quovant in order to expand its legal billing services.

Also in January 2022, CJK Group acquired Retreat Programs to expand its international reach into English speaking markets. This international expansion is another example of ALSP’s expanding their reach to meet clients’ demands. The value that ALSP’s provide to the legal industry is undeniable and should only continue to grow.

A 2020 report estimated that law firms spending $15,000 to $25,000 yearly on tech services, per firm user, could save 20% to 30% annually by using an ALSP consulting service. Furthermore, for every technology, accounting, billing, or staffing problem, among others, that law firms face it amounts to time not spent solving clients’ legal problems.

These problems can distract law firms from their business generating tasks, and these problems have been increasingly outsourced to ALSP’s. This trend should continue uninterrupted through either independent ALSP’s, intra-law firm captive ALSP’s, or the increasingly fluid concept of consulting agencies. While the ALSP industry’s growth may slow down after an unexpected 2021 frenzy, the growth of ALSP’s is an international trend and the industry is just beginning to mature.

In addition to ALSP’s providing solutions to outsourcing, ALSP’s are increasingly providing staffing for legal roles. Such roles include litigation support, merger and acquisition due diligence, regulatory compliance, and contract lifecycle management.

Through ALSP’s, law firms can use contract attorneys for routine and repetitive tasks that consistently arise such as standardized bankruptcy forms, immigration forms, reviewing corporate documents, and litigation e-discovery reception, review, and organization.

The value of employing ALSP’s for these roles becomes apparent when a law firm’s permanent employees see their workload reduced and are available for more complex assignments.

The opportunity for law firms to significantly upscale their operations without taking on the traditional overhead of offices, employee costs, etc., is an opportunity that will remain attractive in 2022, and beyond.

In 2022, the value of ALSP’s will continue to be recognized and the industry should continue to see consolidation and independent growth. Chambers and Partners 2021 Alternative Legal Services Providers Report suggests that Spain and the Asia-Pacific Region are emerging markets.

The Report notes that corporate in-house counsels in Spain have an acute understanding of their outsourcing needs, and how ALSP’s can become a partner in achieving business efficiencies. The Report also anticipates the Asia-Pacific Region will see ALSP’s either trying to penetrate the market through operations in India, Honk Kong, Singapore, and the Philippines, among other locations.

This makes sense as we noted above that some of the 2021 consolidation appeared to be prompted by ALSP’s evolving to meet client demand for international risk and compliance operations. Establishing an outpost within the Asia-Pacific Region will provide ASLP’s with the opportunity to expand their footprint, while continuing to keep their existing clients happy.

In conclusion, the ALSP industry saw rapid consolidation and investment throughout 2021. Although the industry’s activity in 2021 may have been an outlier, the trend is consistent throughout international legal markets and ALSP’s will continue to grow.

Law firms and private equity companies alike have acknowledged the value of ALSP’s, and further growth and investment seems imminent. ALSP’s will also face increased competition from law firms who recognize the benefits of ALSP’s but want to retain total control over their functions. If you are ready to experience the benefits that an ALSP can provide, contact LawFlex to discuss how our world-class services can assist you.


About the Author

Adv. Zohar Fisher is the Co-Founder of LawFlex. LawFlex is an international legal outsourcing company.

Adv. Zohar Fisher is one of the leading veteran strategy consultants in the field of legal marketing, legal technology, mergers and legal outsourcing, holding vast experience and well know reputation of more than a decade in the legal practice field. He has acquired unprecedented professional experience and knowledge while closely and personally accompanying dozens of law firms around the world, lauded not once as the 'law firm whisperer'.

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