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17 January 2020

'Alternative' legal business models and processes fast becoming the norm, report claims

Report on US market claims 'fundamental shift' under way as clients take control of relationship with their advisers

By Dr David Cowan

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Legal practices and services typically dubbed as ‘alternative’ such as alternative fee arrangements and alternative legal service providers (ALSPs) are fast becoming the norm, a report on trends in the US legal market has claimed. According to the 2020 Report on the State of the Legal Market a ‘fundamental shift is now well underway’ in the US as law firms struggle to maintain their business models in the face of a combination of pressures.

The report, which is published by The Center on Ethics and the Legal Profession at Georgetown University Law Center and Thomson Reuters Legal Executive Institute, argues that while the law firm-centric model, where firms decide how services are priced and delivered, has been ‘remarkably resilient’, clients have now taken ‘decisive control’ of the market and are demanding improved efficiency, predictability and cost-effectiveness’.                                                 

It points to the emergence of legal operations professionals who focus on managing outside counsel relationships more efficiently alongside widespread disaggregation of services as clients have increasingly opted to create virtual teams to handle particular projects comprising outside counsel, legal staffing firms, accountants and third-party project managers.

The rapid growth of alternative legal service providers (ALSPs), such as the Big Four consulting firms and other non-law firm service providers, is also becoming a major disruptor of the traditional law firm model, the report argues.

Law firm innovation

At the same time, the report notes there have been some innovative responses from law firms, such as new pricing strategies, tying compensation and partner performance to efficiency and profitability metrics, and partnering with ALSPs or developing in-house captive ALSP subsidiaries. 

James W. Jones, a senior fellow at the Center on Ethics and the Legal Profession and the report’s lead author, said: “We should stop referring to innovative services or delivery models such as alternative fee arrangements and alternative legal service providers as ‘alternatives’.

“They are increasingly becoming the norms in replacing prior ways of providing legal services. Clients are rapidly driving all legal service providers, not just law firms, into a new model that is more collaborative and multidisciplinary, built around integrated technology platforms and delivered with value-based pricing.”

Mike Abbott, vice president, enterprise thought leadership and content strategy, Thomson Reuters, added: “Much of the recent disruption of the legal market has been enabled by technology, and law firms themselves are increasingly driving that innovation.

“We’re seeing a trend towards more law firms launching their own software development businesses, investing in legal tech start ups and establishing technology incubators. These firms understand they can not only benefit from, but can help lead, this technology-based disruption of legal services as a means to improve efficiency and expand their business by creating new products and services for clients.”

Productivity fall

The report found that productivity across the legal sector fell back into negative growth territory in 2019, reversing the performance in 2018. These key performance indicators added up to an average revenue growth across the market up 5.4% for the year.

The ability of law firms to steadily increase their rates has been the primary driver of law firm financial performance in recent years. That trend continued in 2019, with all categories of rates rising: standard rates by 4.4% worked rates by 3.8%, and billed rates by 3.9% and collected rates by 3.3%.

The report’s publication comes hard on the heels of a survey of 200 law firms which found they were writing off up to 20% of their fees as they struggle to comply with their clients’ onerous billing requirements.

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