Captive ALSPs — specifically created law firm subsidiaries that offer alternative legal services — are on the rise, and their increased use could transform the legal market
The past couple of years have seen an explosion of law firm captives — specifically created law firm subsidiaries that offer alternative legal services, many of which are focused on either software and product development or legal services around innovation and consulting. In fact, the law firm captive sector is now the fastest growing category of alternative legal services providers (ALSPs).
According to the Alternative Legal Services Providers 2023 Report, published recently by the Thomson Reuters Institute, the Center on Ethics and the Legal Profession at Georgetown Law, and the Saïd Business School at the University of Oxford, law firms are not only using ALSPs — a market that has grown to more than $20 billion in size — but are creating ALSPs themselves.
Indeed, 22% of global law firms said they already have established an affiliate that provides legal software in conjunction with service offerings, up 7% from just two years ago; and 17% said they offer an interdisciplinary ALSP with a mix of services, up 8% from 2020. And more than 10% of global firms said they offered a general consulting or accounting firm, or a legal process outsourcing firm, each representing an increase in the past two years.
This represents substantial growth for a law firm captive market that largely didn’t exist even 10 years ago. Mirroring the broadening of services that has seen the wider ALSP market, law firm captives today are increasingly moving up the value chain and focusing more on services.
“The lesson I learned was in the messaging, explaining that it’s not a comparison of a true vendor or a captive… It’s that we’re really a hybrid and that we’re bringing a little bit of something different to the equation.”
For example, Troutman Pepper’s eMerge subsidiary was one of the first in this category, founded in 2012 as Troutman Sanders eMerge before the firm’s 2020 combination with Pepper Hamilton. Alison Grounds, eMerge’s founder and managing partner (alongside her role as a litigator at the firm), notes that at the beginning eMerge was largely being utilized for technical work, primarily around e-discovery. But quickly, Grounds says, she found that some potential clients were “lumping us into what I would say is false equivalencies, comparing us to what a true non-law firm affiliated vendor would do.”
The value proposition of a law firm captive, Grounds explains, comes specifically because it is tied in closely with the firm, rather than set apart from it. “We are part of the law firm. Our lawyers are practicing lawyers at the firm,” she says. “We also happen to be able to do some things more cost effectively and efficiently than traditional law firms have done. So, the lesson I learned was in the messaging, explaining that it’s not a comparison of a true vendor or a captive, if you will. It’s that we’re really a hybrid and that we’re bringing a little bit of something different to the equation.”
That journey to find the captive’s increased value mirrors what Bryon Bratcher found with Gravity Stack, a subsidiary of Reed Smith. Bratcher, director of practice solutions at Reed Smith and managing director of Gravity Stack, says that the subsidiary was originally focused heavily on products. But while product development is still part of Gravity Stack’s remit — and one he’s proud of — these days the captive is more focused on fitting into a client’s overall strategy.
“We found that there’s such a variety of legal needs, business needs, and technology needs from clients that it’s better for us to have the expertise to be able to be more technology-agnostic and be able to implement a solution that works for the actual corporate client, rather than trying to push something down their throats that is a proprietary tool,” Bratcher says.
Focusing on strategic areas
It’s perhaps no surprise then, that some of the largest growth areas for law firm captives occur in more strategic areas of the firm’s business, according to the ALSP Report. For example, litigation and investigation support is now global law firms’ third-most likely area in which to establish a captive; and 42% of firms said they were at least somewhat likely to establish this type of captive in the recent survey, as compared to 33% in 2020. M&A due diligence, legal research services, and non-legal/factual research also saw large percentage increases in those respondents saying they were at least somewhat likely to establish this type of captive.
However, while establishing law firm captives is certainly on the rise, their usage isn’t universal. For instance, large firms are much more likely to have captive ALSPs: 75% of large firms said they were using either captives only or a mix of direct ALSPs and captives for e-discovery services, while just 30% of small firms said the same.
Those numbers didn’t surprise Grounds, who emphasizes how difficult it can be to establish an ALSP, especially without a large volume of clients and original investment capital coming from the parent law firm. Further, many firms don’t feel like they have a core competency in the type of work many law firm captives perform, meaning that establishing a captive takes not only financial commitment, but leadership buy-in as well.
“What we found is, you get what you pay for,” Grounds says. “If it’s a loss leader and you’re not making investments in the technology, the technology is not going to be as strong as it could be. Whereas if what you’re selling to the client as a valuable service is not just hosting data somewhere, but hosting it in a customized industry-leading tool that reduces overall cost and improves the accuracy of the legal work that you do, then yeah, that’s worth a penny.”
Bratcher agrees that law firm captives can be risky, particularly on the smaller firm side. However, those that have been successful, he adds, are the ones that are actively integrated into the firm’s strategic planning. A captive “can’t just be a marketing ploy. It’s got to actually be in that strategic plan,” he adds. “I think it’s a concerted effort and acknowledgement by law firms that they have the capability to provide an additional breadth of services for their clients and be their trusted advisor. And I think the firms that have been really smart about it have really infused that thinking into their strategic plans.”
Indeed, Bratcher believes more firms are coming around to this way of thinking, which is why the market is continuing to grow. “I think there’s plenty of room for the entire industry to continue growing, mainly because these law firms are specifically focused in the legal sector and their relationships with legal compliance risk,” he explains. “I think that there’s plenty of market for everybody, but I do think that law firms will continue to grow from that respect.”
Grounds agrees, noting that she’s seen a shift in law firms’ philosophies towards ALSPs and alternative ways to conduct business even in the 10 years since Troutman Pepper eMerge began. “Law firms weren’t thinking about how to do things faster and more efficient in the past, and now we are, and we’re excited by it,” she says. “The practice is changing, and I think it’s changing for the better.”
