A recent survey has found that those in corporate law departments are largely optimistic about the potential for generative AI and programs such as ChatGPT in performing both legal and non-legal work.

In total, 82% of respondents say generative AI can be applied to legal work, while 54% believe it should be applied to legal work, roughly the same rate as their law firm counterparts. Similarly, 70% believe these tools should be applied to non-legal work as well.

The survey, conducted in late April by the Thomson Reuters Institute, gathered insight from more than 580 respondent lawyers and legal professionals within corporate law departments in the United States, United Kingdom, and Canada. The survey forms the basis of a new report, ChatGPT and Generative AI within Corporate Law Departments, which takes a deep look at the evolving attitudes towards generative AI and ChatGPT within departments, measuring awareness and adoption of the technology as well as lawyers’ views on its potential risks.

The report — which pairs with an earlier report done by the Thomson Reuters Institute, ChatGPT and Generative AI within Law Firms — also reveals several key findings that show not only how corporate law departments are approaching their ChatGPT and generative AI plans, but how those plans differ from law firms, and what legal departments want out their law firm partners’ generative AI use. These findings include:

Higher awareness and willingness to apply — Corporate law department leaders surveyed generally had high awareness of ChatGPT and generative AI, with 95% of respondents saying they had either heard of or read about ChatGPT or generative AI. That is higher than the awareness among law firm leaders, of whom 91% said they had either heard of or read about ChatGPT or generative AI.

More comfort with using the technologies — Only a small number of corporate law departments (11%) said they are already using or planning to use ChatGPT and generative AI in their legal operations; however, this was again significantly higher compared to use or planned use by law firm respondents (5%). Among those respondents who said they’re already using or planning to use ChatGPT and generative AI in their operations, 19% of both corporate legal and law firm respondents say they are already using these technologies on a wide-scale basis.

Acknowledgement of the risks involved — Three-quarters of corporate law professionals say they have risk concerns surrounding use of ChatGPT and generative AI, mostly in areas of accuracy, privacy, confidentiality, and security. Further, about one-quarter of respondents said they have received warnings from their companies about ChatGPT and generative AI usage for their work, but only 10% reported ChatGPT and generative AI had been banned at their companies. Many of the objections over AI use in legal work acknowledged the importance of human touch and expertise in the legal profession, the uniqueness and complexity of legal issues, the need for supervision and review of AI-generated materials, as well as ethical considerations and the perception by some that the technology may not be fully ready yet for appropriate use in legal.

Even with the potential risks, general counsel and others are actively preparing for a potentially major change in how work is done. “We’re not shutting our eyes to this,” says one senior legal officer at a large corporation. “We’re working on a solution that would work for us.”

And awareness of generative AI’s potential is likely to spur acceptance and usage, even in the usually reticent legal profession. “Before ChatGPT, technological advancement in legal software has been pretty incremental, but now it appears poised to take big steps toward something significant,” says Gunter Eren, General Counsel in Research & Development at the Business Innovation Centre of Konica Minolta in the U.K.

You can download a copy of the Thomson Reuters Institute’s new report, ChatGPT & Generative AI within Corporate Law Departments, here.

To understand this development further, the Thomson Reuters Institute has released its 2023 State of the U.K. Legal Market report, highlighting the current condition of the legal marketplace for both buyers and providers of legal services in the U.K.

For many U.K. law firms, this potential reduction in legal demand coincided with a period of increased competition among their peers. In fact, nearly half of all legal clients added law firms to their roster of advisers during the year, according to our research. The report, based largely on interviews conducted with U.K.-based senior buyers of legal services, further found that it’s becoming harder for many law firms to differentiate themselves, with a good deal of legal work being commoditized into standard packages in which price is the main differentiator. This is a bit of a reversion to the mature market for legal services compared to what had been experienced prior to 2020.

At the same time, U.K. law firms have been feeling an additional competitive pinch as a result of aggressive investments made by law firms based in the United States that are looking to expand their operations in the U.K. in order to grow their share of the market in the U.K. and Europe. The result of these efforts remains to be seen, however, as U.S.-based law firm operating in the U.K. tend to rely heavily on transactional practices, which have struggled of late, while U.K.-based law firms tend to rely on a more complete suite of client service offerings.

Further complicating the competitive landscape, according to the report, is that U.K. clients are looking to keep more work in-house, as part of a drive for efficiency and cost savings. That is not to say that there will not be work for law firms and other external legal advisers; however, it will be crucial for legal service providers in the U.K. market to understand clearly what it is that clients want and expect and then adapt their services accordingly.

You can download a copy of the 2023 State of the U.K. Legal Market report, here.

The current reliance on competitive pricing advantage seems likely to prove insufficient for many U.K. law firms. Indeed, the efforts of these firms to ensure they have the necessary expertise in all relevant areas will likely leave clients looking for greater value. Price advantage can easily be lost as firms look to become more competitive and comprehensive expertise becomes a given for most firms.

Rather, in the U.K. (more so than in many other regions of the world), clients are focusing on the quality of the whole relationship with their advisers rather than just individual factors. In a major shift over the past 10 years, the historical reputation of a law firm is no longer enough to keep it top-of-mind in the market. That is not to say that reputation is unimportant, rather, it is simply becoming less influential as factors such as legal expertise demonstrated by specialist knowledge and the commercial viability of advice provided to the client become more critical in clients’ minds.

The message of the report is clear: Firms need to re-consider how they present and deliver value to their clients. The key lies in understanding and meeting client needs — both in the context of the general counsels’ departmental responsibilities but also in the company’s broader strategic goals. In short, law firms need to demonstrate that they can act not just as a legal adviser but also as a business partner.

Many firms will say they do this already — and of course, some do. However, the evidence suggests that clients have a narrower and more limited perception of what law firms currently are offering. For those firms that can act as both legal adviser and business partner, the potential outcome could be lucrative. Some 35% of buyers of legal services in the U.K. anticipate that their overall legal spend will increase in the coming year, compared to just 26% who anticipate a spending decrease.

Increasingly, as the report denotes, clients are looking to send more of their legal spend to those law firms where the whole of the relationship between lawyer and client is one in which value is discussed, defined, and delivered.

However, the recovery is divergent in nature, with Am Law 100 firms and Midsize firms facing different sets of challenges and exhibiting varying strengths. In addition to improved performance across all major practice areas in Q1 2023, we are seeing the rise of macroeconomic counter-cyclical practices, led by litigation, labor & employment, and bankruptcy, while transactional practices continue to struggle.

Key takeaways in Q1:

• • The LFFI score improved from last quarter, but remains at historically low levels

  • Expense growth slowed for firms at the top of the market, but remains a struggle for most other firms

  • Demand for counter-cyclical practice areas and rate growth increased significantly, resulting in overall financial improvement

The divergent paths

These practices have driven Midsize firms to post the fastest demand growth for three consecutive quarters, as well as seeing better relative performance in transactional practice areas. These firms, however, still struggle with high expense growth, due to their historic hiring.

Am Law 100 firms’ challenges, on the other hand, include the largest demand decline of all tracked segments, primarily driven by a significant shortfall among the Top 50 law firms. However, these firms have found new strength in their ability to slow expenses, which relieves pressure on the LFFI score overall. Layoffs in Q1 appeared at first to be more widespread among Am Law 100 firms, but they remained relatively shallow and factored into direct expenses’ slowing pace.

This bifurcated recovery highlights the current state of the legal industry, with every strength coming with a weakness. Am Law 100 firms’ market-leading worked rate growth has offset some of its demand shortfalls; but in response, these firms’ collection realization against worked rates has declined more than in other segments. Meanwhile, Midsize firms’ headcount and expense expansion surpassed their strong demand and revenue growth, resulting in shrinking productivity and profitability.

Although law firms have not fully recovered from poor operating environment that led to Q4 2022’s all-time low LFFI, all metrics have improved to a certain extent. However, the rise of counter-cyclical practices provides additional caution for economic stability throughout the rest of 2023. The challenges faced by firms of all types could still feel overwhelming, but each segment’s differing trend in hiring and expenses may provide insight into what law firm leaders believe their prospects will be in the near-term and perhaps for the long-term future.

You can download the full “Law Firm Financial Index report” by filling out the form below:

Indeed, it is a very apropos conversation. The Thomson Reuters Institute has found that 65% of corporate law departments are experiencing increasing matter volumes, while 59% are dealing with flat if not decreasing budgets. This, and much more analytical data has been compiled into the just-published 2023 State of the Corporate Law Department report, which examines how corporate law departments, by and large, are managing these pressures to control outside counsel costs while anticipate increasing legal spend across practices, global regions, and industry sectors.

The report also delves into such topics as what law department leaders see as their main priorities, developing trends in corporate legal spend, and what strategies leaders are pursuing for 2023 and beyond. The findings in this report are the results of 1,569 interviews conducted throughout 2022 with professionals from corporate law departments within companies that have more than $1 billion in global revenue.

You can download a full copy of the Thomson Reuters Institute’s 2023 State of the Corporate Law Department report here.

Key findings in the report

Some of the critical developments and trends noted in the report include:

• • • Compliance with changing global regulatory developments has become the top priority for many law departments
    • Managing and mitigating their companies’ overall risk and cost is a key component to departments’ broader cost-control strategies
    • Overall, far more law departments anticipate an increase in their legal spend in the coming year than anticipate their spend to decrease
    • Increased legal spend is a common trend across nearly every global region, key practice area, and industry sector
    • There is growing evidence that corporate law departments are shifting work among outside law firms as a way of managing costs
    • While exact best practices remain a work in progress, most corporate law departments globally have settled on some form of hybrid work arrangements for their staff

Identifying global priorities

In their own words: What law department leaders are saying about their departments’ mission

“Always keep focusing on longevity and consolidating objectives, avoiding high risks, for any business sector or activity. So, the highest strategic contribution is to see the opportunities, limit risks, and diversify the scope of action.”

— Energy company from Mainland Europe

 “To provide practical legal and commercial support to a growing business.”

— Transportation company from the U.K.

“To promote the growth in the business, which involves implementing technological solutions to some of the challenges around labor and others, and so dealing with those, supporting the clients in that manner is one of our main priorities.”

— Hospitality company from the U.S.

But now, as newer and more complex regulations are flooding the market, and critical challenges — such as environmental, social & governance (ESG) issues or cybersecurity concerns — that had largely been hidden by more pressing matters beforehand emerge as major challenges, the corporate law departments of many Canadian companies are taking action. Many have shifted their mindset and their approach to managing how their needed legal work gets done and what they’re willing to pay for it.

To examine this more carefully, the Thomson Reuters Institute has published the 2023 Canadian Legal Market Update, which highlights the results of a survey of corporate law department leaders in Canada that sought to gain their perspective on key issues such as growth strategies, client relationship development, strategic investments, and performance management. (The report was taken from the results of 272 interviews with Canada-based respondents within the corporate in-house legal community in various legal roles within their companies, which were conducted among multiple different industries. These interviews were conducted throughout 2022.)

Our survey shows that many Canadian corporate law departments have shifted their mindset and their approach to managing how their needed legal work gets done and what they’re willing to pay for it.

Not surprisingly, this year’s report identified certain key developments that are now reshaping many aspects of the Canadian legal market, including:

An aggressive focus on risk — Since 2020, the percentage of Canadian corporate law departments talking about more aggressively preventing and mitigating risk for their companies has nearly doubled, the survey shows.

Hiring and retaining talent has become paramount — Talent in the legal industry became a flash point in 2021 — not only in Canada but everywhere — and more Canadian corporate law departments have made investing in talent a top strategic priority for 2023.

Requiring business savvy from their legal providers — While the attributes that Canadian corporate law departments look for in their external legal providers are similar to those sought by other corporate law departments around the world, business savvy — how well a law firm understands the client company’s goals and can offer advice that is practical and proactive in nature — is an attribute upon which Canadian corporate law departments place even more emphasis.

Indeed, the report offers some crucial insight into the minds of Canadian law department leaders, providing other parties — such as their external law firms — with a road map on what exactly these clients are looking for in their outside counsel.

“I like law firms that are practical, give me timely advice, and give me very commercial advice,” said one corporate law department leader in Canada. “So, if a law firm gives me a 20-minute rendition of the law and all the risks and everything, but doesn’t really give me a good answer, I’m not really interested in them. If you give me really practical advice that’s commercial that’s timely — that’s why I like you.”

All legal organizations in Canada should take note, as this report shows the attitudes, priorities, and mindset among Canadian companies’ law departments are shifting toward more aggressive risk mitigation, managing critical talent issues, and seeking more valued outside counsel.

You can download a full copy of the Thomson Reuters Institute’s 2023 Canadian Legal Market Update here, by filling out the form below:

In the latest Australian Legal Market Midyear Update, published by the Thomson Reuters Institute, we see how firms continue to see lower levels of legal demand compared to the midpoint last year; yet the pace of this contraction in legal demand has slowed throughout FY 2023. While this is good news for many law firms, struggles still remain, such as the ongoing growth in expenses. However, a deeper dive into the midyear data shows that there are reasons for some cautious optimism.

Demand decline & rate growth

As the Midyear Update shows, demand for legal services began the year in negative territory, when compared against the highwater marks of FY 2022. Even though Q2 of FY 2023 saw less of a demand contraction, the midyear measurement still showed an overall decrease compared to last year, which is still concerning.

This is happening at the same time as firms see strong growth in agreed-upon rates throughout the midpoint of FY 2023. While agreed-upon rates remained in record territory for many Australian law firms, the net effect of this rate performance combined with the continued demand downturn saw firms experience essentially flat growth in fees worked for the first half of the financial year. (Fees worked reflects the year-over-year percentage change in the product of rates multiplied by billable hours in the relevant time period.)

This overall flat performance in YTD fees worked is concerning, especially as Australian law firms find themselves under increasing inflationary pressure in which low revenue growth effectively results in a net loss of buying power. Added to this mix is that many Australian law firms also saw a decrease in their billing realization rates, which saw all lawyers experiencing a declining percentage of their work being billed to clients as compared to the previous fiscal year.

Finally, growing expenses remain a constant threat to many law firms’ balance sheets. Compared to the beginning of the pandemic era in Q3 FY 2020, Australian law firms on average have seen their direct expenses — lawyer compensation — grow more than 20%. Indirect expenses — essentially everything else, from office rent to office supplies — declined in the early days of the pandemic due to work-from-home initiatives, but now have returned to pre-pandemic levels.

Signs of a potential rebound?

While all this may indicate a tough road through the second half of FY 2023 for many Australian law firms, the Midyear Update did contain some hopeful indicators. For example, expense growth — which hung like a heavy weight around the neck of many firms — appeared to show that it was slowing by midyear. Further, there are also strong signs that legal demand may be on a slight upswing.

On a further positive note, slightly more buyers of legal services in Australia report that they anticipate spending more over the next six months, with 31% of buyers saying they expect their legal spend to increase in that time frame. This was just slightly higher than the percentage of legal buyers who said they expect to their legal spend to decrease in the next six months. While just a slight net positive, many more buyers of legal services in the specific practice areas of regulatory, labor & employment, and disputes services said they expect their legal spend in these areas to increase as compared to those that said they expect it to decrease.

Interestingly, these spending expectations may reflect what we’re seeing in the broader economy, both in Australia and around the world. For example, increasing inflation, for all its negative impacts, can also influence larger workforce trends, leading to an increased need for legal counsel on labor & employment matters. Increased efforts by the government to stiffen regulations, too could easily result in an increased need for outside counsel.

As the Midyear Update illustrates, the remainder of the fiscal year will be a delicate balancing act for many Australian law firms as firm leaders need to keep a keen eye on levels of legal demand and rate growth, while managing their expenses (especially headcount).

While Australian law firms may be in a slightly more favorable position than many firm leaders might have thought after the dismal first quarter of FY2023, achieving success through the remainder of the year will depend on how fast, flexible, and informed their strategic decision-making will be as they continue to manage ongoing and new risks in today’s legal market.

You can download the latest Australian Legal Market Midyear Update here.

Even if generously viewed, this represents a reversal of fortunes for the legal industry that can only be regarded as remarkably stunning. And while significant challenges and obstacles have hampered many law firms in 2022, what does this score point to as a primary reason for this downturn?

Market observers might be wise to look at law firms’ exceptionally poor performance in productivity — a metric that is included in the LFFI score calculation — which contracted 7.2% in Q4. This decline in productivity was a result of firms’ continued efforts to expand attorney ranks, growing their full-time equivalent (FTEs) 3.6% in Q4. Firms pursued this full-employment strategy even amid the strong contraction in overall legal demand, which itself fell 3.9% in Q4. This heady mix of more attorneys with less work to do only has one clear result — plummeting productivity.

When this productivity question is looked at from a billable hours perspective, we can see that, after a steady downward trend over the past 15 years — one which has greatly accelerated since early 2021 — lawyers billed the fewest hours, 112 hours per month per lawyer, at the end last year since at least 2006.

One key reason for this all-time low billed-hour total, as we discussed in the 2023 Report on the State of the Legal Market, was the substantial drop in demand in transactional practices (a mix of corporate general, mergers & acquisitions, tax, and real estate practices), which had fallen off steadily over the latter part of last year after being a key demand driver throughout 2021 and the early part of 2022.

Who is being less productive?

The drop in productivity seemed to be experienced across the largest types of attorney titles with Q4 seeing the worst billed hours per month recorded for associates, non-equity partners, and equity partners since at least 2006. These attorneys accounted for 76% of all billed hours in Q4, but even less impactful lawyer titles, such as of counsel and other lawyers (which are not represented on the graphic below), recorded their worst billed hours per month since at least 2006 as well.

As the above graphic shows, this past quarter caps off a four-quarter slide for these three lawyer titles and one that places an exclamation point of sorts at the end of a very bad year for productivity.

There are some mitigating factors, of course. For example, there is a seasonal aspect to hours-billed per month in which typically, lawyers bill the fewest hours in the final quarter of the year. In Q4 2022, however, we saw a stiff 6-hour drop recorded for all lawyers, which was the largest drop between the third and fourth quarters ever recorded. Even by individual title, the numbers were bracing: a 6-hour drop-off for equity partners in Q4 was the largest fall between the third and fourth quarters ever; and the 5.5-hour and 6.2-hour drops for non-equity partners and associates, respectively, were the biggest drops between the third and fourth quarters since Q4 of 2008, amid the Global Financial Crisis.

Practice areas of impact

In addition to the variations of lawyer title of lawyer, we also can see which particular practice areas had the largest impact on the drop in year-over-year productivity.

As mentioned earlier, transactional practices experienced the greatest declines in hours per month per lawyer logged, with corporate-general and corporate-M&A each experiencing steep falls in hours billed in Q4 2022 compared with Q4 of the previous year.

Beyond that, every single practice area saw lawyers bill less hours in Q4 2022 than in pre-pandemic times, less than 2020, and considerably less than the same quarter in the year previous.

On an interesting side note, the chart also shows that the only practice area that has consistently declined in productivity over the last few years is litigation, which currently makes up 27% of all legal demand. However, it may be that litigation’s downward stair-step trend in productivity is the result of law firms continuing to add litigation attorneys while i) the nation’s courts are backlogged; ii) lower-value litigation work is being handled by alternative legal services providers; and iii) corporate law departments are taking on more of their own litigation work.

The focus on the performance in transactional practices is not misplaced, which is why its current trendline is so worrisome. However, as the LFFI report mentioned, if inflation continues to moderate and interest rates stabilize, transactional work may well recover. And if this recovery happens, it will certainly play in role in returning law firms’ productivity growth onto a more solid, positive footing.

Even before the pandemic, however, courts needed to be modernized. And once the pandemic occurred, courts were pushed rapidly forward into a new world of virtual hearings, video conferencing between litigants and their lawyers, and other previously seldom-used innovations. And in just a few short years, these innovations in how the nation’s courts operate —on the federal, state, and county/municipal levels — have benefited citizens’ access to justice, making it easier for many people to participate in the court system when necessary.

Examining the impact of these trends, a new report by the Thomson Reuters Institute, the 2023 State of the Courts Report, looks at what judges and court professionals are saying about the challenges still rampant in the court system today, such as hearing delays and the need for advanced technology and digitization. Indeed, the report also looks at how many courts are continuing to leverage the new technology that was brought on by the pandemic such as video conferencing and what the impact of those innovations has been.

This report represents the findings of an online survey that was conducted with 201 judges and court professionals from November 1 to 17, 2022 by Thomson Reuters to better understand challenges in the judicial system, specifically around hearings, evidence, caseloads, and technology in the post-pandemic world.

Watch our on-demand webinar Strategies for Advancing Technology within the Courts, now

The report describes how steep challenges to our nation’s courts remain, specifically around the issue of hearing delays, which can have a cascading effect on the remaining cases on the court docket. In fact, a majority — as much as 79% in some instances — of judges and court professionals say they are experiencing delays in their hearings. Often, these delays impact other cases slated for that week, creating a burden on the entire court docket.

And even as the report lays out how improvements and updates in the use of virtual hearings have improved access to justice for many litigants, it shows that hurdles still remain, especially around outside internet and network access for many litigants with lower levels of digital literacy. Further, the report observes that more widespread use of technologies such as evidence management systems and document automation could go a long way to bringing the court system out of its previous reliance on paper files, overstuffed dockets, and failed in-person appearances that all still contribute to case-delays and calendar backlogs.

Key findings in the report

There were several significant findings throughout the report that came from the results of Thomson Reuters’ comprehensive survey, including:

• • • More than three-quarters of respondents (76%) say that virtual court opportunities increase access to justice for litigants — a significantly higher result compared to the previous report in 2021.
    • A majority of survey respondents say they are either conducting or participating in virtual hearings and expect to continue to do so in future. Currently, about 40% of respondents say the majority of court hearings in which they are involved are being conducted virtually.
    • Almost three-quarters of respondents say they do not use digital evidence management systems; yet, two-thirds of those report that they would benefit from doing so.
    • Almost 40% of respondents say they have introduced new or improved work methods, processes, or service innovations within the past 12 months.

Overall, what comes across in the pages of this report is a court system in which tremendous progress has been made in areas of improving access to justice and technological modernization, but much more still could be done. Indeed, as courts at all levels settle into a growing comfort with the technology they’ve employed since the pandemic, many are seeing new challenges that need to be addressed now in order to better move all legal system participants into a new age of digital efficiency.

You can download a full copy of the 2023 State of the Courts Report, here.

Key takeaways in Q4:

• • • Demand contracted at a historic rate as firms were measured against the peak demand of Q4 2021. Data suggests that certain firms within the Am Law 100 may be recovering.
    • Issues with demand combined with continued hiring brought productivity to an all-time low during a time when associate compensation is as costly as ever.
    • Expenses have improved, with welcomed signs of slowing growth rates.

The demand dilemma

Firms’ struggles to log hours came mainly from two sources: declining demand from clients, and tall baselines to overcome. Whereas transactional demand (a combination of corporate general, mergers & acquisitions, tax, and real estate practices) was strong relative to pre-pandemic levels at the start of 2022, this demand tapered off steadily over the course of the year.

With non-transactional demand fighting to recover to its pre-pandemic level, law firms that were already having difficulty measuring up to last Q4 now had a tougher row to hoe. That was made even more difficult because the final quarter of 2021 was also one of the busiest for firms on record, with a glut of transactional demand lifting the large law firm industry into record profitability. Not surprisingly, having to measure from firms’ current valley against this peak put the LFFI on route to its new all-time low score.

Further, continued hiring throughout 2022 brought in a fresh class of associates at a time when many law firms were already having difficulties keeping their current lawyers busy. This situation of fewer hours being spread around more lawyers resulted in historically low productivity, both in terms of contraction against last year and hours per lawyer per month.

Can there be a turnaround?

Despite all this mostly dismal news, there was evidence that the legal industry — and similarly, the Index — may have hit bottom and could see a turnaround this year.

For example, while expenses continued to grow on-top of the growth firms experienced in 2021 (as both lawyer-based expenses and overhead outpacing worked rate growth in 2022), the average lawyer remains more profitable than they were before the pandemic. Still, the result of this current expense growth is that profit per lawyer effectively erased the gains of 2021, which strongly impacted the Index’s score.

Add into this that the transactional surge has ebbed, non-transactional demand is on the mend (led by some of its largest practices such as litigation and strength among Midsize law firms) and overall demand remains even with pre-pandemic levels, even after Q4’s contraction. The Am Law 100, which has been the segment facing the greatest demand struggles, is also showing signs of recovery within certain pockets.

Expense growth is also showing slowing in its growth across multiple categories, with more of the expense growth coming from the on-boarding of new talent rather than salary increases or inflation like in recent quarters.

Firms are also gearing up for another increase in their rates to boost 2023 revenues. Last year was the first since 2008 in which firms’ pace of worked rate increases fell behind inflation, hampering their bottom lines. While firms are facing issues with realization, potentially because of client pushback, significant rate increases would be a useful tool to stem the decline of profit per lawyer.

Ultimately, the situation surrounding 2023 is too unstable to know for certain if law firms are going to reverse their fortunes. A recovery from the top of the market, slowing expense growth, and another series of rate increases may be enough to pull the LFFI out of its tailspin and send it back into normal territory.

You can download the Thomson Reuters Law Firm Financial Index (LFFI) report for Q4 2022 by filling out the form below:

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.”