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The market for alternative legal service providers grew at an annualized rate of nearly 13 percent from 2015 to 2017, driven by larger-than-expected sales growth to corporate legal departments and law firms, according to a report released Tuesday by Thomson Reuters.

The market for so-called ALSPs was estimated at $10.7 billion in 2017, the report says. The percentage of large law firms that use ALSPs for at least one service, including e-discovery, document review, legal research or litigation support, rose to 87 percent in 2018, up from 56 percent in 2016. At legal departments, that figure rose to 74 percent from 60 percent.

While those growth rates exceeded the expectations of a comparable report two years ago, the latest report predicts the market has even more significant growth ahead. It says ALSP owners expect to increase at a 25 percent annualized growth rate “over the next few years.” At that pace, the market would reach $20 billion in sales in three years.

For comparison, the $10.7 billion market in 2017 is slightly smaller than the combined revenue of the four largest firms in the Am Law 100. A $20 billion market would be about the size of the 10 largest Am Law 100 firms.

Large law firms said they were increasingly turning to ALSPs for strategic business reasons, even if their concerns about the quality of ALSP services remain. For instance, 53 percent of firms said using ALSPs could help them expand and retain client relationships, up from 44 percent two years ago. Similarly, 55 percent of firms said their traditional business model was being challenged by ALSPs, while 44 percent said so two years ago. And 39 percent of firms said they are facing increased pressure from clients to use ALSPs, up from 18 percent two years ago.

“For law firms, the pressure is on to win clients, to compete head-to-head and to improve bottom lines,” said Eric Laughlin, managing director of Thomson Reuters' legal managed services division, which is an ALSP. “And ALSPs are seen as part of the solution to that pressure.”

Still, it is unclear if large law firms are embedding ALSP use in their business model or using their services for particular matters at the request of clients.

“From the data, we can show that most law firms are using ALSPs in some way, but we can't yet tell that they have invested in ALSPs,” Laughlin said. “Less than 20 percent of firms have a captive [legal process outsourcing business]. So the rest of the usage is potentially experimentation, partnering with ALSPs or using them as a vendor.”

Thomson Reuters partnered with The Center on Ethics and the Legal Profession at The Georgetown University Law Center and the University of Oxford's Saïd Business School to prepare the report, which included surveys of law firms and legal departments.

The market for ALSPs continued to be highly fragmented. It includes captive legal process outsource businesses within law firms, the Big Four's legal services arms, independent LPOs, managed services businesses and staffing services. The largest of those categories is independent LPOs such as Consilio LLC, DTI and Integreon Inc., which the report estimated to bring in $7.4 billion in revenue.

The estimated revenue of the Big Four's legal services business grew from $900 million in the 2016 survey to $1.2 billion in the latest report.

Companies including UnitedLex, Elevate and Thomson Reuters make up a “managed services” component of the ALSP market that had the largest growth rate of all divisions, increasing from an estimated $250 million in revenue two years ago to $700 million in the latest report.

The report also included some data on law firms' experience competing with the Big Four. Twenty percent of large law firms said they competed against a member of the Big Four in the past year for legal work, and 23 percent said they had a client use a Big Four firm for work the law firm expected to win.

U.S. corporations are also a large driver of ALSP growth. The percentage of corporations using ALSPs for particular services doubled in two years for services including litigation and investigation support (38 percent in 2018, up from 11 percent in 2016); legal research services (34 percent from 17 percent); document review (32 percent from 11 percent); and e-discovery (28 percent from 13 percent).

Corporations did not report as large of increases in their reasons for using ALSPs as law firms did, but still expressed strong demand for them.

For instance, 23 percent of corporations said they were encouraging their law firms to use ALSPs, up from 18 percent two years ago. And 27 percent said they were facing increased internal pressure to use ALSPs to decrease legal spending, while 22 percent said so two years ago.

“This all points to the fact that ALSPs are a more stable, mature presence in the legal ecosystem that clearly has high growth in front of it,” Laughlin said.