Peer Monitor Report: The Make-or-Buy Question & Why the Way Companies are Answering it May Indicate Lasting Changes in the Legal Services Landscape

Topics: Business Development & Marketing Blog Posts, Corporate Legal, Law Firms, Peer Monitor, Thomson Reuters

industry focus

The question of whether to integrate vertically—i.e., whether to make a needed product or service in-house or buy from a third-party vendor—is not a new one for companies. Regardless of whether a company’s principal business activity lies in retail, services, manufacturing, etc., at some point, each link in the chain between a company and its customers is likely to be put to this question. Legal services are no exception, and recent surveys show companies have been increasingly answering “make” to the make-or-buy question.

So, what are we to make of this trend? Is this simply a matter of companies having to do more with less, or is there also a qualitative aspect we should account for? Of course, the recession of the past decade has forced many companies, out of sheer financial need, to reexamine their budgets and rethink how they operate. In that time, however, companies rethinking how they procure legal services may have benefited from recent developments in the legal services industry that have made it more practical than ever before to re-examine how they approach the purchase of legal services.

Changes in the valuation of legal services are one such development. Companies have been able to negotiate significant price reductions with outside firms, which may serve to maintain existing relationships for a time but may also expose bloated fee arrangements. Regardless, the increased willingness of outside firms to enter into alternative fee arrangements (AFAs) and the greater accessibility to alternative service providers (ASPs) have given companies unprecedented flexibility and predictability in procuring legal services. Such flexibility and predictability lets companies “pick their spots.” For example, if an outside firm is willing to break up prospective services into discrete units (e.g., particular phases of litigation) and perhaps an established ASP is available to compete for certain units, the company is able to refine its decision-making regarding what can be reasonably (and less expensively) handled in-house or by an ASP and what may be more appropriately suited for an outside firm with greater expertise and resources.

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Advances in legal technology are another such development. It’s not unusual for a company, in times of economic downturn, to review its office technology against the technological advances of the time in an effort to reduce costs through greater efficiencies. If technological change is exponential, perhaps we can reasonably expect a company reviewing its legal technology in recent years—perhaps seriously for the first time since before the recession—to discover and implement advances yielding significant and cumulative efficiencies. Such advances may include cheaper yet more powerful capabilities for researching legal issues, managing legal matters, generating and automating legal documents, and reviewing and analyzing discovery. The efficiencies achieved may be significant and cumulative enough to make room for more legal matters, in number as well as scope.

If these developments have indeed made it more practical than ever before for companies to make more of their own legal services, we may be witnessing real and lasting changes in the legal services landscape. If so, it would be reasonable to expect an overall erosion (at least to some extent) of the share of legal services outside firms will be asked to perform for companies. That said, it also would be reasonable to expect that those outside firms providing more specialized services or proving especially adaptive to this newer landscape will have opportunities to grow their businesses at the expense of those that don’t.