The legal industry is undergoing huge disruption with changing operating models, alternative legal service providers and technology driving the change. Africa is lagging in relation to the US, UK, Europe and Australia in adoption of these new developments and techniques in legal services delivery. What this disruption is doing is fundamentally shifting the economics underlying the industry.
Research on how in-house legal departments decide when to make or buy legal services in South Africa has found that in-house legal departments are regarded as non-core support functionalities. This is in most corporate organisations that provide a homogenous service specific to the industry or to the organisation (i.e. legal services for banking, legal services for mining etc).
The decision facing most in-house legal departments is when to deliver a service internally or when to buy these services in the open market. Traditionally, there was a single type of service provider in relation to the ‘buy’ decision - the law firm.
It was more expensive to buy services in the external market which led to organisations building legal capabilities to deliver internally.
However, in-house departments could not deliver all the required services and were forced to also purchase skills and expertise in the open market. This led to a situation where the sourcing choice was not make or buy but rather make and buy.
When determining how to make the decision, the organisation assesses the cost to produce the service versus those associated with sourcing, contracting and managing the transaction between two parties.
Traditional transaction cost economics suggest that an organisation required to produce a non-core services (like legal) should be able to source those services on the open market more cheaply than how it can produce those services internally. A service provider should be able to reduce the costs associated with production through economies of scale and scope, which the organisation itself cannot achieve.
Results of both qualitative and quantitative research have demonstrated that the decision is complex for in-house legal departments.
The recurring themes, evident across the data received, was that in-house departments try to deliver the general day-to-day legal requirements while using external suppliers in areas of high volume, once off projects or high specialisation and expertise. The majority of respondents confirmed that they only used law firms to deliver external legal services, with a small minority starting to make use of locally based Alternative Legal Services Providers (ALSP’s)
This demonstrates the historical and legacy position and goes against economic thinking. This is that a law firm (with its core services being legal services) should be able to produce those services more cheaply than an organisation. However this was not the case with firms coming out more expensive than internal delivery.
However, this is changing. With the advent of ALSPs and new technology, in-house legal departments now have procurement options which are cheaper than delivering those legal services internally. This moves the ‘make and buy’ decision for in-house corporates much closer to the traditional economic position. It also affords in-house legal departments more procurement choices - service providers who can now produce some services more cheaply than what can be done internally. This has elevated the role of legal procurement and influences the very strategies deployed by in-house departments to deliver legal services.
Africa, as a whole, can benefit from this shift. In-house departments can now leverage their procurement choices to source the correct service provider for the correct level of work, be that ALSPs or technology for high volume/low value tasks and the law firms for high complexity advisory services. This will not only reduce costs, but should deliver greater efficiencies in the delivery of legal services to the organisation, shifting legal from a cost centre, to a strategic partner enabling business.
The choice of how to make and buy legal services is solely in the hands of in-house legal departments. But how they embrace ALSPs and technology and make the changes required to panels and procurement practices will determine whether an in-house legal department can leverage the shift.
To learn more about how the future of legal services may impact you, the modern African lawyer, in determining some of the important aspects, that potentially influence and disrupt the way in which you will be delivering legal services take this free Africa Legal online course