Make-or-Buy Analysis for Legal Departments in the Light of Digital Transformation

Abstract

This chapter examines the impact of digital transformation on the make-or-buy analysis for legal departments, or the strategic decision to perform a legal function internally or outsource it to external providers. It traces the evolution of the legal market and the legal departments from a situation of information asymmetry and buyer ignorance to a situation of information differentiation and buyer knowledge, where in-house lawyers have gained more power and prestige over their outside counsels. It also identifies three phases of the development of law firm panels, which are lists of preselected law firms that legal departments use to optimize their sourcing strategy and reduce their costs. Finally, it argues that the emergence and advancement of artificial intelligence as a general-purpose technology challenges the traditional pricing models of law firms and requires a new approach to the make-or-buy analysis, where the primary question is the optimal balance between human and machine involvement for each task.