There has been plenty of hand-wringing of late about what impact legal tech AI ultimately will have on lawyers and law firms and how they do business.
When I say legal tech AI, I am referring to Generative Artificial Intelligence (Gen AI), Artificial Intelligence (AI), and even automation, which has already had a big part in changing how firms operate.
Let’s start by being clear about one thing: the legal market is far from monolithic. Different firms have different business models, and the impact of legal tech AI and automation tools will be different depending on a firm’s business model.
A plaintiff’s firm whose business model is based on contingency fee awards will no doubt see and use AI tolls very differently than a firm that collects most of its fee based on the billable hour.
Since so many firms use the latter model in whole or in part, how these firms will be impacted by AI and automation will significantly impact the legal market.
To understand how these firms may be impacted, looking at how and from where the billable model firms developed is useful.
Background on legal tech AI
The vast majority of firms in the U.S. have the following business model: bill by the hour and use leverage to increase revenue and profit. The former is limited by the number of hours in a day.
The latter solves that problem by engaging more lawyers on a matter to multiply the number of hours that can be billed. The leverage model allowed a larger firm to reap enormous profits by assigning cadres of associates to a matter, all churning out large sums of billable hours. The leverage model also required that firms hire greater numbers of associates to maximize the leverage model.
In addition, because it was difficult to access information about a particular legal subject matter (you had to have large libraries of books, for example, to get to the relevant information), a rise of specialists in areas of the law developed.
The difficulty and time required to become a specialist limited the potential to specialize in must-leave areas of law.
Focusing on narrow areas enabled the specialist lawyer to raise their rates due to their expertise. Due to economies of scale, this favored the development of very large law firms.
All that may be about to change.
Will law firms embrace legal tech AI?
Thomson Reuters recently released a report that identified three possible scenarios for the future with the advent of AI and Gen AI tools.
The first supposes that a few firms will embrace AI and shift how they get work done, thereby gaining more client work. The second scenario assumes clients will leverage AI more and more.
As a result, In-house counsel will increase the use of AI to do work in-house and demand changes in efficiencies and pricing by outside lawyers. The third scenario, accounting to Thomson Reuters, is that AI will not significantly impact the work of outside lawyers.
Given the reluctance of law firms to embrace technology and the power of AI and automation, the first and third scenarios are unlikely. Instead, AI will enable clients to take more and more control over how outside lawyers do their work, what tools they use, and how efficient they are.
And it is this scenario that has the potential to upset the billable hour and leverage models.
How AI and Gen AI are radically changing firms
AI in general and Gen AI in particular enables tasks to be automated and done with fewer people.
Recent estimates suggest that close to a quarter of a lawyer’s daily work could soon be automated. Multiple that by 100 associates, and it’s a sizable hit.
Fewer people needed to do the work, particularly more mundane work, means less leverage. Less leverage could mean less revenue and less profit.
So, rather than asking an associate to prepare a deposition outline, for example, a partner could ask one of the many GenAI tools to do the initial draft. The same is true for initial research.
Knowing this, clients will inevitably insist on less human billing for tasks. The Reuters study suggests that even before the advent of Gen AI and other tools, in-house were taking more and more control over matters referred to outside counsel.
Clients have become more involved in directing how work is being done by outside counsel, what’s being charged for it, and what tools to use.
Corporate clients have already come to regard their outside lawyers as vendors rather than trusted advisors. Most businesses are ruthless when it comes to demanding better pricing from their vendors.
It would be naïve to believe that in-house counsel won’t insist that their lawyers use Gen AI, AI, and automation to be more efficient. The result, less leverage.
But that’s not all. AI and Gen AI will inevitably allow in-house counsel and even businesspeople to do more work that was traditionally farmed out to outside counsel. Everyone in business is already under constant pressure to do more with less. Gen AI provides that ability.
As I have pointed out before, in-house lawyers are often overworked and overstressed. When overworked and overstressed, you seek any means to alleviate your situation.
That inevitably leads to increased automation and the use of AI tools. And in-house legal will expect/demand that their outside lawyers do the same.
So, less work to outside counsel, more insistence on cost control and efficiency, less human work, and more technology work. The net result is fewer billable hours and less need for the leverage model that has for so long powered law firm profits.
Legal tech AI affects firms differently
Certainly, large complex “bet the company” matters may continue to be handled like they always have been. This is because the exposure is so great in these cases that the increased costs of intensive human labor work are either ignored or believed to be necessary to ensure the best result.
But smaller, less complex matters are ripe for more effective cost pressures from clients. That’s because the amount at risk in these matters is not as significant.
The consequences of an error are smaller, and the issues tend to be more straightforward. If true, then firms that don’t’ routinely handle “bet the company” matters could soon find themselves in a bad spot.
The imposition of stricter cost controls and demands to use technology like Gen AI, AI, and automation to do more with less could leave these firms hung out to dry.
Clients are and will be sympathetic to the need for law firms to increase rates. After all, inflation and the cost of more sophisticated technology can take a bite out of profits.
But consistent with the notion that clients are becoming more demanding and in control, collections — the measure of what clients are willing to pay law firms — may be reduced. Reduced collections mean reduced profitability.
Clients will be more aggressive with write-downs when they perceive work could be done more efficiently with automation and AI tools.
Midsize firms: Watch out
Gen AI, AI, and automation will threaten midsize firms the most.
Why? Much has been written about the threat to these firms from below (smaller firms) and above (very large firms).
The small firms that adopt technological tools can do more with fewer personnel and lower costs.
This ability and their nimbleness will threaten a traditional advantage of midsize firms. And the threat from above?
The very large firms are already thinking about how to leverage AI tools to commoditize work, work that their cost structure and hourly rates would not previously enable them to take.
This kind of work was also historically done by midsize firms.
Law firms may be getting ready to experience what insurance defense lawyers have dealt with for some time. Reduced control, increased pressure to do more for less cost, and, for many firms, decreased profits.
What opportunities does legal tech AI present to firms?
There are some silver linings for lawyers and law firms who look for opportunities instead of hiding their heads in the sand.
First, lawyers and law firms that recognize the potential for the new reality may have the best chance to succeed.
The bottom line is that clients view the practice of law as a business, and providers need to understand how businesses view what they do.
Law firms will need to adjust and use the same cost and risk philosophy as their clients to thrive.
The ability to adjust and mimic clients hinges on understanding the tools available and what those tools can do now and in the future.
It’s an oft-quoted maxim that AI, Gen AI, and increased automation will let allows do what they are best at:
- Solving thorny problems.
- Developing strategies that meet their client’s needs.
- Creating a vision of success with their client’s legal issues.
Indeed, if you ask a room of good and successful lawyers if they have the time to do all they would like to do to help their clients in these three areas, you will get a resounding no.
Being at the forefront of technology will enable outside lawyers to see things as their clients do. It will give them more time to better meet their client’s needs.
Gen AI, AI, and automation tools offer other opportunities as well. These tools don’t get tired. They will happily work 24/7.
They don’t want vacations, they don’t ask for raises, and, importantly, in these days and times, they won’t leave you for another law firm.
That’s an advantage and opportunity if and when law firms figure out how to price the work these tools do. Billing by the hour won’t work, but billing by the task for tools that can work all night may make up in quantity for the lost hours.
AI and automation tools can reduce nonbillable time spent by humans. Estimates indicate that 35% of the time of almost half of the timekeepers surveyed is nonbillable.
That’s a staggering 700 hours of lawyer time per year. Assuming there is billable work being left on the table, then that alone can increase revenue and profits. Not to mention the need for fewer administrative staff and accompanying reduced costs.
The most successful future law firms will use Gen AI, AI, and automation to deliver work more efficiently, bill for tasks differently, and scrupulously control costs.
Return of the generalist lawyer?
There is another impact that these tools bring to the table. We now have access to more information and expertise than ever before.
If the Internet brought us the world of knowledge, Gen AI holds the prospect of managing and harnessing that world of knowledge in unimaginable ways.
Subject matter expertise will matter less when anyone and everyone can gain that expertise with technology.
What then matters more are other skills: how to apply judgment to that knowledge to solve a problem.
Empathy and understanding problems holistically within the overall business interests.
Successful lawyers will need to cultivate people skills and the ability to understand problems and solutions more profoundly.
But of course, most really good lawyers already do this. Now they will have more time to do what they do best.
A roadmap for the future
Where we are headed:
- More client insistence on cost control through technology
- Less work from in-house counsel and fewer billable hours
- Reduced reliance on the leverage model
- Firms can succeed by recognizing what Gen AI, AI, and automation can do and embracing the new reality these tools bring
- Lawyers need to focus more on skills that are still needed, like understanding solutions and empathy, and less on billing hours
The law firm that embraces technology and represents its clients more efficiently and better with fewer people will succeed.
These changes will not happen overnight. But they will happen. The worst strategy is to deny the changes and convince yourself they won’t happen.
The only way to prepare for the future is to know what Gen AI, AI, and automation will and will not do. These tools will inevitably change the practice of law.
