InView Connect Sydney 2024 - ON SALE NOW - Buying 3 or more tickets? Use our code TEAM50 for 50% off.
Corporate legal teams are demanding AI powered solutions, and software vendors and elite law firms alike are responding by accelerating their investment in Artificial Intelligence (AI). The legal technology industry is expected to double in size over the next decade and the number of solutions being built for lawyers is growing rapidly. While funding for traditional legal technology slowed in 2023, funding for AI powered legal tech has been readily available for both incumbents and new entrants to the market.
What impact will AI have on legal? Although we are only in the nascent stages of learning about AI, looking back at the impact that other technologies have had on the cost and delivery of legal services over past decades provides valuable insights into what the future holds for the legal industry.
Technology has been quietly impacting the delivery of legal services for many years now. While frontline legal service providers to medium and large corporates are still mostly top law firms, the composition of who (and what) is providing legal advice has changed dramatically.
The modern law firm’s technology stack likely already includes AI powered solutions. Technology providers such as Litera who provide a range of products including document comparison and AI powered contract due diligence tools to improve efficiency are widely adopted by a majority of top law firms. Many law firms have their own captive alternative legal service providers (ALSP) or relationships with independent ALSPs that provide the scale and processes for completing low complexity tasks efficiently, which has made high volume work like e-discovery much less costly.
AI has put pressure on law firms to adopt technology, and will accelerate the pace at which they invest in and transition to more cost-effective models of providing lower complexity legal services. Large law firm hiring has by and large been stagnant for years, but law firms are launching new products and are increasingly finding an appetite for providing technology enabled fixed fee offerings. One way for firms to use technology is to experiment with how providing more cost-effective legal advice could grow their client book. Startups that do not yet have a big legal budget but have the potential to develop one are an obvious target. Many firms already have groups dedicated to startups and are investing in building new products to serve them, like the Wilson Sonsini Neuron group’s recent launch of Dioptra, a contract review solution.
Law firms, legacy software providers and new legal tech startups are all exploring how to best leverage AI. Ostensibly, law firms are at an advantage due to two reasons, (a) their existing monopoly over much of the delivery of legal services to enterprise clients and (b) their vast repositories of existing client data and understanding of what clients really want.
However, a real challenge for technologists at law firms will be in navigating the complex and entrenched existing structures and processes. It is exceedingly difficult to overturn established culture and work against incentive structures and established hierarchies, regardless of the threat of inaction or size of the ultimate reward. Law firms are designed for qualified lawyers to provide legal services, not for a range of professionals to provide legal products.
One way to overcome the resistance to change within law firms is to enable a team to spin out an independent company. Recently, the UK top 40 law firm Travers Smith did this with Jylo, a newly independent business that will sell its AI platform to the wider legal market. Jylo will be able to leverage the firm’s connections and perhaps data to build and sell products to the firm’s clients under a new organization. Travers Smith will be able to continue providing legal services, but with the assurance that they now have a stake in the legal AI game.
The legal industry is expected to be significantly exposed to disruption by AI, with some reports predicting that the majority of legal tasks will be able to be assisted or fully automated by AI. Given the gravity of these forecasts, it’s not surprising that law firms are making moves to capitalize on the growing market for legal products and simultaneously hedging themselves against a disruption to the market for delivery of legal services.
AI is best used to help automate the most mundane aspects of providing legal advice. This will allow lawyers to perform legal tasks more efficiently and legal service providers to deliver their services more cost effectively.
Highly complex strategic legal advice will be less impacted by AI, as AI is best placed to help with low complexity legal tasks. Because of this, and perhaps contrary to expectation, AI is unlikely to exert significant downward pressure on elite law firm rates. Both the CounselLink 2024 Trends Report: “Dynamics Shaping the Future of Legal” (CounselLink report) and the Thomson Reuters 2024 Report on the State of the US Legal Market (Thomson Reuters report) show a steep increase in law firm rates in the past year. The CounselLink report showed the widest gap between the median partner billing rate at large firms and mid size firms that they have seen since they started reporting eleven years ago.
It makes a lot of sense for top tier law firms to use AI to put distance between themselves and their competitors by doubling down on building their brand as the best “read: expensive” minds in their core practice areas. Procuring legal advice for strategic or high risk matters is not cost sensitive but it is quality sensitive, and so winning this category is a strong move that positions firms in a place that is relatively immune to the impact of AI (in the medium term, at least).
However, the truth is that the vast majority of legal work is not in “bet the company” strategic legal advice, but in a blend of humans and technology completing the day to day “run the company” work. This less strategic work which is more cost sensitive, less complex and high volume is where AI will disrupt the legal industry.
In a recent study, Toby Brown, former chief practice management officer at Perkins Coie found that “Drafting and Reviewing” accounted for 47 percent of the revenue in a sample of timesheets analysed from a broad range of work performed by ten large firms. For big law firms, it’s unlikely that rate increases for a decreasing portion of highly strategic work will be enough to offset the impacts of AI on the increasingly commoditized bulk of their day-to-day work.
In reality, technology has been making the performance of lower complexity legal services more and more efficient for decades – AI will simply accelerate that. As AI makes it possible for more of the tasks involved in providing legal services to be performed by less experienced lawyers, the value add of having a pedigreed lawyer deal with run of the mill contract review will drop. Tools that help with drafting, clause comparison and precedent management already carve valuable hours off contract review.
Although ALSPs are widely used for due diligence review and eDiscovery, law firms are still performing a high volume of contract review. For corporate teams, the efficiency gains created by AI powered solutions along with the presence of alternative legal service providers presents a good opportunity to exert pressure on law firms and drive the price down.
Based on the CounselLink report, this appears to already be happening. While the data collected shows a steep increase in law firm rates over the past year, that increase does not correlate to an equally steep increase in blended rates at the matter level. This indicates that as top tier law firms are increasing their prices they are simultaneously completing their work more efficiently, which is effectively softening the impact of those rate increases on their clients. A large component of the services that corporations procure from law firms could be completed by alternative legal service providers (ALSPs). ALSPs have been a vital component of the enterprise legal services market for many decades, but as lawyers we still don’t fully understand how to use them to our benefit.
A study from Thomson Reuters found that ALSPs already serve 79 percent of law firms and 71 percent of in-house legal teams surveyed, however awareness of ALSPs among middle market legal teams remains low. Because ALSPs excel in using efficiency to perform commoditized legal work at scale, they have been built and marketed almost exclusively to enterprise clients. The Thomson Reuters State of the UK Legal Market 2022 report found less than twenty percent of the in-house respondents surveyed were aware that a selection of prominent consultancies offered legal services.
ALSPs are generally very efficient, cost effective and experts at leveraging technology which makes them much better suited to performing low complexity legal work than law firms. The introduction of AI presents a real opportunity for ALSPs to expand their remit to more low complexity legal work like routine contract review and to middle market clients with lower volumes of work. However, will this trigger a rapid shift? Not likely.
Law firms have historically owned the relationship with corporate legal departments, and as long as General Counsel continue to cut their teeth at big law firms they will continue to do so. In many cases, law firms already have avenues for routing low complexity legal work to their own captive low cost providers or independent ALSPs.
For the matters that have the most potential to impact your business, the price of legal advice should be irrelevant. For these matters, you should indulge in luxury. Buying legal services from a top tier law firm brings many benefits, and as the saying goes, “No one gets fired for hiring Cravath”. Receiving high quality expert legal advice on the right matter at the right time could be invaluable. Likewise, bad legal advice is (at best) worthless.
Large corporations today typically have teams of technology-savvy and commercially minded in-house lawyers. Not all legal work is well suited to outsourcing, and corporations with a large in-house team can be selective about the types of tasks they choose to send externally and what they should perform internally. Any urgent work that requires an in-depth knowledge of the business should be kept in-house. As AI is slowly infused into our day-to-day productivity tools, this type of strategic work will become easier but will not be completely automated by AI.
Any work that consists of a high volume of standard “run the company” tasks that the team cannot scale to absorb themselves is well suited to low cost legal service providers who can deliver with a blended human and technology approach. There is not much point in paying legal’s brightest minds to review NDAs, and now there are a plethora of contract review solutions that leverage AI to help users identify risks and insert acceptable language. This work should see a significant price drop in the coming years as the time and effort required to complete each review decreases.
Where possible, all corporate legal teams should be empowering their peers across the wider business to answer their own questions on day-to-day low risk legal issues. There is a lot of easy value to be gained by doing the groundwork to get resources in place that will protect the legal team from distracting queries such as answering questions about policies, providing reports, managing contract expiries or signing contracts. Clear policies are a start, but newer tools are able to leverage AI to help make policies and contracts more consumable and help the wider business understand them more easily.
For those of us who work in-house, we are perfectly placed to take advantage of the growing array of legal products and service providers available to drive down external legal spend where it makes sense. Being willing to consider viable alternatives for some tasks could help to put pressure on existing suppliers to perform cost sensitive legal services more efficiently.
Making it a priority to keep abreast of new technology is the best way to confidently navigate the landscape. Proactively redirecting some budget towards upskilling your team or investing in your own AI solutions will equip you and your team to understand and fully leverage AI and the products and service providers using it. Knowing when and how they should be using it to deliver more efficient legal services to you will help you to know where it makes sense to negotiate and what you should be asking for.
