The legal sector is on the brink of a profound transformation driven by the deployment of AI on a large scale. In addition to transforming the practice of law, AI is also expected to completely redefine the business and operating models of law firms, challenging long-standing practices and requiring a strategic reassessment of how legal services are delivered and priced.
The well-publicized role of AI in improving efficiency and productivity
AI can perform complex legal work such as drafting and reviewing documents, conducting expense analyses, summarizing stories, and converting legal jargon into plain English. As AI tools become more skilled, lawyers will increasingly rely on automation to perform tasks such as conducting more complex research, drafting legal documents, and suggesting case strategies . These tasks will be performed at speeds and with precision far beyond human capabilities: sophisticated AI-based technology can perform legal work at 100 times the productivity of lawyers (although it is still subject to to occasional hallucinations). Yet despite the broad and in-depth media coverage this impressive performance has created, less attention has been paid to the impact of AI on law firm governance and business operations.
The impact of AI on customer relationships and business operations
AI is poised to transform client relationships and overall law firm operations. Client relationships have traditionally been advice-driven, with relationship management and company reputation seen as key differentiators. In the future, AI will enable these relationships to become much more performance and results driven. Corporate clients, in particular, will use AI tools to measure and compare results, and in return will demand greater transparency and efficiency from their legal service providers. For example, a company can deploy an AI-powered dashboard that aggregates various legal service provider performance metrics, such as case duration, win/loss rate, profitability, and client satisfaction. This dashboard then provides a comprehensive benchmark for evaluating and comparing providers.
The technology function within law firms, which has traditionally been a back-office function, is quickly becoming essential to compete and win in the marketplace. Technology integrations and AI tools are integrated into client data and workflows, transforming the way legal services are delivered and creating new opportunities for innovation and growth. A few Law firms use predictive analytics tools to predict likely case outcomes based on historical client and third-party data. This approach helps the firm develop more effective strategies, provide clients with better advice, and make data-driven decisions about whether to pursue litigation or settle a dispute.
AI requires a move away from the billable hour
The use of AI by law firms has a significant impact on productivity and therefore has financial implications. For example, the use of AI tools that can perform document reviews and legal research faster and more accurately than human lawyers raises the issue for businesses of how to maintain revenue when they use a traditional hourly billing model. On the other hand, companies have the opportunity to use AI to process more cases and therefore generate more revenue. The challenge will be to increase revenues while maintaining traditional margins.
This conundrum will eventually force the hourly billing model into decline over time. However, the solution will not be to move towards the Armageddon of fixed rate billing, which is traditionally defined as a base rate for managing an entire case. Instead, the creative and appropriate solution will be to move towards activity-based billing. In this model, clients are billed based on activities performed rather than billable hours spent. This model allows companies to replace human talent with AI talent, increase productivity and maintain (or potentially increase) their margins.
Ultimately, if companies fail to adjust their billing models to reflect the increased productivity enabled by AI, they risk reducing their margins per case. It is therefore crucial that firms strategically manage this transition and ensure their pricing models align with the new realities of AI-enabled legal work.
Navigating change management and generational conflicts between partners
A key aspect of change management introduced by AI is resolving generational conflict within law firms. Associates nearing retirement may be reluctant to increase capital expenditures on technology and more focused on short-term profits. In contrast, younger partners are often more open to innovation and willing to invest in new technologies that promise long-term benefits. Balancing these conflicting perspectives and guiding the company through this transition requires strong leadership and strategic vision from the company’s chief executive officer (MD), who must increasingly focus on strategic management of change within of the company.
Additionally, the broader role of the MD will also evolve. Physicians have always focused on overseeing practice culture, recruiting talent, and maintaining relationships with key clients. As AI becomes an integral part of business operations, the role of the CEO will move away from business administration, where technology and legal operations can play a larger role, and it will become an agent of change for his company. Going forward, the CEO will focus on leading the company by enabling strategic change and managing the many investments required by AI’s impact on the company’s business model. In addition to the generational conflict challenge mentioned above, these important new functions will include acquiring the appropriate technologies, managing the transition to new pricing models, and shifting the cost base toward a fair balance of professionals and technology, while managing company culture and culture. reassure customers about the value of the company.
New skill sets are required as the role of lawyers evolves
The influx of AI is also expected to redefine the roles and skills required of talent within law firms. The traditional role of the lawyer is evolving, with an increasing emphasis on technological competence. A higher threshold than just passing the bar exam will increasingly be in play as companies focus on hiring or training associates who can use AI tools and understand their implications for legal practice. This shift will ultimately result in the creation of a new corps of lawyers who are not only experts in the use of technology, but also capable of advising clients on the use of AI-based technologies in their own businesses . These tech-savvy attorneys will help their clients mitigate risk, manage information, and potentially even handle routine legal matters internally.
Leveraging AI to Drive Competitive Advantage and Profitability
Another marker of the AI revolution will be helping to narrow the resource disparity gap between large and small law firms. Larger companies often have the resources to invest in new technologies and manage the associated changes. On the other hand, small and medium-sized businesses that compete with larger players may struggle to keep up. For these companies, understanding and harnessing AI will be a crucial tool to level the playing field with larger competitors and open up new growth opportunities.
AI-driven innovation is set to transform the legal ecosystem, not only of the practice of law, but also of legal affairs. Law firms must be proactive in embracing this change and, in doing so, be prepared to address the fundamental reevaluation of traditional business models and meet the difficult change management challenges that accompany this transition. Those who do so will be well-positioned to leverage AI to gain competitive advantage, improve efficiency, and drive profitability for years to come.
Mike Suchsland is a board member and investor in Legal Tech. He is currently a principal at Joplin Consulting, an independent consulting firm providing strategic advice to private equity firms that have invested or are seeking to invest in technology, content and legal services companies. Mr. Suchsland is Chairman of the Board of SurePoint Technologies in addition to serving as a venture capital partner for the LegalTech Fund. Previously, he was president of the legal department at Thomson Reuters.
