Law Firm Leadership Series 2023

A new era for law firms

Artificial Intelligence and its impact on law firms

AI is the elephant in the room for many businesses and industries but none more so than for professional services and law firms. The capacity of AI to complete increasingly complex, intellectual tasks quickly, and with improving accuracy, makes it perfect technology for firms in the knowledge economy.

Most law firms are currently grappling with the basics of AI. They are considering which provider or technology partner to work with to implement and develop their AI solution.

Perhaps more importantly, they are asking questions around how much it will cost and then how it can be sold (and charged) to clients. Importantly, there is a paradox in that AI represents a significant outlay to firms, and yet to clients it represents an opportunity for bill reduction and cost savings.

There is now plenty of advice on how to procure and implement AI solutions, and technology Partners will work with law firms to support the application of AI. This article looks at what the wider impact of AI might be on law firms. Will adopting this new ground-breaking technology affect how law firms operate and service clients? Will AI impact on law firm workforces and cultures? Does it have the potential to changes those cultures? Career development is another area we think may well be affected if AI is widely adopted and used by law firms. After all, the culture of learning 'on the job' by carrying out relatively simple tasks under the supervision of a more experienced colleague relies on availability of the type of work that AI is able to do. Finally, we will discuss how AI has the potential to change the way law firms charge their clients, both for the better or the worse.

AI and law firm workplace culture

Workplace culture in law firms has been undermined over recent years. The pandemic and subsequent rise of remote working dealt a hammer blow to cultures that were built on long hours spent together in offices. The entrance of new generations into the law firm workforce has also led changing attitudes – many younger Associates no longer accept the long hours that have long been intrinsic to law firm culture. The question is whether AI may undermine law firm culture even further?

Traditionally, both knowledge and culture has been imparted by Partners through 'learning on the job'. At the start of their career, Associates have been asked to take on relatively simple tasks in support of and under the supervision of a Partner. This usually gives the Associate exposure to the expertise of the Partner and to the firm's ways of working as well as increasing their technical knowledge. It was the accepted way to develop talent and helped to build culture. It was also the way for Associates to 'earn their stripes'.

The emergence of AI means that many of the tasks that are used as ‘training’ for Associates may soon be the province of AI. There may soon not be work that Partners and young Associates can collaborate on in a way that promotes a shared culture.

A more diverse workforce?

If AI is the beginning of a seismic shift in the use of technology to deliver work for clients, law firms are going to need new and different skills in their workforce. At the very least, law firms will need technical specialists able to procure and manage digital technologies. Technology specialists and data analysts will need to sit alongside the legal experts to bring together the advantages of the technology and the legal expertise.

Law firms have always employed non-legal staff, but we could see a situation where the technologists are key rather than incidental to delivering for clients. If a significant proportion of the work for clients is being done using AI, the people who can make AI work effectively become more important. They may eventually be perceived as more valuable, and harder to recruit, than some Associates. This would represent a significant shift in relationships between legal and business professional staff. It could also significantly change the culture of the law firms overall.

The challenge will be to create or maintain some form of common identity and culture when a growing proportion of staff are not lawyers and do not have that shared 'law' background. Firms will also have to address the reward and career progression incentives for these staff. The ultimate financial carrot for Associates has always been making Partner. This has been less common for the other professionals working inside a law firm – will that need to change?

AI and billing

We believe that the area that AI could transform beyond recognition is billing. Law firms have always billed by time. When we looked at the varying approaches of Pace Setter and Career Firms, the number of billable hours per year was a key differentiator. When law firms want to increase revenue, the only route open to them is to bill more hours against clients – regardless of whether they increase the number of people or the utilisation rate. Until now, it was often lower value, repetitive work that was billed on fixed fees.

All the work that law firms deliver to clients is done by people, Associates or Partners, and the cost is primarily measured by the time spent on a client or project by those people. AI changes that. Law firms face a situation where, expensive AI has reduced the time that the lawyers take to complete a piece of work. Some proportion of the work will have been delivered by AI technology in a fraction of the time it would have taken an Associate. The time taken to complete the task becomes almost irrelevant.

As AI develops and becomes increasingly reliable, it is reasonable for clients to expect a significant proportion of the work they pay for to have been done by AI. They will argue that as fewer human hours have been spent on the work, the price they pay should also be lower. This will be untenable for the law firms. They will not be able to both invest substantially in implementing AI and charge less for their work as a result.

The only solution may be for law firms to break the link between price and billable hours.

Law firms will need to find an alternative model for billing. One option will be to move to fixed or project pricing based on value. This will not be entirely new; clients have already imposed capped or fixed fees on transactions in some areas of work. But in other areas, this would represent a completely different way of pricing legal services. As well as a new pricing model, this will require a complete rethink of how work is resourced and managed. This is potentially the biggest and most challenging change to law firm operating models.

We think law firm leaders may initially baulk at the idea of changing the pricing model that has stood them in such good stead for so long. However, for many law firms, the changes to their pricing could be hugely beneficial.

Law firms may be able to move away from the ratchet effect that forces them to constantly balance profitability and the wellbeing of their people. Revenue will depend on delivering work efficiently using all digital tools available rather than simply billing more hours. This could be massively helpful for the Mainstream firms who cannot currently compete with Pace Setters on reward.

Secondly, law firms might be in a position to bill according to the value of the work to the client. Pricing by project could allow firms to charge a premium for projects that require a skill set that is hard to find or very much in demand. They might also be able to link the cost of their work to the added value delivered to the client. A high value or high-profile project might then command a premium.

Another trend we saw was the use of AI in other areas of law firms. For example, in creating marketing material and responses to Requests for Proposals; designing financial dashboards that help Partners manage their budgets; helping Partners deliver accurate bills that comply with outside counsel guidelines and reduce the risk of being rejected by e-billing systems. These may be seen as lower risk areas in which to experiment, and we saw several firms exploring AI technology in these uses.

AI; just a new technology?

It is clear that AI has the potential to automate a significant proportion of the work done by law firms. This, on its own, represents a massive change in how law firms operate. However, as we have seen, AI will also force law firms to reconsider how they tackle other areas of operation. Training will need to become more professionalised as it will need to address technology and the softer skills needed as the focus shifts to maintaining relationships with clients. Culture will change as the respective roles of Partners and Associates are transformed by the automation of much of their current work. Lastly, and perhaps most importantly, billing based on time is going to be hard to maintain once AI is full embedded into operations.

More importantly, AI will likely be a catalyst for the transformation of individual law firms and how they operate. It may even change the whole industry as it changes the value exchange between firms and clients. It is clear that not all the law firm leaders we have spoken to understand the full transformational potential of AI.

As we discuss in the foreword to this series, we believe that AI could be the catalyst for a new age of law. AI may force law firms to make substantial changes in how they operate. Culture, collaboration, training and billing will all need to be modernised to accommodate and maximise the impact of AI. The result may be law firms that are very different from those operating today.

For some law firm leaders, this is a change for the better as it will make law firms more modern and in tune with both society and their clients. For other law firm leaders, these changes run the risk of undermining the way of working that has seen them successfully navigate both the pandemic and the 2008 Financial crisis.

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