AI’s Impact on the Business of Law

The Well-Publicized Role of AI in Enhancing Efficiency and Productivity

AI can perform complex legal work such as drafting and reviewing documents, conducting spend analysis, summarizing narratives, and converting legalese into plain English. As AI tools become more highly trained, lawyers will increasingly rely on automation to perform tasks such as conduct more complex research, draft legal documents, and suggest case strategies. These tasks will be performed at speeds and accuracies far beyond human capabilities—sophisticated AI-powered technology can perform legal work at 100x the productivity of lawyers (albeit still prone to the occasional hallucination). Yet, despite the broad and deep press coverage this impressive performance has created, less attention has been paid to the impact of AI on law firm governance and business operations.

AI’s Impact on Client Relationships and Firm Operations

AI is set to transform client relationships and the overall operations of law firms. Client relationships have traditionally been advisory-driven, with relationship management and firm reputation counted on as key differentiators. In the future, AI will help enable these relationships to become much more performance- and outcome-driven. Corporate clients in particular will use AI tools to measure and benchmark results, and demand greater transparency and efficiency from their legal service providers in return. For example, a company can deploy an AI-driven dashboard that aggregates various performance metrics of legal service providers, such as case duration, win/loss ratio, cost efficiency, 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 core to competing and winning in the market. Technology integrations and AI tools are being embedded with client data and workflow, transforming the way legal services are delivered and creating new opportunities for innovation and growth. Some law firms employ predictive analytics tools to forecast the likely outcomes of cases based on both client and third-party historical data. This approach helps the firm develop more effective strategies, provides clients with better advice, and makes data-driven decisions about whether to pursue litigation or settle.

AI Necessitates a Shift Away From the Billable Hour

Law firms’ use of AI has a significant impact on productivity, and therefore causes financial implications. For example, the use of AI tools that can conduct document reviews and legal research more quickly and accurately than human lawyers raises the conundrum for firms of how to maintain revenue when utilizing a traditional hourly billing model. On the other hand, there is an opportunity for firms to use AI to handle more cases and therefore generate more revenue. The challenge will be to grow revenue while maintaining traditional margins.

This conundrum will ultimately force the hourly billing model to decline over time. However, the solution will not be to move toward the Armageddon of fixed-rate billing, which is traditionally defined as a base rate to handle an entire matter. Rather, the creative and appropriate solution will be a move toward activity-based billing. In this model, clients are charged based on the activities performed rather than the billable hours expended. This model allows firms to replace human talent with AI talent, increase productivity, and maintain (or potentially increase) margins.

Bottom line, if firms fail to adjust their billing models to reflect the increased productivity enabled by AI, they risk lower margins per case. Therefore, it is crucial for firms to strategically manage this transition and ensure that their pricing models align with the new realities of AI-driven legal work.

Navigating Change Management and Generational Conflict Among Partners

A critical aspect of change management introduced by AI is addressing the generational conflict within law firms. Partners who are nearing retirement may be resistant to increasing capital expenditures in 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 firm through this transition requires strong leadership and strategic vision by the firm managing director (MD), who must increasingly focus on strategic change management within the firm. 

Moreover, the broader role of the MD will also evolve. MDs have historically focused on overseeing the firm’s culture, recruiting talent, and maintaining key client relationships. As AI becomes integral to the firm’s operations, the MD’s role will shift away from firm administration, where technology and legal operations can play a larger role, and they will become a change agent for their firm. Going forward, the MD will focus on leading the firm through activating strategic change and managing the many investments required by the impact of AI on the firm business model. In addition to the generational conflict challenge noted above, these newly important functions will include acquiring the right technologies, managing the transition to new pricing models, and evolving the cost base to the right balance of professionals and technology, all while still managing firm culture and reassuring clients of the firm’s value.  

New Skill Sets Required as Lawyers’ Role Shifts

The influx of AI is also set to redefine the roles and skills required of talent within law firms. The traditional role of the lawyer is evolving, with a growing emphasis on technological proficiency. A higher threshold than just passing the bar exam will increasingly be at play, as firms will focus on hiring or training associates adept at using AI tools and understanding their implications for legal practice. This shift will ultimately result in a new corps of attorneys who are not only adept at utilizing technology but are also capable of advising clients on the use of AI-enabled technologies in their own business. These tech-savvy lawyers will help 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 to help close the resource disparity gap between larger and smaller law firms. The largest firms often have the resources to invest in new technologies and manage the associated changes. In contrast, small to mid-sized firms that compete against the larger players may struggle to keep pace. For these firms, understanding and leveraging AI will be a crucial enabler for leveling the playing field with larger competitors, and unlocking new opportunities for growth.

The innovation driven by AI is set to transform the legal ecosystem—not only from the practice of law but to the business of law as well. Law firms must be proactive in embracing this change, and in doing so, be prepared to address the fundamental reevaluation of traditional economic models and navigate the difficult change management challenges that accompany this transition. Those that do will be well-positioned to leverage AI to gain a competitive edge, improve efficiency, and drive profitability for years to come.

Mike Suchsland is a board member and investor in Legal Tech. He currently serves as principal of Joplin Consulting, an independent consulting company providing strategic advice to private equity firms that have invested or are seeking to invest in legal technology, content, and service businesses. Mr. Suchsland is chairman of SurePoint Technologies’ board in addition to serving as venture partner for The LegalTech Fund. Previously he served as president of Legal Business at Thomson Reuters.