Tim Pullan strips away some of the hype and takes a broad view of the use of AI in legal practice, highlighting its impact and potential
The commoditisation of corporate legal services has been going on for some time. Since 2007, in-house legal teams have been squeezed for resources. Law firms are under increased cost pressures, made worse by increased competition from within and outside the legal sector. Because of the inelastic nature of legal spend on high-value bespoke projects, many legal activities regarded as low value-add, such as bulk contract analysis, are passed on to low-cost providers.
Data in the US has demonstrated price erosion in the legal industry, with declining revenue per lawyer that may only be offset by cost reduction and an increase in non-equity partners. Neither of these methods is particularly sustainable. AI and automation tools may provide the solution, allowing lawyers to adapt their business models to make workflow more efficient, increase their margins and deliver more value to clients at the same time.
Maintaining profit margins
Traditionally, law firms maintain their profit margins by charging clients the same hourly rate across both high value-added and low value-added parts of a project. The previous wave of development of AI technology enabled the automation of repetitive tasks, including many low value-added tasks traditionally performed by junior lawyers and paralegals. For example, AI tools can review documents for points of law or look for specific issues within a portfolio of contracts in a fraction of the time it would take using traditional manual resources.
The income from senior lawyers who spend most of their time performing more bespoke and relationship-focused tasks was not severely impacted by the advent of the first wave of AI technologies. By and large, the value propositions and strategies of law firms did not change much; the resources flowing to junior lawyers and paralegals were simply diverted to these basic AI tools.
However, more recently, AI tools have become much more powerful and can even automate tasks that had required a high degree of human judgement and expertise. For instance, contract review tools now not only extract clauses but also determine their meaning and assess for risk based on a firm’s contract playbook. Consumer and business clients alike can seek sophisticated legal advice from automated chatbots.
As AI tools across the board have become more accurate and efficient, more law firms are getting accustomed to using them. As a result, law firms have found their automatable, and especially commoditized, services becoming less defensible. The traditional ‘billing-hour model’ is also under pressure because of the inherent paradox of having to bill for fewer hours when productivity is increasing.
Responses to AI disruption
There are typically three types of reaction to AI’s disruptive effect. Some legal providers go further up-market as lower-value processes become automated. These firms move away from performing bulk contract reviews and due diligence work and focus on more bespoke deals, which still command high fees. Other legal providers incorporate AI solutions into automatable processes in their workflow, making traditional services more efficient. This cost reduction allows them to offer more competitive prices to their clients. Yet others offer clients two separate packages: commodity pricing for more automated services that clients are less willing to pay high prices for, while retaining high hourly rates for high-value added activities that have always commanded a premium.
These changes in business model confer benefits on both law firms and their clients. Law firms can tap into easy revenue growth by providing previously cost-inefficient and low-value services that have become more commercially viable because of AI tools. Even though prices have fallen, AI tools increase lawyers’ productivity, allowing them to focus their time better on more creative and high-value added tasks, increasing job satisfaction. Clients also obtain more value for money from expenditure on commoditised legal services because AI tools provide much more robust assessments than low-cost providers using traditional methods.
Using AI to add value
Lawyers can certainly derive much value from using AI to augment the services they offer. However, for law firms to become successful in the future, it is not enough to simply use AI as an engine of efficiency to improve existing processes. Successful law firms need to create new value offerings to clients from the affordances of AI.
The raison d’etre of a commercial lawyer is to provide advice on transactional risk. But traditional advice tends to be anecdotal, case specific and heavily dependent on the experience of the individual lawyer. AI offers an opportunity for lawyers to provide quantitative data to back up their advice. For example, AI tools can provide a portfolio-level overview of the effectiveness of different contractual positions in different scenarios.
Lawyers may also apply AI tools to other types of unstructured data, beyond contracts. Many types of risks and opportunities can be identified from non-legal documents such as operation records and supply-chain data to complement insights drawn from contracts. This allows lawyers to produce more valuable and strategic advice to business clients and more effectively mitigate the risks that clients face.
AI and automation technologies have shifted up a gear, moving from simply automating routine tasks towards providing intelligent analysis from a variety of data sources. Law firms that are prepared to maximise the opportunities that AI and automation technologies present to improve legal workflow will be those that succeed in an increasingly competitive global marketplace.
Tim Pullan is CEO and Founder of ThoughtRiver, which is involved in the application of AI technology to contracts, including generating risk assessment reports on contracts in seconds: www.thoughtriver.com.