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| Santiago Rodríguez |
Today, while it is difficult to estimate the exact number of workers needed to construct the pyramids, with the resources at our disposal — cranes, trucks, drones and bulldozers, among others — it can be safely assumed that the required human capital would be but a fraction of what was needed nearly 5,000 years ago.
This serves as an apt analogy for the transformation underway in the legal services industry. An industry traditionally reliant on extensive human capital is being disrupted by a technology that significantly reduces the need for such labor, enabling tasks to be completed more swiftly and efficiently. The transformative force in question is, of course, artificial intelligence.
The Potential Effect of AI in the Legal Services Industry
Artificial intelligence is not a dystopian technology looming over the legal services industry; it has already arrived. According to DocuEase,
- Approximately 60% of legal professionals are already utilizing AI.[2]
- AI has the potential to reduce the time lawyers take in routine tasks by 20%.[3]
- Around 39% of in-house counsel are experimenting with AI;[4]
- In 2023, the AI market for the legal services industry was valued at $1.9 billion and is projected to grow to $45 billion by 2030;[5] and
- According to a LexisNexis survey, approximately 60% of in-house counsel expect their external law firms to incorporate AI into their work.[6]
According to a report published by Goldman Sachs in 2023, the legal services industry is among the most susceptible to disruption by AI, with approximately 44% of its tasks potentially automatable.[7] This statistic does not seem exaggerated — any legal practitioner with a basic understanding of AI can recognize the plausibility of this figure.
Why is the legal services industry so prone to disruption by AI? The profound impact of AI on the practice of law is rooted in a fundamental aspect of law firms' identities — the billable hour.
Law firms generally rely on billable hours as a cornerstone of their business model and a key metric for assessing their lawyers' performance. The required number of billable hours expected from lawyers to receive bonuses has also increased over time, with approximately 2,000 hours per year becoming the common standard for big U.S. law firms and elite firms worldwide.[8]
In other words, as a general rule, the legal services industry, particularly in BigLaw firms, heavily depends on and rewards high billable hour targets.
The suitableness of using the billable hour as a measure of a lawyer's performance or as the cornerstone of a firm's business model has been debated for decades.[9] As with all metrics, it has advantages and disadvantages.
However, AI poses a triple threat to the billable hour model: It will likely reduce the need for human capital for certain tasks, as well as decrease the time required to complete those tasks, and if companies start using these AI tools internally, they will likely also reduce the amount of work delegated to law firms.
Winners and Losers From the Adoption of AI in the Legal Services Industry
The question is not whether AI will affect the legal services industry, but rather the magnitude of its effect and who will be the biggest winners and losers. As is often the case with legal matters, the answer is nuanced.
Winners in the Short Term: BigLaw Firms and Companies
Current AI tools are expensive and usually beyond the reach of small law firms, boutiques and smaller companies. It will take time for these tools to become more affordable and widely adopted. In the meantime, BigLaw firms and companies will hold an advantage.
Furthermore, if companies begin using AI tools for tasks typically outsourced to law firms, such as drafting memos, legal research and preparing basic contracts, the demand for law firms' services will likely decrease. This is already happening, with Repsol SA, a Spanish multinational energy and petrochemical company based in Madrid, using Harvey to "process legal documents and simplify workflows."[10]
Winners in the Mid and Long Term: Companies, Boutiques and Small Firms
The biggest winners of the AI revolution seem to be companies and boutique or small firms, assuming AI tools become affordable and entry barriers fade over time.
For companies, AI will help them decrease their reliance on law firms. For instance, AI can efficiently perform legal research or prepare initial drafts of contracts[11] — typical tasks for which companies currently rely on law firms.
For boutique and small law firms, the primary advantage of big firms has traditionally been their greater resources. If AI tools become more accessible, boutique and small firms will gain resources that will enable them to operate as if they had bigger teams, without the burden and cost associated with big firms.
Moreover, thanks to AI, companies will increasingly handle routine legal tasks internally. This will, potentially, lead companies to rely on law firms mainly for specialized services. If specialization grows in importance within the legal services industry, boutique and small firms will likely become more attractive for companies since these firms often deliver specialized services with comparable or superior quality to BigLaw firms, typically at lower costs.
Biggest Loser: the Billable Hour
If we assume that AI tools will become cheaper and more accessible over time, the most vulnerable players in the legal services industry appear to be those heavily reliant on human capital and a business model based on billable hours — namely, BigLaw firms.
Some argue that BigLaw firms will adapt and survive, as they have done with previous technological shifts. This may be true, and only time will tell how AI will affect them. However, more than the big firms themselves, it is the billable hour model that appears to be under threat.
As AI tools become more prevalent in both law firms and companies, the challenge for law firms lies in justifying their current costs and maintaining performance metrics heavily reliant on billable hours. With the capability to accomplish tasks faster and with reduced human capital, and as companies decrease their reliance on external legal services, the traditional model faces significant disruption.
Some law firms are already addressing this issue by restructuring their business models.
In fact, several firms are moving away from a predominant reliance on the billable hour model toward alternative fee arrangements when billing clients. Additionally, there is also a shift in internal career paths within some firms, moving beyond the emphasis on billable hours to focus more on other factors such as higher education achievements, publications and other academic contributions in order to grow within the firm.
This evolution appears logical. Seeing how legal costs keep increasing over time,[12] companies are understandably reluctant to pay huge amounts of money and bear all the risks involved in a transaction or a dispute. Consequently, it is becoming more common for law firms to share some of these risks through contingency fees, while capping billable hours for specific matters.
In addition, with AI poised to handle many routine tasks, the distinguishing factor for elite law firms will likely focus more than ever on the quality of their legal expertise. This will demand a higher level of quality and knowledge within these firms, so it is logical to see a shift in the way law firms value their lawyers' performance focusing more on their substantive knowledge and academic background.
What Students Should Do
What implications does AI hold for current students and recent graduates? Once again, the answer is nuanced. The widespread adoption of AI tools won't happen overnight.
However, if I were a student or recent graduate, I would focus on three key areas: (1) mastering the use of AI tools, (2) specializing deeply in a specific area of law, and (3) enhancing skills such as critical thinking, public speaking and drafting.
Regarding the first point, partners at law firms often rely on younger lawyers for expertise in technology. Students should seize the opportunity to learn how to effectively make use of these tools and become indispensable for partners who wish to use them.
Concerning the second point, certain things will always remain invaluable, such as knowing the substance of the law better than anyone. As some law firms shift their models to reward strong academic backgrounds, becoming highly knowledgeable in specific legal domains will always be advantageous.
Lastly, regarding the third point, despite the capabilities of AI tools, certain skills remain irreplaceable — at least for now.
Critical thinking, persuasive argumentation, and compelling drafting are crucial distinctions between good lawyers and exceptional ones. While AI can produce decent memos and legal summaries, it currently cannot provide insights into which arguments are most persuasive in front of a judge or arbitrator, orally argue in an articulate and persuasive way, or draft in a manner that is tailored to the specific judge or arbitrator you are trying to persuade.
Conclusion
The AI revolution in the legal services industry does not appear to be a passing bubble. While it will unlikely eradicate law firms, it will undoubtedly test their resilience — especially big ones.
Unlike previous technological trends — such as blockchain and cryptocurrencies — the enthusiasm for AI appears enduring. Just five years ago, few law firms discussed future AI use, but today, nearly all law firms are either utilizing AI or actively exploring integrating it into their operations.
AI possesses all the attributes necessary to disrupt an industry heavily reliant on human capital. While the exact landscape of the legal services industry in the next five to 10 years remains uncertain, the elements are there for a substantial transformation.
Santiago Rodríguez Sr. is a senior associate at Arias SLP. He is also an adjunct professor at IE Law School in Madrid.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Vaclav Smil, How Many People Did it Take to Build the Great Pyramid?, IEEE Spectrum (May 28, 2020), https://spectrum.ieee.org/how-many-people-did-it-take-to-build-the-great-pyramid.
[2] DocuEase, 26 Key AI Statistics In the Legal Field, DocuEase (2023), https://docuease.com/statistics.
[3] DocuEase, 26 Key AI Statistics In the Legal Field, DocuEase (2023), https://docuease.com/statistics.
[4] DocuEase, 26 Key AI Statistics In the Legal Field, DocuEase (2023), https://docuease.com/statistics.
[5] DocuEase, 26 Key AI Statistics In the Legal Field, DocuEase (2023), https://docuease.com/statistics.
[6] LexisNexis, LexisNexis International Legal Generative AI Survey Shows Nearly Half of the Legal Profession Believe Generative AI Will Transform the Practice of Law, LexisNexis PressRoom (Aug. 22, 2023), https://www.lexisnexis.com/community/pressroom/b/news/posts/lexisnexis-international-legal-generative-ai-survey-shows-nearly-half-of-the-legal-profession-believe-generative-ai-will-transform-the-practice-of-law.
[7] Joseph Briggs & Devesh Kodnani, Global Economics Analyst: The Potentially Large Effects of Artificial Intelligence on Economic Growth, Key4Biz (Mar. 26, 2023), https://www.key4biz.it/wp-content/uploads/2023/03/Global-Economics-Analyst_-The-Potentially-Large-Effects-of-Artificial-Intelligence-on-Economic-Growth-Briggs_Kodnani.pdf.
[8] Kathryn Rubino, Top 50 Biglaw Firm Ups Their Billable Hours Requirement, Sparking Ire Among Associates, Above the Law (Feb. 22, 2023), https://abovethelaw.com/2023/02/perkins-coie-billable-hours-change/.
[9] Stuart L. Pardau, Bill, Baby, Bill: How the Billable Hour Emerged as the Primary Method of Attorney Fee Generation and Why Early Reports of Its Demise May Be Greatly Exaggerated, 50 Idaho L. Rev. 1 (2014), https://digitalcommons.law.uidaho.edu/cgi/viewcontent.cgi?article=1123&context=idaho-law-review.
[10] Repsol, Repsol, first Spanish in-house counsel team to use Harvey, the generative AI platform for lawyers, Repsol (Apr. 3, 2024), https://www.repsol.com/en/press-room/press-releases/2024/repsol-becomes-the-first-spanish-in-house-legal-team-to-use-harvey/index.cshtml.
[11] See e.g. Harvey, https://www.harvey.ai/products.
[12] Allie Reed, Companies' Legal Spend Has Risen Nearly 30%, Survey Finds, Legal Dive (Feb. 23, 2023), https://www.legaldive.com/news/legal-spend-companies-acc-survey-exterro/706067/.
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