Most experts agree that generative AI has huge potential when it comes to creating a win-win for both law firms' bottom lines and their clients in efficiency and cost savings. However, the question of how to make that work is not fully defined, according to several technology consultants to law firms.
"There is a general concern among law firm management around this topic, but ultimately what it means for law firms' business models still feels like a pretty open question," said Sean Monahan, senior director in the strategy and transformation practice at consulting firm Harbor Global.
There is a tension between corporate clients' expectations of some level of cost savings as their outside counsel invest in AI, and the reality that for many law firms AI has been a massive cost when it comes to buying the technology, training staff and implementing its use, Monahan said.
"They are hearing from clients, 'If you can do this faster, this should be reflected in our bills.' But firms are saying, 'We are putting a huge amount of time and money and energy into this, but we're barely able to pass along savings because of the huge up-front investment,'" he said.
In fact, rather than passing along savings, many law firms are instead passing along the cost of the investment to their clients through line item fees for AI or research and development fees, the consultants said.
The potential to truly create a win-win for both clients and outside counsel with AI largely rests on the implementation of alternative fee arrangements, or value-based billing, a concept that has been slow to catch on among many corporate law firms, according to Lourdes Fuentes, founder and CEO of Karta Legal, a legal operations and law firm management consulting firm.
Because many large law firms bill their services by the hour, an uptick in efficiency could mean fewer hours billed on a given matter and less revenue generated for the law firm.
For firms with high-volume practices like immigration, trusts and estates, personal injury and family law, the answer is relatively simple: They can do more work faster and bill with a flat fee based on the matter rather than the hour.
But for large law firms and sophisticated boutiques, the answer may be to use AI to become more efficient on lower level tasks in order to free up lawyers to dedicate their time to high level, "intellectual," high cost tasks that are still billed by the hour, Fuentes said.
"You have seen how rate increases are happening in most of BigLaw. I think part of what's guiding that is the expectation that their lawyers are doing more high value work," she said.
The rate increases "could be a strategic move to hedge against the anticipated reduction in billable hours driven by AI advancements — a shift that appears increasingly inevitable in the near future," Fuentes said
Rather than approaching the implementation of AI as an opportunity to strategically enhance their bottom lines, many firms are doing it as more of a box-checking exercise because clients are asking them what they're doing in this area, according to Andy Morris, a senior adviser at Unbiased Consulting. Morris previously held technology leadership roles at WilmerHale, Hogan Lovells and Thompson Hine, as well as professional services giant Accenture.
The same thing happened around other technological innovations in the past, he said.
"The clients will see something emerging, a technology or something that's supposed to make things better, faster or cheaper, and they'll throw it in their RFPs. So then the firms that work for them get reactionary and say, 'We need to say we're doing something,' without a thought as to how it could drive a benefit to the firm," Morris said.
Morris said he wishes he could wave a magic wand and help firms approach the implementation of new products or processes like AI by first defining the value of those services both internally and to clients.
He said law firms need to start thinking about AI by deciding what area of their business makes the most sense to target — maybe that's a single practice group or a certain type of work — "then envision what efficiency would look like, then decide how to monetize that."
Monetization may mean charging for matters on a flat fee basis, or the technology could add value that allows the firm to charge more for its services, or it could mean becoming more efficient to allow the firm to capture more business from existing and prospective clients.
The last step would be to implement the technology, Morris said.
"If you start by delivering things for the client, you're putting the cart before the horse, in my opinion," he said.
--Editing by Robert Rudinger.
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