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.
