Clearly, legal firms need to understand Gen AI’s potential and integrate it effectively. They should also remember that LLMs are not new. The first early natural language model was ELIZA in 1966. A turning point was the introduction of Transformers (no, not those Transformers) in 2017, which used algorithms to process words in relation to all other words in a sentence, vastly improving contextual understanding. It is the unprecedented scale of today’s LLMs like GPT that allows them to generate what seems to be such transformative coherency and contextual understanding. To put it into perspective, GPT 4 is pre-trained on literally billions of data points, and is constantly “learning” from our prompts and questions. Put differently, improvement begets improvement, and each improvement happens faster than the one before.
Law firm leaders should also remember that the pace of change is not dependent on just what the legal sector and its clients and competitors are doing. The pace of change is affected by the entire global application of Gen AI – in every sector and in every company and indeed every home. Think of Gen AI as a network of high-speed trains connecting different cities (sectors). Each train (AI development) travels rapidly, carrying goods and passengers (knowledge and technology) between cities. When one city develops a faster train or better tracks, it not only improves travel for its own citizens but also enhances the connectivity and efficiency of the entire network. So, advancements in AI in any sector not only benefit that sector but also enhance the overall capacity and efficiency of AI as a whole. For instance, improvements in natural language processing AI in the customer service sector can and will quickly be adapted and used in the legal sector for document analysis and client interaction.
Still not convinced about the pace of change? As the saying goes, we “ain’t seen nothing yet”. Pause to consider the potential of quantum computing in accelerating AI and legal data analysis. Thanks to some recent breakthroughs, aggressive road-mapping, and high levels of funding, we may see general-purpose quantum computers earlier than many would have anticipated just a few years ago, some experts suggest. “Overall, things are certainly progressing at a rapid pace,” says Michele Mosca, deputy director of the Institute for Quantum Computing at the University of Waterloo. An optimised and stable AI provided by quantum computing can complete years of analysis in a short time and lead to advances in technology.
The impact of Gen AI on the legal sector is more multifaceted than an efficiency and cost play, especially considering its effects on the hierarchy and operational models of various types of law firms.
The democratisation of Gen AI tools levels the playing field between large corporate firms and smaller, boutique firms. This shift may disrupt the traditional advantage held by larger firms, which have historically had more resources and access to advanced technologies. Now, even solo practitioners can leverage AI for research, drafting, and other tasks, potentially challenging the dominance of larger firms. However, large firms may, for now, still hold an edge by developing bespoke AI solutions tailored to their large datasets, which smaller firms might not be able to match.
The proliferation of Gen AI will reduce the demand for certain legal services. As individuals and corporate legal departments become more self-reliant in drafting basic legal documents and performing tasks that previously required external legal counsel, the nature of legal work will evolve. This change will lead to a reduction in demand for traditional legal services, especially in areas like basic contract drafting or routine legal inquiries. While Gen AI may currently be playing at the lower end of the legal value-chain, this will change as the technology and it’s capabilities continue to evolve and improve.
Large law firms, with their complex, costly and often rigid business models, might face significant challenges in adapting to these changes. These firms are typically structured around billable hours and high leverage models, where junior lawyers do a significant amount of the groundwork. If AI starts automating even some these tasks, it will disrupt their revenue model and require a substantial restructuring of their workforce and business strategy. This change will be particularly difficult for firms that are slow to adapt or heavily invested in traditional ways of operating. For example, the ongoing fixed cost of the long-term rental agreements that many large firms are tied into, is cause for some anxiety, since the revenue model cannot slip much before the cost profile starts to seriously hurt profitability.
On the flip side, the shift will also create opportunities for legal professionals (note, not only lawyers) to specialise in AI-related legal issues, such as data privacy, intellectual property rights related to AI-generated content, and the ethical implications of AI in legal proceedings. Traditional law firms that are agile enough to pivot towards these emerging areas may find new avenues for growth and relevance., but this will quickly become a highly contested space – with all that entails, including rate pressure and margin squeeze.
The shift will also benefit ALSPs that are able to quickly take advantage of the short to medium term need for firms and clients to effectively, efficiently and cheaply prompt the various Gen AI tools and then apply appropriate quality control to the output to ensure that the output shows no signs of hallucinating, bias, error propagation or data drift. In so doing, ALSPs secure further access to the client base, putting even more pressure on the traditional law firms, few of which are now commercially structured to do volume work at low rates.
The rise of Gen AI in the legal sector will also necessitate a change in legal education and training. Future lawyers, EAs, and indeed all support professionals, will need to be trained not only in traditional skills but also in understanding and working with AI technologies. The forward-thinking law firms should already be fundamentally changing their internal training methodologies and strengthening their bench of non-legal trainers – a pool of talent that will become increasingly competitive and, thus, costly.
So, Gen AI presents challenges to the traditional hierarchy and business models in the legal sector. It also offers opportunities. The key for law firms of all sizes will be their ability to adapt, embrace new technologies, and potentially rethink their service offerings in response to the evolving demands of the legal market.
The larger, established entities face challenges in agility, investment in existing models, and the complexity of change. For large law firms, the commercial risk lies in potentially becoming less competitive if they fail to adopt and integrate AI effectively. The organisational challenge involves restructuring their workforce and business models to accommodate AI, which can automate tasks that traditionally required a significant number of junior lawyers and staff. The risk is that without adaptation, these firms may find themselves outpaced by more agile competitors who can leverage AI more effectively to provide faster, more cost-effective services.
Large law firms can meet the challenges in adapting to the advancements in Gen AI and changing market dynamics by considering innovative strategies:
- A firm could establish a separate subsidiary or business unit dedicated to leveraging technology, including Gen AI. This ‘digital twin’ would operate with a different business model, focused on efficiency, technology-driven solutions, and alternative billing methods. This business would be staffed with a mix of legal professionals, technologists, and data scientists. It would focus on services that can be significantly enhanced by AI, such as document review, legal research, contract analysis, and automated legal advice for simpler matters. This approach allows the firm to experiment with new technologies and business models without disrupting its core operations. It could serve as an innovation lab, testing new ideas that could eventually be integrated into the larger firm. The key challenge will be ensuring that the digital twin remains sufficiently integrated with the parent firm to leverage its brand and client relationships, while also maintaining enough independence to innovate. Trying to manage and develop this new business in the same way as one manages a law firm will be to see it fail. A response to Gen AI is not something to simply be handed over to the “innovation team.” It is a strategic issues that impacts the entire firm. Ideally the new business will flourish, becoming an increasingly significant part of the law firm’s revenue stream, becoming a client itself to the law firm, and ultimately becoming the dominant new, improved and modern brand, with the law firm becoming a smaller support business.
- Amending the firm’s ownership structure to include non-lawyer professionals, such as technologists and technology developers, could bring in new perspectives and expertise. This could involve creating new positions within the firm’s leadership or even offering equity or quasi-equity stakes to key technology partners. Including technologists in the ownership model could drive a more tech-focused culture and incentivise innovation. It also opens the door to attracting top talent from the tech industry. There will, no doubt, be resistance from traditional partners and regulatory hurdles. Additionally, integrating professionals from different backgrounds into the firm’s culture and decision-making process could be complex.
- Diversifying into a group of companies, each specialising in different aspects of the legal sector, can spread risk and tap into new revenue streams. This could involve setting up separate entities focusing on various niches, for example, a legal tech company developing AI tools, a legal consultancy providing bespoke legal-tech solutions to clients, and a traditional law practice. This structure allows for specialisation and agility within each entity while maintaining a coherent brand and shared resources. It can cater to different market segments and respond more effectively to industry trends. Managing a diversified group requires strong commercial leadership and a clear strategic vision. Again, each entity must be sufficiently independent to be agile yet integrated enough to benefit from shared resources and brand value. The non-law firm businesses in the group should not be structured or managed like a law firm.
In all these strategies, the key is strong commercial and strategic leadership that is more than just “crank the handle and chase rate x hours”, and balancing technology adoption with the firm’s existing strengths. Only by diversifying, integrating technology, and attracting new talent and perspectives, can a firm navigate the evolving landscape effectively, turning potential threats into opportunities for growth and transformation.