With GenAI poised to significantly disrupt how lawyers perform legal services, it may also significantly alter the relationship between corporate law departments and their outside counsel around how the work should be priced
There are opportunities for both in-house lawyers and outside counsel to benefit from the efficiencies and new workflows of artificial intelligence (AI) and generative AI (GenAI). The challenges of managing those changes, however, are myriad and could even redefine many aspects of the law firm-client relationship.
Currently, most of the corporate law department leaders with whom I speak say they are extremely concerned about costs. Many cannot afford the rate increases that outside counsel have been requesting, to the point that I believe it’s nearing crisis proportions. Frankly, these rate increases making it very challenging for companies to continue business as usual with outside counsel.
In-house law departments are working all the cost-control levers at their disposal: conducting panel reviews, using advanced billing technology, moving more work either in-house or to more cost-effective law firms, and so on. These costs need to be addressed, however, and departments are looking at AI as an opportunity to both increase efficiency and revisit the pricing models their outside firms currently use.
Billable hours vs. AFAs — An ongoing debate
The emergence of GenAI is already leading many general counsel (GCs) and other legal department leaders to start zeroing in on the fundamentals of the current law firm business model, including the billable hour. Entrenched and widely popular, its flaws are problematic for many clients in multiple ways — yet the billable hour still remains the standard.
Even though I’ve been pleasantly surprised to see that alternative fee arrangements (AFAs) now account for between 15% and 25% of billings at sophisticated law departments, that figure has remained stubbornly stagnant in recent years. All too often I’ve found that the AFA options presented by outside law firms, such as budget caps or blended rates are little more than billable hours presented in a different wrapper.
However, if GenAI can produce the efficiency gains that are being touted, it may set off a complete rethinking of how legal work is carried out, priced, and valued.
In the near term, I believe the impact of using AFAs may be more evolutionary than revolutionary. A large percentage of work that has traditionally been done using the billable hour, such as bet-the-company litigation, will remain hourly — and with good reason.
At the same time, there is a large segment of legal work — such as certain routine employment matters, real estate transactions, and IP procedural work — in which the number of professional service hours needed to complete these matters could collapse.
AI, accompanied by qualified human direction and oversight, may be able to get the job done with acceptable quality. Therein lies the opening to rethink the billable hour model that law firms love but that drives many of their clients crazy.
Many of these matters are already adjacent to existing AFAs, so those areas will be ripe for expansion of that pricing model, allowing it to take a larger share of the total spend pie. For now, growth of AFAs resulting from GenAI may be about degrees and percentages. But more disruptive changes clearly may be ahead.
How legal work is performed and valued
The caveat is, of course, that this is all highly speculative. Anybody who thinks they know with certainty how GenAI will play out in the corporate legal context is fooling themselves.
It’s important to remember that historically, the introduction of productivity-enhancing technology — whether semi-conductors, the internet, email, Smartphones, etc. — frequently expands the volume of knowledge work, rather than decreasing it. A classic example is how email and collaborative drafting tools, have actually increased hours spent on contract matters as lawyers leverage their increased productivity to increase contract turnover and reviews to produce more sophisticated and detailed contracts that can benefit their clients enormously.
GenAI could produce an even greater magnitude of productivity improvements than those older technologies, and it’s easy to envision lawyers, in turn, applying the productivity gains towards creating, for example, more effective legal documents, better litigation strategies, lower legal risk, and superior legal outcomes for clients.
When it comes to pricing of these services, however, questions arise about how to properly value the work performed, both for the client who derives the value from the work, and the outside law firm that can now perform the work with much higher efficiency. For certain legal tasks, GenAI will undoubtably significantly reduce the labor inputs a firm requires to produce the output of similar, or arguably, higher quality work (assuming they apply the time savings to adding additional value).
Indeed, the real question may become, which does the client value more: capturing the time savings of outside counsel or the opportunity for outside counsel to add additional value to the quality of their legal advice?
The ultimate question: Who will lead?
Further, the logical follow-up question then becomes, who is going to step up first in revisiting the pricing model — the client or the law firm? It’s easy and often tempting for either side to be in a reactive mode, preferring to wait and see how things will shake out.
Typically, however, I’ve seen the most change happen when in-house counsel provides a vision, maps out specifically what they want to see, and states with some degree of specificity what they would like outside counsel to do. I encourage in-house counsel to be proactive and not wait for their outside counsel to come up with a dream pricing deal for the new AI-driven world.
At the same time, however, there are opportunities for innovative law firms to take the initiative. Innovative firm leaders that are willing to seize first-mover status could gain significant competitive advantages over their peers, winning new business and increasing client loyalty. This strategy may also help protect the law department from the very real temptation of some GCs to leverage AI to simply bring more of legal work in-house.
For now, I don’t think we’re going to see a stampede in any of those directions. However, a portion of in-house innovators and creative law firm leaders likely will step forward to revisit how legal work is performed and priced just to get ahead of the mounting wave of change, rather than risk getting swept away by it.
You can find more insight into how to price AI-driven legal services here.
