Why would a law firm, or for that matter a corporate legal team, sack a lawyer who is doing a good job? One widely mentioned reason is because the new wave of generative AI could take their role – but will it really?
Now, before we get into this, some may say let’s focus on how AI helps lawyers to do a better job, rather than think in terms of replacement. That makes sense, but the challenge is that the existential question about ‘AI taking lawyers’ jobs’ is already out there and people are taking it seriously this time around. There is no point in hiding from it. So, let’s do this.
Why Would a Law Firm Sack a Lawyer?
Let’s say that AI tools based on LLM technology are able to resolve many of their challenges, e.g. data leakage and hallucinations, and they continue to do an increasingly good job in the blink of an eye when it comes to legal tasks based around text. In fact, many say that they are already very good at things like preparing documents, reading and reviewing them, or conducting legal research, so, figuring out the new wave of AI’s impact on jobs is a matter of when, not if.
To get a sense of what people think Artificial Lawyer has been running ‘The End of Lawyers Deadpool’ survey on Twitter (see results below). As you can see, the most popular view is that we will see lawyer job losses within two years. The survey is still going, but the dominant view is clear, AI will lead to SOME lawyers losing their roles. Only a small minority said it will ‘never happen’. Naturally, this is only an indicative sample, but mostly from people who know a lot about law and technology, so although not a scientific study, it’s probably worth paying attention to in terms of gauging market expectations – and hence this piece.
So, why would a law firm ask a qualified lawyer, who they’ve trained, who they’ve mentored, who is making a huge profit for them by selling their time to the clients, to then leave the firm? Would the fact that an AI tool can do some or much of what they do in a few seconds be enough to make that forcible exit happen?
The short answer is: no, not with the current law firm business model. Despite all expectations, the reality is that large law firms (which are in the time-based game) have no incentive to let any technology, whether AI or anything else, impinge on the ability of their lawyers to generate fees in the way that they do. Not now, nor at any time in the years ahead….unless the business model changes.
Time, Money and the Law
Large commercial law firms, at least economically speaking, mostly sell time. There are some fixed fees, success fees and other AFAs, but generally they are selling time.
Every fee earner, from paralegals, to the associate leverage group (by far the largest part of the fee earning body), to salaried partners, to equity partners, are all selling time.
Every associate is (and look away now if the unpleasant realities of legal economics upsets you) a time-generating engine, a human taxi meter if you prefer. The money that lands in the equity partners’ pockets mostly comes from those taxi meters running for as long as they physically can, at the highest rates they can be charged out at, with as many of them on each matter that the client will accept given the timeframe of the matter, i.e. big matters with short timeframes need more associates because this is manual labour that is only ‘assisted’ with technology. But, however a job unfolds you WANT that manual labour on the timesheet, and lots of it, as that is how everyone gets paid.
Under such a time-based legal economic system any partner would be mad, or perhaps dangerously unaware of how they make their own money, to want to remove anyone from the firm that has a meaningful role in the leverage pyramid.
In fact, the most profitable of all the leverage pyramid is the bottom three or four years – because even though you may think BigLaw salaries are high, after those associates have been billing 2,000 hours at $500-plus per hour, i.e. $1,000,000 generated per year in fees, then the profit left over for the partners is very significant. And of course, those rates could be way higher for certain firms, so too the billable targets.
E.g. even if a junior associate has a salary of $200,000, then after they’ve been paid, their work leaves $800,000 on the table for the partners – who own the firm – to pay off other costs and then keep the rest for themselves. And the larger law firms have hundreds of associates, sometimes thousands. (Naturally, this is a simplified model, but you get the picture – you actively want a lot of junior fee earners, as long as they stay busy.)
In such a world, the only reason a law firm would alter this is because they need a certain amount of associates, certainly after three years or so, to leave the firm to keep the leverage pyramid in good shape. Many leave by choice, others are made aware there is no future for them. Either way the majority of all associates hired by a firm eventually leave so the layered pyramid up to partner level can remain appropriately staffed to meet demand and stay very profitable.
‘Up or out’ is the name of the game, and the reality is that this system – which the BigLaw culture has so normalised people don’t even question it – has been the cause of more lawyer job losses than anything else in modern history.
Therefore, if you sack those ‘billable time-producing’ associates you are keeping in the leverage pyramid then you are simply making yourself poorer – if time is the majority of what you sell. I.e. think about all that profit that is lost after you’ve covered salaries and operational costs at the firm.
Aside from ‘Up or out’, you’d only sack these associates, if 1) there is no work to be done, e.g. 2008 financial crisis that froze corporate activity, or 2) the work they used to do has become so commoditised the firm’s associates can no longer do it profitably enough for you to keep doing it, e.g. some elements of eDiscovery work, and there was nothing else the associates could productively do. In case 2, the reality is that firms did find something else for those associates to do.
So, to conclude. Let’s say that the new generative AI tools get to a point (and some may say we are already there) that they can do large parts of what a junior lawyer does, in effect making them not as necessary. As long as the firm’s goal is to sell time, things won’t change, because you cannot sell the time taken by an AI to read a document if you want to make money. You have to sell something else instead – see below.
Note 1: it’s been mooted that a law firm could make savings on property and operational costs by sacking some associates, while the remaining associates use AI to support them – but then make up for the loss of all those ‘human taxi meters’ and billable hours by hugely increasing fee rates to compensate for the drop in net billable work.
It’s an interesting idea, but the challenge here is: if clients are willing to pay so much more all of a sudden, then it would be far better for the law firm to have lots of associates, not less, as they clearly have struck a seam of legal gold.
Also, the base of the leverage pyramid is where firms make their greatest profit. Even with some saved operational costs from having less fee earners in total, the loss of income by greatly reducing your lower-level associate ranks who are generating $100,000s each for the firm’s partners, would be catastrophic to the profits of the business.
Note 2: with regard to small firms / High Street firms, many of which operate on fixed fees for the majority of their work, then see below. They also have a different approach to associate leverage, very often have a different culture re. longevity of roles, and in some cases for newer boutiques start from day one with a focus on fixed fees. I.e. they are a long way from the BigLaw model set out above. Also, new law firms that start with fixed fees from day one may have an advantage here, as they don’t have to do an economic shift away from time and can focus on leveraging AI and other tech right out of the gate.
Why Would an Inhouse Legal Team Sack a Lawyer?
Inhouse lawyers are all employees and although they can save the company from great financial risks and even with some smart thinking help it to be more profitable (e.g. improving contracting processes), they don’t by themselves make a direct profit for the business as a law firm lawyer does. In such a scenario one could theoretically see some junior inhouse lawyers getting sacked because AI can do their job, with cost savings as the driver…..but, that also seems unlikely, at least in the next few years.
Why? Because if I owned a large company the last people I’d sack would be the inhouse lawyers at a time when legal and compliance needs seem to be multiplying like some alien fungus that has taken over the planet. There are also so many other parts of the company to trim because of AI cost savings first before getting into the very complex (and risky) task of figuring out who in the legal team can be replaced by software, which is still – it has to be said – very new.
Moreover, the trend is for inhouse teams to take more and more work and handle it internally. The long-term trend – i.e. above and beyond any temporary economic bumps – is towards more lawyers inhouse, not less – even if some of those lawyers are arriving on temporary gigs via an ALSP’s on demand services.
However, one could see the use of AI eventually slowing down staffing growth as its support capabilities are so great, e.g. around standard contract creation, review and management, that even if corporates don’t start cutting roles, they won’t feel the need to keep hiring in new permanent talent, especially at a more junior level. So perhaps an AI-driven hiring freeze for long-terms roles, rather than cuts, is on the cards.
Overall and given how slowly the inhouse world has moved to embrace even well-documented tech such as CLM systems, the idea of AI storming the inhouse Bastille in the short-term is remote.
Until the C-suite leads the charge, the idea of GCs throwing out legal staff who already do a good job seems unlikely. The order for change – if it ever comes – will come from the top floor (see below).
What’s Holding Change Back?
There is one thing that is way more powerful for law firm economics than AI or any other tech, and that’s bringing an end to the time-based legal economy.
If law firms sold ‘products’, or at least highly discrete legal services, which all came with a fixed fee, i.e. here is the output you wanted, here is the price – it doesn’t matter how we get to that point, just that you want it done quickly, done well to meet your needs, and we can agree on a price for it.
Now the law firm will make more profit the faster they can get the job done, and the more effectively they can wield their brain trust of knowledge and expertise inside the firm to do that work. AI – and any other technology that works – is of value, not just as a support, or for unbillable work, but feeds directly into the profit margin of the legal business.
In such a world could a law firm decide to reduce its fee earners? Yes and no. Automation and AI in a world of fixed fees would mean they needed less lawyers to reach $1 bn revenue, for example, that is for sure. The profits for the partners would also be far, far greater, as more work is coming through the system – as they can now do more. (Note: you’d still need the partners, as someone has to take personal responsibility for the client’s matter, and there will still need to be plenty of associates for everything tech can’t do, which remains a lot (!) – but in this scenario it’s reasonable to assume you need less fee earners than the current leverage ratio using a manual work/time system.)
But…now we also have a new kind of market. In this market more volume really means more money for the partners – because the AI enables that.
(Note: Maybe this is what is holding things back..? I.e. that many partners don’t realise they would be a lot richer – yep, even more than they are now – if they moved to fixed fees powered by tech rather than time and elbow grease.)
Also, AI may allow better access to justice, as the cost per matter could decrease if smaller firms embraced AI and regulators supported its use in scenarios where there may not always be a lawyer present in all of the work. All in all, the legal market could grow and more legal needs could be met.
One other aspect to consider is if clients using AI inhouse for legal tasks has a real impact on the work going out to law firms. Moreover, will ALSPs or other novel legal businesses embrace AI tools at scale and really take on the work that has become insufficiently profitable for ‘traditional’ law firms, as happened to plenty of eDiscovery work?
And this point does have some resonance, i.e. if the clients can hold back more and more work due to AI so that it doesn’t get sent to the law firms then they will have no choice but to hire less lawyers in certain areas – unless they can find a corresponding increase in work elsewhere (and on that latter point one wouldn’t bet against them).
So, fixed fees, client buy-in to the use of AI at scale, an ambitious ALSP sector, and smart partners who realise the old model is actually not as profit-generating as it could be…could lead to a net reduction in the need for lawyers – if the market stayed the same size. But the demand globally for complex legal services keeps growing year on year…..so, again, even here one would not bet against that the net total of lawyers globally may still grow, even if some BigLaw firms embrace the future and restructure for a new approach.
In short, a major loss of lawyer jobs in such a context seems unlikely, at least for a long time to come.
Conclusion: AI Chicken vs AI Egg
Some people have suggested that because AI works super-fast, then the billable hour will drop away all by itself, ushering in a new era for lawyers as if they had no say at all on the subject.
But, nope. It’s the other way around.
For the law, it will be a case of a new economic model going on to leverage AI technology to make the most of that approach. Or to put it another way: revolutions only happen when you have the right conditions, and that goes double for the legal world.
The current game will change only when a large enough group of clients, e.g. the majority of the Fortune 500 and FTSE 250, demand the end of the billable hour, with only the most exceptional cases allowed to be timed. At that point AI can actually be leveraged to its full extent, rather than providing primarily comfort and ease to lawyers around their non-billable tasks – which there is nothing wrong with, and if it helps that’s good.
So, the future – especially the future of the BigLaw commercial legal sector – is really in the hands of the clients and the people who own the world’s larger companies, and so far there has been little to no indication there is an appetite for major and very rapid changes. If there is a burning platform, then many GCs seem to be sitting a very long way from the flames.
That could shift. Investors, whether small shareholders, or the major funds that dominate corporate America, could decide that: yes, law is finally now going to be treated as any other part of the business world and any tech developments will be pushed through despite what anyone wants. And it is they perhaps who will one day start a chain reaction that filters through the C-suite, to inhouse, to large law firms and the wider market.
But, we will see. For now, we are a long way from any lawyer losing their job specifically because of AI, let alone seeing large numbers getting handed a cardboard box or being sacked via Zoom because of new technology. For now, AI is playing a positive and welcome supporting role on the legal stage. Whether that ever grows into something that combines with systemic change is down to the people with all the power: the clients.
By Richard Tromans, Founder, Artificial Lawyer, May 2023.
[Note: the subject of AI and ALSPs and also in relation to ‘Small Law’ will be explored in more detail at a later date. ]
Legal Innovators California Conference – June 7/8
All this and more will be discussed at the Legal Innovators California conference, June 7 and 8 in San Francisco.
If you would like more information about the two-day event, please see here. Day One will focus on law firms and ALSPs, and Day Two will focus on inhouse and legal ops.
See you all there!