Expert comment

AI and new business models in legal services

Robots are not (yet) replacing lawyers, but AI’s capacity to automate knowledge-based work, in particular its rapid processing of very large amounts of text, means that it can take on a number of legal tasks. The impact of this is likely to be, not the loss of jobs, but changing roles, new types of legal services provider, and new forms of organising in existing law firms.

Professor Mari Sako explores some of these implications in a working paper with John Armour, Professor of Law and Finance: ‘AI-enabled business models in legal services: from traditional law forms to next-generation law companies?

 

The way things were/are

In a traditional law firm partnership, lawyers provide bespoke legal advice to clients, which is charged by the ‘billable hour’. The opaque nature of expertise combined with a highly customised service means that clients have no way of judging the quality of this advice, sometimes not even after delivery.  Law firms capture value by building the reputation of groups of lawyers, and by adjusting leverage, i.e. the ratio of associates (more junior lawyers) to partners (senior lawyers who are joint owners of the firm). Through extensive training and licensing, lawyers achieve uniform standards in their work, and they have been socialised to share ethical norms. The partnership structure is decentralised with consensus-based decision-making.

 

New AI-enabled business models in legal services

Legal technology business models focus on developing AI platforms and software tools to be used by customers to facilitate the completion of legal work. Often what is sold is a machine-learning model (sometimes pre-trained for particular applications) which clients – law firms or corporate legal departments – can then (further) train using their own data.

The legal operations business model separates lawyers’ work into tasks to lower legal costs by applying business process re-engineering, process mapping, design thinking and project management to improve the workflow and quality.  AI can be used to automate some of the process steps. AI can also increase the accuracy of predictions about resource and time to complete projects, which facilitates output-based pricing.

The consulting business model provides advice on how to reorganise legal work at law firms and in corporate legal departments. This can include advice on choosing AI platforms and software tools.

These new business models are being employed by legal tech start-ups, alternative legal services providers, and – crucially – the Big Four audit firms, which are increasingly seeking to offer fully integrated services to corporate clients.

 

The challenges these business models present for traditional firms

Traditional law firms have wrestled with the implementation of AI and of AI-related business models. This is partly because they lack people with the right kind of expertise (in data science, project management, etc.) inside the firm, and partly because the partnership structure both constrains risk-taking and excludes people with essential technological knowledge from the firm’s decision-making process. They have sought to adapt in three principal ways.

Combining the traditional model with the legal technology, legal operations and/or consulting business models within the firm

Before AI, major law firms created their own ‘knowledge centres’, rather than outsourcing to independent Legal Process Outsourcing providers. These centres can be enabled further by AI. Paralegals are supervised by lawyers who step out of the associate-to-partner promotion route to become managers, with only a minority of these non-fee-earning senior lawyers able to insist on a partner status. From the clients’ point of view, this is a positive arrangement as it is easier if a single firm can do both bespoke and process work. Moreover, some law firms offer consulting in legal process, project management, and digital solutions to their clients.

Combining the traditional model with the new business models via vertical integration

Some law firms began early to develop an in-house technology/innovation/knowledge management team. Such teams are tasked with supporting a variety of practice areas that require tech support to either improve internal workflows and/or to win business from clients. However, this involves recruiting people with different skills and an innovation remit – something the traditional partnership is not set up to do, as the model does not recognise contributions to the profit pool by non-lawyers.

Combining the traditional model with other business models via contracting

Law firms are experimenting and diversifying by establishing tentative relationships with a number of different providers. As a relationship with a provider deepens, there is likely to be a level of customisation to the user firm’s needs that generates relationship-specific value, although the firm cannot usually take advantage of this without access to the platform on which the applications run.

As a result, a number of law firms have established accelerators and incubators; some have also taken equity stakes in software vendors; and others have acquired legal tech firms outright, or have set up joint ventures with them.

[illustrative] filing binders

Questions for law firm leaders

Is AI really ready to be used for legal services? Machine learning relies on the availability of large and consistent datasets, but data owners (corporate clients) are often reluctant to give permission to aggregate data. Also, AI models cannot explain predicted outcomes.

Is your firm ready to promote professionals who are not lawyers to senior positions? Data scientists and engineers are key to creating innovative and income-generating AI-enabled services, but are not fee-earners in the traditional way. Or should more lawyers be trained in data science?

Should you adopt a different governance structure? Investing in technology development can require access to external finance: if you were to become a corporation you could raise external capital and adopt a managerial hierarchy that incorporates non-lawyer talent. 

Overall, is your firm highly motivated to change? If yes, are incremental changes sufficient? If not, should you remain a pure law firm within the traditional business model, with reputation as a key asset?

 

Find out more about the research project, Unlocking the Potential of Artificial Intelligence in English Law, funded by Industrial Strategy Challenge Fund's (ISCF) Next Generation Services Research Programme and UK Research and Innovation (UKRI), run by researchers in the Oxford departments and faculties of Law, Economics, Computer Science, Education, and Saïd Business School.