What Generative AI Means for the Law Firm Business Model

Episode Notes

Transcript

Sharon Nelson: Before we begin, we would like to thank our sponsor Nota.

[Music]

Intro: Welcome to The Digital Edge with Sharon Nelson and Jim Calloway. Your hosts, both legal technologists, authors and lecturers, invite industry professionals to discuss a new topic related to lawyers and technology. You’re listening to Legal Talk Network.

Sharon Nelson: Welcome to the 187th edition of The Digital Edge: Lawyers and Technology. We’re glad to have you with us. I’m Sharon Nelson, President of Sensei Enterprises, an information technology, cybersecurity and digital forensics firm in Fairfax, Virginia.

Jim Calloway: And I’m Jim Calloway, Director of the Oklahoma Bar Association’s Management Assistance Program. Today our topic is, What Generative AI means for the Law Firm Business Model. Our guest today is Jordan Furlong, a strategic consultant and market analyst for the legal sector. He studies trends in the global legal market and tracks them with technological and geopolitical developments worldwide to paint a picture of how the legal world is changing and where it’s headed next. Jordan has spoken to thousands of lawyers and legal professionals at dozens of conferences for the last 15 years and he publishes a very good free, weekly newsletter at Substack.

Thanks for joining us today, Jordan.

Jordan Furlong: Jim and Sharon, thank you so much. It is fantastic to be here.

Sharon Nelson: Let’s start. We have kind of two sentences here so I’ll roll them together. Jordan, what do you mean when you refer to the law firm business model and what are the current business features of law firms that you think will change because of Generative AI?

Jordan Furlong: Sharon, thank you. Yeah, the whole term “The Law Firm Business Model” is kind of a term of art. So to be clear, I’m talking here now of the kind of traditional general approach that most law firms use for their revenue generation, which is lawyers do work for clients. They bill the client the number of hours, their work times their billable rate, and not every firm does this and not all legal work is done this way, but as a general rule, that’s what we’re talking about. And it’s this model I think that Generative AI is going to wreak some havoc with.

The first and most obvious is Gen AI is going to reduce the amount of time it takes to do any number of legal tasks, and this is almost anything right now involving the creation and review of documents and contracts, legal research, contract analysis, even some litigation analysis. In a few cases, it will completely take over the task, but I think in most cases it will just kind of shorten or compress the amount of time required. The shortening and compressing is going to intensify as the AI inevitably gets better and quickly and human lawyers won’t need to do as much fact-checking in review of its work. So the first change will simply be that as the work gets done faster, there will be fewer hours to bill for each matter, and so, that’s going to be a hit to revenue the way a law firm is generated.

Secondly, it matters whose work is getting shortened and compressed, because for the most part in law firms, it’s going to be junior lawyers and associates because they’re the ones doing the lower level-lower value work that falls to less experienced people. And in the traditional business model for law firms, the leverage model means that partners will profit off of associates by selling the client every hour the associate or junior works for less money than they’re being paid. So if there’s fewer associate hours, profit is going to go down.

And then thirdly, the change that we’re going to see in terms of how juniors are trained and I use that word very loosely on entry-level work. This is how most law firms train new lawyers. You get them doing this kind of grunt work like document drafting and research and review and so forth, so they learn the ropes of being a lawyer. But as that work it gets consumed by Gen AI, now, how does a firm train its juniors? So these are some of the issues that I think we’re going to start seeing unfold, not in a case of weeks or months but certainly in a matter of a few short years, absolutely.

Jim Calloway: Jordan, let’s start with time-based revenue issues. Is this yet another prediction that the billable hour will die. I remember making some of those predictions a couple of decades ago and they don’t seem to have been correct so far.

Jordan Furlong: Absolutely, and I’m guilty, I’ve made those predictions as well. I’ve now concluded the billable hour will never die. It will be around until the sun goes nova, the billable hours and twinkies. That’s all it’s going to be left.

And you know what? Honestly, as a pricing mechanism, the billable hour doesn’t make sense sometimes. You got a new relationship with a lawyer and a client. They don’t really know each other. They haven’t found each other out over to really kind of novel unique situation. No one really knows what kind of price you put on anything. Sure. They make up an hourly rate and they use that until they come up with something better.

I think the reason that myself and you, folks, and many other people have hoped for and rooted for the death of the billable hour is partly that it has been so toxic to clients, right?

(00:05:09)

Because the client as we all know has no idea how much they’re going to be paying for legal service and won’t know until the service is completed, which as a friend of mine in the business said, it’s like you take a flight somewhere and when you land they tell you what the fare was, and you got to pay it right there. And partly it’s toxic to lawyers. As we all know all too well, it creates incentives to overwork yourself at the cost of your physical and mental health. It creates very negative incentive situations inside the law firms and so forth, but when Gen AI comes at the billable hour, it’s not going to come out from these angles at all because it’s not going to care. I think fundamentally Generative AI is going to make so much legal work so efficient, and like whether law firms like it or not, well, lawyers like it or not, it’s going to take so many hours out of all law firms’ inventory it’s simply not going to make economic sense for the firm to bill by the hour anymore, because fundamentally, why would you bill your work on the basis of time spent when you were spending less and less time doing that work every day?

Sharon Nelson: Well, whatever else you might say about the billable hour, Jordan, at least it’s easy for everyone to understand. So why would firms want to take on a more difficult and challenging valuation system?

Jordan Furlong: Yeah, it’s a good question because the path of least resistance is the most well-trodden path in law firms and has been since forever. But, here’s the thing about the billable hour, and I think this is the real reason why it’s been around for so long. I think it is really useful as a proxy for the value that’s rendered by a lawyer for their client in any given case, because the client in most matters, they can’t tell you how much a legal service is worth to them. But you’re sure, if you’re suing somebody for $50,000 and the lawyer helps you win the case; sure, the value of those services will be some portion of 50 grand, okay. But what’s a last will and testament worth? Right? What’s it worth to successfully immigrate to a country or to get a suspended sentence out of a jail term? Right? The client doesn’t know. The lawyer doesn’t know.

So the billable hour I think has been a kind of a rough solution to that. It has kind of equalized the value of the lawyer’s time and effort with the client’s need and solution and I think that kind of basically lines up with their general sense of how things work in the world. You work hard at something, that’s a measure and reflection of what you should get paid for it, but again, I think Gen AI is really going to cut the legs off from under that because it is going to automate legal tasks and augment legal tasks so fully that the value of the work is going to radically diverge from the amount of time required to do it. The proxy equation is not going to work anymore.

And I think because of that, lawyers are simply going to say, “I’m not putting up with that. I’m not getting paid what I’m worth. I’m putting in lots of work and lots of mental work and emotional energy and so forth, but the amount of time it’s taken me to do it is much less than it was and I think lawyers simply will not want to get paid so little for something that everyone knows is worth a lot more.”

So, yeah, I mean, I think as a pricing mechanism, the billable hour will survive, but it will dwindle to a reasonably small minority of specialized legal matters, but beyond that, I think to my mind I’m pretty confident that the day is coming when it will be only one and a not very often used method of pricing legal work.

Jim Calloway: But what about the leverage lawyer aspect of this. If law firms can’t make money off their associates, I mean why even hire them, and then where do the firm’s future leaders come from?

Jordan Furlong: Well, yeah, and I’ve been kind of hearing variations on those questions from law firms and from managing partners. This is where it gets interesting, because the implications of Generative AI kind of rippled throughout the whole business. It’s not just on the financial side.

So, this is my theory of associates and law firms. Law firms hire and employ associates, new lawyers for only two reasons that they all generate truckloads of cash as leverage of paper, right? And that a handful of them one day will pony up a whole lot of money, buy into the partnership and become part of the equity partnership with the firm. But only a very small few ever get invited to the partnership, and it’s well-known by now. I mean, this is a separate conversation, but this generation of associates and young lawyers has less interest in becoming full equity partners in law firms in any generation that came before it, certainly mine. I think certainly your guys. But the firms have said, “No, that’s great. That’s fine.” We’ll hire a bunch of associates on day one and we’ll let them compete against each other, hunger games and the law firm. You’re out working each other. You’re out earning each other and in six, eight, ten years’ time we’ll take the survivors into the partnership and the circle of life continues because everybody else will have left either because they quit or we fire them.

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And again, that’s worked pretty well because this attrition process which has extended longer and longer over the years means you can make more money off these associates for a longer period of time. So, again, this seems to me Generative AI is going to take down as I’ve mentioned, The Leverage Labor System, because it’s going to take fewer hours and fewer minutes and fewer time, and less time and effort from lawyers to get work done. And if you’re not really making a lot of money off all of these grazing herds of associates, you’ve gotten your law firm, then the only reason left to hire them is because you need partners down the road. You need people to refresh the capital and buy into the partnership and replace it with the retiring partners, but you don’t need. If you get 10 associates, you don’t need 10 partners down the road. You don’t want 10 partners; this is going to dilute your profits. You probably only want two or three.

So you’re probably going to hire a lot fewer associates than once did, and maybe that makes good economic sense for the law firm. It’s going to be a problem for new lawyers, I fear. It’s going to be a huge problem for law schools because in separate conversation, but their business model, as far as I can tell, is just churning out as many new graduates into this wood chipper system the law firms have, and if that system goes down, it’s not clear to me. The law schools are in a volume business and I think volume at least in the short term is going to take a hit when it comes to the number of lawyers entering law firms.

Jim Calloway: Yeah, and on that happy note before we move on to our next segment, let’s take a quick commercial break.

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Sharon Nelson: Welcome back to The Digital Edge on the Legal Talk Network. Today our subject is What Generative AI Means For The Law Firm Business Model. Our guest today is Jordan Furlong, a strategic consultant and market analyst for the legal sector. He studies trends in the global legal market and tracks them with technological and geopolitical developments worldwide to paint a picture of how the legal world is changing and where it’s headed next. Jordan has spoken to thousands of lawyers and legal professionals at dozens of conferences and retreats worldwide over the last 15 years. He publishes a free weekly newsletter at Substack.

Jordan, let’s talk about the question of training and developing new lawyers in smaller numbers as you point out. Are the firms really going to have to build expensive brand-new training programs for their young lawyers?

Jordan Furlong: Well, yeah. I mean, it brings us back to the whole thing about training, and as I said before, whenever here law firms talk about training I always think of Inigo Montoya. I don’t think that word means what you think it means. If you look at other businesses and industries and professions and what they do under training and you compare that to what we do like you really see how far behind the curvier, like you don’t train new surgeons by having on spent five years in clinic with a tongue compressor saying as “say ah”, right? You train new professionals in the kind of work in the kind of techniques that advanced professionals will use to deliver their high-end value.

So I think there’s been very little pedagogical value for lawyers, and I’m spending the first few years of their careers or if you’re in a big firm maybe the first several years of your careers, doing this basic were kind of grunt work. You’re never going to do again once you become a senior practitioner, right? That’s not training. So my view is, yeah, actually all law firms should develop expensive training programs for the young lawyers or sign them up to an outsourced training program. I think they should have done that decades ago, right? Honestly, I’ve very little sympathy for the law firms to say, “Well, you mean, we have to train our own employees now? Yeah, right?

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And they get so upset when you tell them this. You’re not going to be able to bill the work if you know new lawyers anywhere close to what you used to, but who’s going to pay for their training? I don’t know. You? The employer? I am just spitballing here. It’s crazy. It’s crazy that this is so deeply entrenched in the culture of law firms. The real world does not work that way.

Jim Calloway: What other aspects of law firm business do you think Gen AI might affect?

Jordan Furlong: It’s kind of related to training, but I think it also touches on the kind of things you value in lawyers, because right now, the incentive systems inside law firms are going to drive certain kinds of behaviors among lawyers. It’s going to discourage certain other kinds. And since in most law firms, the only two things that really matter to your career advancement are bringing in business and sending out hours of work. Then you were naturally going to produce the skewed kind of personalities and people and tactics and behaviors that again, it wouldn’t really fit in any other kind of operation.

So what I’ve been writing about a little bit is, I think there’s a real opportunity for us to rethink skills in the legal profession and in law firms. One of the little soap boxes I like to jump up on every so often is how much I hate the term “soft skills” and I hear this used all the time. So it goes, “Oh well, I guess we have to teach lawyers soft skills these days.” I said, “Don’t call them that.” They’re really difficult and they’re really important. Soft skills make it sound like it’s second or third rate. I don’t call them “soft and hard skills”, I call them “human and technical skills.” I think both are important. I do a fair bit of work in terms of advising and working with regulators in terms of licensing and competence and trying to talk to law schools and a couple of them are listening, but the point I’m trying to make is I said, “Look, you need both sets. You need the technical skills a bit of knowing how to do lawyer stuff, but you need the human skills to be a human being in a very important and challenging, and oftentimes emotionally draining line of work and these are both important.”

Again, going back to Gen AI, the technical skills, the kind of stuff that we’re accustomed to lawyers doing in all the document creation and the review, and the research and so forth, Gen AI is going to take a lot of that stuff. It’s not going to take the human skills. It’s not going to take the listening and the caring about what your clients off to and the empathy and the ability to communicate and to manage other people and to relate to other people and to read a room, and all the things you need a lawyer to be able to do properly to advocate and advice.

So, I would like to think that as a secondary or tertiary effect of these changes, law firms will start to appreciate more the importance of the human skills, and will align their own systems and their own incentive approaches to match that.

Sharon Nelson: We’ve talked Jordan about all the downsides and the difficulties that Gen AI will pose to law firms. Tell us if there’s an upside somewhere.

Jordan Furlong: Oh, I think there’s a massive upside, honestly. The easy stuff to see, and this is where most of the stuff that’s been written. I have written about a two, is on the kind of downsides and the risks and the worries. But there’s at least two sides to the coin of Generative AI. I mean, there could be several sides in which case, it’s something else. It’s not a coin, but whatever. But on the one side there’s the efficiency play, and we talked at some length about what’s going to do in that side, inventory and workflow in hiring, but I think there’s also the value creation play. Now Gen AI, if you’ve had a chance to play with it at all, you’ll note it’s an incredibly fun and creative device and you can use it in so many different ways in law firms that are not being used today.

One example I gave you the day to someone that you can use it to supplement your training. You can have Gen AI role play a client or an opposing counsel, or a judge and have the lawyer try out your arguments and your sales pitches and so forth. Give it a try and see what kind of answers you get back. This is immensely helpful. It’s a safe space for you to work out with a highly sophisticated engine ways in which you can or can’t, or should or shouldn’t relate to a situation. You can use it to come up with a lot of higher value offerings to clients, the assessment of strategic risk, the identification of new business opportunities, ways to look at the client situation differently.

Lawyers are all be talking about how we love to bet the company work from clients. I used to make the argument pre-AI that what you should be looking for is a law firm. Look for the run the company work because there’s way more of it. It’s a lot more stable. You can automate it. You can mechanize it. You can scale it. It’s immensely profitable. That’s what the big four have been looking at to the extent they were interested in or focused on in this area, but thanks to Gen AI.

(00:20:01)

I think we now have a third category going forward, and that’s grow the company work, and it doesn’t have to be a company. It could be any client. How can I improve your situation, your business situation, your life situation? How can I help you anticipate problems and prevent them before they happen? How do I bring us some more stability, peace of mind? We always talk about lawyers, our highest calling is to be advocates and counselors, and trusted advisors, and that’s great. And that is our highest calling. That is always the kind of stuff that we should have been doing not all the billable hour cranking out the machine stuff. But we’ve not pursued that to degree that we should have before.

Well, I think we have the opportunity now, probably AI is not giving us much choice in the matter, and we have this extremely cool creative machine that can help us do with it. So yeah, I think now it’s a great time to start zooming up that value chain. I think it’s going to be a lot of fun when we get there.

Jim Calloway: We’ll following up on that. What steps should law firms take right now to start preparing for whatever Gen AI throws at them?

Jordan Furlong: Both formally and informally experiment with it, use it, play with it. When I say “formally”, I mean what some law firms have done, they’ve kind of set up, and you don’t need to spend a huge amount of money. You don’t have to. You can if you want. You can go to Microsoft and get co-counsel from formerly case text into your office and run all sorts of do things that way, and you can even — I mean if you’ve got a legally trained large language model like co-counsel or Lexis AI+ or other offerings that are out there right now and are going to come fast. Great. You can feel confident using that for your client facing work and your legal work. But even on the short-term, you can find advisors and help you set up almost a little sandbox or a playpen for a place. It is very safe. You’re not sacrificing or risking confidential client documents, you’re not doing any of that but you are showing your lawyers and your staff this is not a lawyer-only thing. These are the ways in which you can use this stuff and I tell them to experiment and try things and come up with develop prompts. I mean we’re still in the prompt engineering phase where we have to kind of design how we ask our questions of Gen AI so we get the best responses.

I tend to think that’s a transitional phase. I think in a couple of years that’s not going to matter, but fine, you can still do that, but come up with use cases, to the extent you can bring clients in on a very informal basis. Do that as well, and sort of say, hey, what could we do with this? How could we make things work for you? I think getting people exposed to it, knocking down the myths, getting people past their fear, get in the past because every conversation I have about Gen AI and someone says, “What about that lawyer in New York who submitted that thing to the judge and the cases weren’t real?”  I said, “Yeah, that was really stupid and that’s not how you use Generative AI? Can we be anymore clear about that?”

But getting lawyers past that degree of trepidation and worry and risk and let them play with it. I really honestly think lawyers are going to love this because it is fun. It is as if the very first time I wrote about it I said, it is a language and knowledge machine and lawyers are in the language and knowledge business. So yeah, play with it, run with it, and then as time goes by and it will not take much time, you will find the opportunities and the applications that you can use for this. So yeah, get after it and have some fun with it.

Jim Calloway: Before we move on to our next segment, let’s take a quick commercial break.

[Music]

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Sharon Nelson: Welcome back to The Digital Edge on the Legal Talk Network. Today, our subject is What Generative AI Means For The Law Firm Business Model. Our guest is Jordan Furlong, a strategic consultant and market analyst for the legal sector. He studies trends in the global legal market and tracks them with technological and geopolitical developments worldwide to paint a picture of how the legal world is changing and where it’s headed next. Jordan has spoken to thousands of lawyers and legal professionals at dozens of conferences and retreats worldwide over the last 15 years. He publishes a free weekly newsletter at Substack.

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Jordan, we’ve talked about what lawyers should do to prepare for Gen AI. Conversely, is there anything law firm should not do in this regard?

Jordan Furlong: Well, at this stage the wisest course is avoid the extremes, and one extreme, I want nothing to do with this. It’s unsafe, it’s risky, it’s unprofessional. We don’t need any of that kind of stuff like outright forbid people from using in any way. I just think that isn’t a suicide for a law firm or for any business right now to say, “I’m not going to take advantage of any technological tool.” There will be people within law firms who take that approach and they will not all, but largely be people who are a little bit older, a little more experienced and I think for them they see all the risk. They see especially the reputational risk, which is extremely important for them to avoid. But I really think that as a firm it’s important not to let those voices dictate and guide. It is extremely important that your firm starts figuring out what all of this is going to involve.

At the other end, obviously, do not dive fully into this pool with both feet. I mean, it’s — and not just because of, yes, there are some risks there for sure and you got to be really careful with anything involving client data. The clients themselves have some very strong views about that, but also because this whole area is moving so fast. I mean a lot of the engines we got out there now are built on GPT-4. We are going to see other versions of GPT coming out of OpenAI. We are going to see other versions of large language models coming from other providers. Google Gemini is the buzz term now at the moment. The people are expecting great things when that comes out, and then something else will come down the road and overtake that.

So I would be reluctant to build a very large expense of an inflexible foundation on a particular edition of this technology that hasn’t yet fully evolved. So once again, for me, flexibility, open-mindedness, yes, keep an eye out for the risks but more so than lawyers are comfortable with doing traditionally, open yourself to the opportunities. I think they are manifold.

Jim Calloway: Jordan, let’s take out your crystal ball and discuss what the future holds for Gen AI in the law? We’re still in the first year of the announcement of ChatGPT, so what does this conversation look like in 10 years’ time or 20?

Jordan Furlong: Oh, boy. That is extremely tough to say, just because things are going to change obviously, really fast, and in ways and down tracks we can’t foresee. Also, Generative AI of course, is not the only kind of AI that’s out there. We’re seeing remarkable advances in all kinds of areas and all kinds of directions. Law I think is particularly vulnerable to what Generative AI does because we are as I’ve said before in the business of words and language and meaning and especially in documents. I don’t think chiropractors are nearly as concerned about Generative AI as we are nor should they. The guy that work on the construction site across from me, same thing.

The hope that I have is that the real advantage technology, and AI in particular, holds for us, for me, it strips away a lot of the accoutrements, a lot of the unnecessary stuff. We’ve been trailing around his profession for so long. We become captive to the stupid business model that says “how much you get paid, it depends on how long you work”. Maybe that made sense in the 1870s. It doesn’t make sense today and it hasn’t for a long time.

The lawyers, I really feel, when I think of lawyers today, I think of lawyers as encumbered, heavily encumbered and burdened with all these unnecessary requirements and incentives, and cultural accretions. I just want technology and other developments to blow them off, blow them away so it’s just us, right? It’s just us as the caring professionals, the knowledge, the knowledgeable advisors and advocates who will get in there with the client and say, “I’m on your side. I’m here to make things better for you. And it doesn’t matter how long it takes and it doesn’t matter if you and I can’t come up with an evaluation for what a better life looks like? You know what? We’ll figure that stuff out.

But I think the level of satisfaction that we could rate — the amount that we could raise the level of satisfaction in the legal profession I think is extraordinary by way of letting the machines do the machine work. Let the processes do the process work. We do the human work and the more that we are acting like humans and working with humans and getting in touch with our own personalities and our character and our integrity, that to me, that’s the future of the law that I want to see and I think Gen AI can help us among other things, take us there.

Sharon Nelson: Well, Jordan, thank you so much for joining us today. You are an exciting and provocative speaker, and I really enjoy all that you have gone through with us today.

(00:30:05)

It was very thoughtful and I think really helpful for our listeners, in fact, I wouldn’t listen to this once. I listen at least twice to take notes because there’s a lot of really good advice for lawyers here. So again, Jim and I are very thankful that you were with us today, Jordan.

Jordan Furlong: Thank you so much Sharon and Jim. As always, a tremendous pleasure to work with you.

Sharon Nelson: That does it for this edition of The Digital Edge: Lawyers and Technology. And remember, you can subscribe to all the editions of this podcast at legaltalknetwork.com or on Apple Podcasts. And if you enjoyed our podcast, please rate us in Apple Podcasts.

Jim Calloway: Thanks for joining us. Goodbye, Ms. Sharon.

Sharon Nelson: Happy trails, cowboy.

[Music]

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