Yesterday’s final Legalweek keynote by Heather Nevitt, Law.com Editor in Chief, and Patrick Fuller, ALM Chief Legal Industry Strategist, was entitled “State of the Industry – The Reckoning.” It was revealing and scary.
Focusing on two non-legal industry disruptors in the early 2000s, Apple and Netflix, Nevitt and Fuller tried to present a call to action to law firms to embrace AI and advance change. Both Apple and Netflix abandoned very good business models because they saw something much better on the horizon. For Apple, that meant creating the iPhone, which ultimately made the iPod obsolete. For Netflix, it meant creating a streaming service that made their video mail service no longer popular.
Nevitt and Fuller hypothesized that law firm clients are hungering for law firms to similarly use AI to do things faster, cheaper, and importantly, better. To offer predictable pricing, more collaboration, and innovative use of new tools. To be leaders in using AI to solve problems. For firms to be more transparent and client aligned. More than ever, clients are more interested in value and outcome than rates and time spent.
And those law firms that are innovative and use AI to be disruptive will be the winners. But is it actually happening?
The Power of the Billable Hour
To meet these client goals and desires, law firms would need to make fundamental changes in their business model. It would require disruption of law firm culture, goals, and visions.
Why? The billable hour does not necessarily produce better — and certainly not cheaper and faster — outcomes. But AI provides the opportunity to do things differently. Nevitt and Fuller’s thesis was that engaging AI tools and different pricing models can better achieve what clients really want. So, the firms that make that pivot will be the ones that succeed in the future.
Hard to quarrel with that. But I come back to the famous Richard Susskind quote when it comes to law firm change: It’s hard to convince a room of millionaires that their business model is all wrong.
As one managing partner told me one time, “Our business model is pretty simple. Bill more time. Make more money.”
My Experience
I know. In the late 90s, I undertook a national engagement under a flat fee model. Much of what Nevitt and Fuller observed proved true, even back then. The client loved it. I loved it. The firm budgetary officer should have loved it. The revenue to the firm was predictable and the cost to the client was set.
So, what went wrong? I needed to get work done at the lowest cost to maximize profit. That meant getting partners and associates to do work as efficiently as possible. As a result, they all hated me because their hours took a hit. And it was billable hours that ensured associate advancement and ultimately partner compensation. It was simple: The flat fee was anathema to the billable hour model. Culture always eats strategy for breakfast.
What Firms Are Really Doing
And some statistics cited by Nevitt and Fuller evidence the continued viability of Susskind’s quote and the absence of an Apple/Netflix-type pivot.
When law firm leaders were asked how significant AI will be to their business over the next five years, most believed it would be very significant. And most firms feel pretty comfortable about their rate of AI adoption.
But when asked how prepared their lawyers are to use AI, that confidence wanes a bit. So, you would think that to prepare for the future, firms need to be robustly training their workforce.
Indeed, 75% say they are offering AI training. Sounds good until you look at how they are doing it. Only 66% are hiring professional specialists to help. As Fuller put it, “That’s like giving someone a map before building roads.”
He’s right: Law firms all want to say they are embracing AI but very few are adequately preparing their lawyers for effective use. A use, by the way, that without planning and forethought could reduce billable-hour revenue and, ultimately, profit.
Another Hurdle
Profitability in the brave new world of AI can’t hinge on time spent since it will necessarily be less. It has to be based on outcome and value. To maintain profitability where fees are based on outcome and value, you have to move to alternative fee models that aren’t based on time, leveraging AI in the process.
But there is a second hurdle to changing law firm business models. Compensation. Advancement. Culture. All are based on the billable hour. So, when you try to move to something else, you aren’t just talking about a minor shift, you are talking about changing the very fabric on which law firms are built.
The More Things Change, the More They Stay the Same
Here are some statistics cited by Nevitt and Fuller: Only 19% of firms have modified fee arrangements in place that are consistent with increased AI use and adoption. Think about that. Everyone thinks AI will disrupt and reduce billable hours, but less than 20% are doing anything about it.
But here’s something worse: 72% of the firms have no plans to change attorney compensation structures to align with the increased use of AI. If you don’t change the compensation structure, you can’t change the business model to something other than time spent, period.
Bottom line: Law firms aren’t enthusiastic and robustly training their workforce to deal with AI, they aren’t changing how they bill, and they sure as heck aren’t changing how they compensate their lawyers.
But What About Clients?
And here’s a final nail in the coffin. Despite my client embracing my flat concept, I had very little success convincing other in-house counsel to do the same. The typical response was: “What a great idea! But we can’t do that.”
I would like to think that’s changed since my 1990s experience. But the law firm statistics suggest that despite all the talk, in-house demands for change may not be as robust as some think.
Why? One thing that drives law firm change, and perhaps the only thing, is client demand. If clients were demanding flat fees reflecting the rise and power of AI, then more than 19% of the law firms would be doing it. What clients may instead want is for firms to use AI to reduce time spent and cost under a billable hour model that they aren’t prone to want changed.
Could There Be Change?
Nevitt and Fuller’s point was that successful future firms will do what Apple and Netflix did in the early 2000s: Change their business model, how they do things, and their culture. That takes foresight and leadership.
But law firms are primarily driven by a consensus decision model. This means unlike Apple and Netflix, where one visionary at the top could move the organization, law firm leaders have to get the buy in from virtually all partners. That’s a harder sell. And they have to do it in the face of revenue continuing to roll in, a seemingly inexhaustible ability to raise rates, more work, and client complacency.
So, I applaud their efforts. I think they are right about a lot of things. But moving the needle won’t be as easy.
And here’s something else telling. The keynote about the state of the industry, arguably the most important part of the show, was held on the last day. Was sparsely attended. But previous keynotes by an ex-football player and an actor in the TV show The Office, both of which had little to do with legal, were full.
Think the legal industry is ready to change? Think again. It’s still whistling past the proverbial graveyard.
Stephen Embry is a lawyer, speaker, blogger, and writer. He publishes TechLaw Crossroads, a blog devoted to the examination of the tension between technology, the law, and the practice of law.
The post Legalweek Final Keynote: An Industry Still Whistling Past The Graveyard? appeared first on Above the Law.
