20th February 2024

dominoes-2364492_1280Last week, Legalweek was held New York City. It’s the annual legal tech Conference put on by ALM and directed at Biglaw and, sometimes, not so big. Lots of exhibitors, lots of parties, and fancy dinners. Glitz and glamour.

And this year, as you might expect, there are lots of educational sessions, discussions, and hard-core sales pitches around generative AI. There are predictions ad nauseam about how it will transform the legal profession. How it will let lawyers reduce the time they spend on mundane matters so they can spend more time contemplating life’s big problems for their clients. How Gen AI will take over the routine aspects of the practice and make everything great again. 

Oh, there are a few references in the sales pitches to those pesky hallucinations and inaccuracies. But hey, you can deal with that by just being extra cautious. For sure, don’t worry about privacy and security, we got that covered. Just trust us. The pitches all include a solemn warning that the real dangers lie with the public-facing, inexpensive AI products like ChatGPT, not the vendors’ closed systems.

And yes, lawyers face other problems and pain points, but why try to solve those when we can sell our shiny new Gen AI programs?

What’s Not Being Talked About

But despite all the talk, there is one thing that the Gen AI titans never mention. Cost. Ask any Gen AI provider offering programs to assist with the substantive end of the practice like eDiscovery or legal research (as opposed to the back office or practice management end), and you get a lot of shrugs, hems and haws. Or some vague answer that depends on the user and whether they want to do it. I have been to plenty of pitches and about all I get is that the Gen AI tool will be an add on to an already somewhat expensive program.

But what information is available indicates that the costs can be substantial. According to confidential sources, the costs for the substantive tools can range from over $150 per user per month to $1,000 per user per year. Some providers also require every lawyer in a firm to be a user, dramatically escalating the costs. Others tie other subscriptions to the AI products, further increasing the cost. 

One unnamed source told me that the millions of dollars spent in well-known acquisitions and mergers of Gen AI providers and products has fueled aggressive pricing in an attempt to make up for the cash poured into the field. 

The Concerns of Smaller Firms

But there are real concerns being raised among practitioners and law firms, particularly at midsize firm levels. These firms fear a double hit to profitability due to Gen AI tools. These firms face a plethora of products with precious little information to go on to ensure the right fit with their needs. At the same time, they fear that the costs for purchase and implementation will create a substantial financial burden. They are also concerned that the work that the programs are reportedly able to do is often billable. So, the firms are worried not only about increased costs but also decreased revenue. Of course, the cost of the Gen AI program is probably less than hiring a cadre of associates. But that cadre of associates produces revenue to offset some of the cost.

These smaller firms already face competition from the big players who can better afford the swanky products that can be dangled in front of clients. While some industry reports suggest clients have been referring more matters to smaller firms since they are less costly, the costs to the firms of Gen AI may decrease their competitive advantage on the cost side. Any increased revenue due to the increased work may be lost by the loss of billable hours of associates and paralegals replaced by Gen AI products. The midsize firms generally handle smaller, less complex matters that are also ripe for more effective cost control.

Beyond that, as clients insert more and more control over matters, as industry surveys suggest, they may move work to firms that are using Gen AI products. A shift like this could impact traditional law firm models, particularly at the midsize level.

AI Back Office Practice Management Tools Offer Help

But there are ways that midsize firms can push back and control costs. While there is a lot of hype over Gen AI that does substantive legal tasks, a number of companies are quietly offering Gen AI tools for back office work and practice management. Work like preparing billing, tracking collections, automating client intake, routine client collections, and accounting functions can all be done more efficiently with AI products whether they are Gen AI or just regular AI. Value billing functions in particular can be aided by these tools especially in monitoring time and costs being incurred. And the tools solve the problem of legal staff writing off time spent in doing functions they feel they are over qualified to do.

Most of this work is all non-billable for law firms and shows up as a pure cost. Reducing these costs does not reduce revenue but instead improves profitability. Reducing these costs may help firms deal with the changes that the more substantive AI tools will make to the legal practice. These tools can help smaller firms weather the financial storms. Many of these tools are viable even now, allowing firms to take a more wait-and-see approach to the substantive tools and perhaps allow the costs to come down. 

Midsize and smaller firms might benefit from focusing on these kinds of tools and exercising caution regarding other Gen AI products.

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.

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