Corporate Teams Expect an Edge Over Law Firms on AI Savings

In-house counsel and the outside law firms they use are racing to capitalize on an AI-infused transformation of the legal industry. Both are promising big time savings and value gains.

The reality isn’t that simple.

Aggressive in-house legal teams are positioning themselves to see the biggest benefits as AI lets them do more work they used to outsource while demanding law firms charge less for fewer hours worked.

“With the advent of AI, I guess I’m glad I’m not the managing partner of a law firm, because I do think it’s ultimately going to benefit corporate legal departments,” said Bruce Byrd, general counsel of Palo Alto Networks.

In-house teams were growing faster than law firms even before the legal industry’s AI transformation began. The demise of the billable hour has been predicted for years, but AI offers a unique threat, given so much of its potential rests on the premise it allows people to work more efficiently.

To be sure, corporate legal teams’ optimism is based more on what they believe the tech will be able to do than what they’ve actually seen it accomplish. And law firms are exploring ways to prevent revenue from falling in a more efficient world, perhaps by charging for outcomes instead of hours or increasing rates. Firms hope their ultimate differentiator will be expertise on bet-the-company matters that clients can’t find anywhere else—and AI can’t replace.

But amid a wave of AI-hype, firms are increasingly sensitive to clients’ perception—accurate or not—that AI will structurally change the way they work and lead to lower bills.

“There is a huge demand and a lot of expectations that are coming from the clients about leveraging these tools to create efficiencies,” said Alicia Hawley, of counsel at K&L Gates.

Aligning Incentives

The argument that AI-gains will accrue more to in-house teams tends to focus on one big factor: incentives. Commonly viewed as a company cost center, in-house teams are always trying to boost productivity. Law firms, whose revenue increases when lawyers spend more time on work, have different motivations.

“Imagine selling a dentist on a tool that prohibits all cavities when he makes half of his income by filling new cavities,” said Jason Winmill, chair of Buying Legal Council, an organization advising in-house legal teams. “How would you charge for that new innovative technology? It’s clearly going to benefit patients. Does it benefit the professional providing the services?”

Law firms are more interested in appearing to be innovative than making changes, said Scott Stevenson, CEO of the contract AI company Spellbook, which sells software to law firms and in-house legal departments.

“Actually cutting your billable hours in half is not that valuable for a law firm,” Stevenson said.

When firms negotiate deals with AI software companies, talks often center on the announcement of the tech buy, he said.

“The law firms are buying the press release and the marketing,” he said.

The marketing has caught the attention of legal departments in a way that could backfire.

“What they’re saying is like, ‘Look, it’s not going to take you as long. Why is this costing us as much?’” said Wendy King, a senior managing director at FTI Consulting.

Supercharged In-House Teams

In-house teams have also been handling more work without the aid of law firms.

“When you think about who has taken the most work from law firms in the last decade and a half, it’s in-house legal departments,” said Oz Benamram, former chief knowledge and innovation officer at Simpson Thacher & Bartlett LLP.

Innovation leaders have been pushing in-house teams to stop paying firms for simple tasks like non-disclosure agreement approvals, document review, and due diligence work. AI could add to that list.

“I don’t have to assign out to my outside counsel for a thousand dollars an hour,” Stacy Lettie, chief of staff to the general counsel at Organon, said while speaking in a personal capacity at a Legalweek panel.

Pricing Dynamics Change

Law firms could figure out ways to make the same amount of money from tasks completed in a fraction of the time, Benamram said. For example, firms billing $1,000 an hour for a task that used to take three hours could switch to charging a flat $3,000 for that task, he said.

However, that change could create friction with clients who realize they’re paying the same amount of money for jobs law firms can complete faster, Benamram said.

“There’s definitely going to be tension,” he said. “Every change brings casualties.”

The American Bar Association said firms should charge “reasonable fees” consistent with time saved from using AI.

“We’re in a little bit of a gray zone as to how do you ethically switch your pricing model,” said Dru Armstrong, CEO of the billing platform 8am.

The ABA has suggested that lawyers figure out how to charge for value instead of time. Some large companies, like GSK, started moving away from hourly billing long before AI. Armstrong pointed to bankers who take a cut of a successful deal.

Such arrangements have become more normal over the last couple decades, said K&L Gates’ Hawley.

“We have to look at it as a bigger package as opposed to just, ‘How much time did it take you to do it?’” Hawley said.

Even AI’s most ardent in-house supporters expect litigation, transactions and other high-stakes matters to live at top firms. Top lawyers could charge more if AI means they’re only billing for world-class expertise, rather than routine tasks.

The challenge for firms is to manage expectations on what AI can do and divvy up AI-gains with clients in a way that’s fair to both, said Barclay Blair, senior managing director for AI innovation at DLA Piper.

“Law firms need to get into the business of making money from the thing that is going to replace them,” Blair said.