AI adoption in the legal industry will lead to pricing disruption, according to a new report by Deloitte Legal, The AI Imperative: Reshaping of the Legal Industry. The report declares “[t]he commercial model will be fundamentally renegotiated.”
Law firm and client relationships are set to be redrawn as AI becomes more widely adopted. Legal departments’ priorities are clear from their providers – reduction in costs (78%) followed by improved quality of legal services (57%) are the most desired benefits from AI.
Pricing disruption is expected. 85% of respondents believe AI will change how law firms price work to a moderate, large, or very large extent, with the share of hourly-rate work expected to fall from 72% today to 44% within 2-3 years. The commercial opportunity is substantial for General Counsels: external legal spend could reduce by 20–40% over the next 3 years through collaborating with outside counsel to capture AI benefits and insourcing.
The majority of the 121 senior legal leaders surveyed–General Counsels, Heads of Legal, Legal Operations Directors and Managing Legal Counsels–agreed that the “Most Important Benefits” of AI usage by outside counsel would be a Reduction in Costs (78%), Improved Quality of Legal Services (57%), and Increased Innovative Pricing (55%). In addition, the senior legal leaders anticipate a very significant rise in alternative fee arrangements (AFAs) over the next three years, some geographies by as much as 50%. (see charts below)
First, let’s remember that the death of the billable hour has been headline news for nearly 30 years. And, even with the rise of the law firm pricing profession over the last decade, AFAs have never had a 3-year surge like the one predicted.
Second, with each evolution of production, costs fall and benefits rise. The AI revolution is no different. How a firm charges for its services (i.e., Pricing) and what it charges (i.e., Price) are always evolving; “disruption” seems overly dramatic. Of course AI adoption will disrupt (is disrupting) the production of legal services. In turn, firm leaders must respond to the added costs (e.g., licenses, tokens, staff), as well as benefits (e.g., increased efficiency, higher quality), when determining their firm’s Pricing Strategy.
Finally, I want to highlight a part of Section 3 (“The Impact of AI on Roles, Skills, and Careers”). In its discussion about lawyers with increased technology skills, the report raises the subject of “Re-Pricing of Legal Talent.” Noting that a “fundamental change” with “structural consequences” is around the corner for lawyers at all career levels, the authors look to the tech sector to suggest the legal industry will encounter a similar shift in personnel, which will shift the quantity and quality of timekeepers within in the firm.
Read the full report HERE.
