Many are predicting that the prices of legal matters, or at least specific tasks, may come down due to GenAI — and some GCs think that needs to happen
The majority of corporate general counsel (GCs) report year-over-year increases in legal matter volumes. At the same time, however, we see consistent reports of flat to declining corporate law department budgets and attorney headcounts. For many GCs, the ability to bring more work into their in-house departments is a key strategy to meet their focus on controlling costs. But how can GCs balance the problems of increasing matter volumes with their desire for in-house teams to absorb more work — all amid smaller budgets and fewer attorney staff?
The advent of generative AI (GenAI) with its promises of increased productivity and efficiency are a welcome assist with this do more with less pressure that GCs have felt for years. However, they do not necessarily expect that GenAI will be an all-purpose solution.
GenAI tools can only do so much in terms of legal work. Many legal tech pundits have observed that GenAI does not replace roles, rather it completes certain legal tasks. Applied to the workload conundrum that GCs have to address, GenAI can be used to take over certain tasks that are consuming hours of legal department staff time, particularly those tasks that are most repeatable. A key question remains, however: Will the increases in efficiency in automating these repeatable tasks free up enough capacity among law department staff to allow them to pull a greater volume of legal work in-house.
In classic lawyer fashion, it depends.
Anecdotally, many GCs worry that GenAI will bring with it not only greater efficiency but also even greater demands for the legal department’s services. Applied broadly, GenAI is predicted to catalyze the already accelerating pace of the business cycle while at the same time creating a host of potential legal issues, ranging from intellectual property and privacy concerns to enterprise-wide data compliance challenges. Indeed, one legal department operations executive with whom I recently spoke with said that his team anticipates certain types of matters and tasks will increase not by 50% to 60% but by 500% to 600% of the current volume.
The impact of larger volumes on matter pricing
Watching from the outside, law firms are understandably concerned that the efficiencies GCs are counting on to help in-house legal teams could potentially devastate law firm revenue streams. On a micro level, individual tasks and even whole matters may experience pricing decline as work can be completed dramatically faster. However, this fear may not come to fruition after all.
First, revenue for certain types of legal work might decline, but the profit margin of that work might expand greatly due to the increased efficiency with which it can be completed.
And second, the volume of work available could potentially grow exponentially. The same legal ops professional I spoke with also said that if the costs of some types of legal work doesn’t decrease, and decrease dramatically, their current projections have them legitimately worried about how they will complete the work using only their in-house team and whether they would be able to afford to use outside counsel. It may simply incur too great a cost at too large a volume to be sustainable.
A few potential lessons
For GCs, it is critical to begin to get an understanding of what matter volume projections might look like as AI becomes more fully integrated into their organizations. However, it’s important to note that this does not mean as AI becomes integrated into the law department — rather, it means measuring AI’s integration into the business as a whole, as these two events may happen at very different times.
Thus, GCs should start to map out what these volume projections might look like now. And these projections do not have to be completely accurate, but they should be directional indicators of potential areas of concern. Such an exercise is necessary for long-term resource and budget planning. It is wise to assume that whatever matter- and task-volume growth is projected will be an underestimation, but going through the exercise will allow the in-house legal team to more effectively plan for what the future may hold.
For law firms, now is an excellent time to start having conversations with clients’ in-house legal teams to get a better understanding of what anticipated needs they are seeing for the coming years. These needs will vary from client to client, of course, but identifying them now will help give law firms some ideas of where additional staff might be required.
The insights gained from these conversations can also help steer future pricing decisions. For example, if the client anticipates a large increase in they type of work their outside firm already performs, that may be an indication to the law firm that even if the per unit price for that type of work goes down, there may be a lot of money to be made out of increasing volume, provided that the work does not dip into the realm of negative profitability.
This, in turn, can help bolster an argument to create more robust alternative or fixed pricing options for the types of repeatable work that clients anticipate will increase in the coming years. This is because the repeatability of much of this work could make it susceptible to decreases in billable hours worked, if that is the measure. This, in turn, could drive total prices for the tasks into unsustainable territory that both hurts law firms’ overall revenue and while not adequately reflecting the value of the service delivered.
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To be sure, a task that used to take 10 hours to complete at a cost of $5,000 (at an assumed rate of $500 per hour) does not suddenly become worth $250 because it can now be completed in 30 minutes. However, unless the firm and the client reach an agreement on the actual value of the service delivered, that could be the undesirable outcome.
Both parties need to begin this conversation around actual value — what is the outcome of the legal work worth to the client beyond simply the time it took to produce? — which then lays the groundwork for the evolution of matter pricing.
In this way, law firms can protect their revenue streams while taking advantage of efficiencies for greater margin and seeking more client matter volumes to fill available working hours. GCs can address their increasing matter volumes through negotiations that give them more favorable pricing terms from their outside firms to better safeguard their budgets without expecting their in-house staff to absorb all of the new work.
It’s critical to understand that the first efforts at identifying this AI-optimized practices areas and establishing new prices for them will not be the end point — they will, however, serve as a good start. Some early efforts will be more successful than others, which is why honest and open communication between law firms and their clients will be vital.
However, the worst option for all would be to wait too long to see what happens. The end result of that approach could have incredibly negative consequences for GCs and law firms alike.
You can find out more about the challenges of pricing AI-driven legal services in today’s legal market here
