Much has been written about the economic, geopolitical and structural challenges facing the US legal industry, in particular those whose role is to manage law firms and shape their strategy. In a brave new world that is increasingly volatile and unpredictable, the future impact of AI invariably tops the anxiety list of many law firm associates, according to several recent surveys. You only have to look at the globally coordinated hiring reductions among the Big Four accounting firms to see why.
But rather than ignore these concerns, some law firms are meeting this challenge head on, encouraging their associates to develop greater tolerance towards the uncertainty and disruption which surrounds them, and develop a more constructive approach.
Fo example, Latham & Watkins held a mandatory two-day AI academy in Washington D.C. last November for the 400+ lawyers in its first-year associate class. The message was unambiguous: AI isnow a core element of the firm’s operation. Latham tech partner Michael Rubin commented: “Turning away from AI as opposed to embracing it is just not an option. We are going to run as fast as we can toward it.”
Manifestly, lawyers are not accountants. And Latham is far from being the only big law firm to embrace AI so positively with its new cohort of young lawyers by championing AI adoption within their business.
Amid fears that AI will lead to job losses, there is a credible counter argument that new AI-based technologies will demand new skills and create new opportunities. Indeed, some commentators suggest that young lawyers will have a different future relationship with AI which offers them greater potential when compared to some of their accountancy brethren.https://www.ft.com/content/1d859a36-6251-4caa-9f8c-aeb35f1d628e
Of course, the current reality is also more complex. Although the aggregate demand for legal services has continued to increase, it is most often focussed and more tightly targeted on specific practice areasrather than fuelled by an across-the-board requirement for additional legal advice.
At the same time, hourly billing rates have risen sharply – by over 7 per cent last year, well above the 2.7 per cent rate of US inflation. The advent of $3,000 an hour rates for a small group of highly specialized attorneys is not merely a short-term pricing anomaly, but a signal of scarce expertise to meet the needs of outsized client risk. For this elite cohort, AI has no discernible impact on the level of demand for what they offer.
The world of luxury goods provides a neat comparison. Demand for some limited-edition watches or handbags can outstrip supply – which, according to manufacturers, serves to justify their eye-watering prices. Economists would argue that premium legal services share some notable characteristics withsuch luxury goods: both are subject to the law of supply and demand which dictates that the price of goods and services are determined by the relationship between their availability and the buyer’s level of desire or need.
Without question, the knock-on effect of high-end partner rates is significant, not least for those clients who have no alternative but to foot the bill. As a disproportionate share of corporate legal spend is now accounted for by a handful of elite partners, clients have become far more attuned to focussing on their total legal costs.
In their search for greater efficiencies and potential economies, companies are looking hard at diverse AI systems in the hope that technology will take on more of the work that is usually sent to law firms. https://www.ft.com/content/e5114ad0-66ca-4a12-a2fa-7c5944fbcf99
Since they first realised its potential to improve speed and quality, and thereby reduce cost, corporate legal departments and general counsel have been adopting generative AI in earnest. Indeed, many routine legal tasks are particularly well suited for a new wave of automation – from reviewing contracts to supporting litigation. Significant steps have been taken in doing discovery work in-housethrough the use of AI systems, leaving outside counsel to focus on the litigation.
Some early adopters have reported incremental changes rather than dramatic transformation. As they experiment with and expand their use of AI technology, they are simultaneously trying to resolve issues such as how to preserve human judgment, build in safeguards and train their staff in a new range of skills.
These developments are forcing law firms to re-evaluate their anticipated levels of future growth with a cautious eye. Rather than embarking on ambitious, broad-based hiring sprees, they are managing demand through prudent staffing levels, tighter leverage, and a focus on margin preservation and realization.
Amid the various factors of uncertainty that exercise the minds of those responsible for law firm management, there is one certainty: prioritizing the senior associate level. The Goldilocks of its cohort – a “safe pairs of hands” in consistently high-demand practice areas – these are attorneys who can deliver complex work with minimal supervision and very low execution risk. For them, AI is an increasingly useful tool – but not a threat.
Senior associates, particularly those who are capable of independently running deals or cases, have emerged as the most in-demand cohort. They offer an optimal leverage profile: senior enough to absorb responsibility and reduce partner load, yet still billing at rates that generate sufficiently strong margins relative to their compensation.
Notably, their importance differs from historical patterns. In previous periods of high-demand, firms typically increased hiring at the junior and mid-level associate level in order to scale execution while maintaining leverage by hiring in bulk.
Whereas the current level of ultra-high partner rates has raised client expectations in relation tostaffing efficiency and invoice scrutiny. Anchored by senior associates, leaner teams are easier to justify than large pyramids which require extensive training and oversight.
Junior associates, while still essential to the long-term talent pipeline, represent a higher short-term cost in an environment where demand is strong but uneven. In this context, AI is significantly transforming recruitment as law firms increasingly favour tech-savvy candidates who can demonstrate high levels of AI proficiency.
Unless demand broadens materially or clients regain greater comfort with their legal spend as a proportion of overall costs – both of which seem quite unlikely – hiring looks set to remain targeted at the senior associate level and focused on immediate productivity rather than volume growth. AI might yet change that dynamic, but not in the short to medium term.
