A recent survey and report from Thomson Reuters painted a rather bleak picture for midsize law firms. A similar survey, this time from the practice management platform, Clio, provides an even more dire picture facing solo and small law firms. But where there are threats, there are also opportunities. As always, the issue is who will capitalize on those opportunities.

And if solos and small firms don’t change, both will face new and more formidable competition. Both are ripe for disruption.

They’re Using AI, But…

The Clio report, which came out in May, reveals some paradoxical findings. On the one hand, it shows some 71% of solos and 75% of small law firms are using AI. That’s encouraging.

But more than half of these firms don’t have any policy about the use of AI. This, in turn, creates risks that could lead to financial hits and even ruin. For solos, that’s perhaps not all that surprising since the guidelines are often kept in the solo lawyer’s head. But still, even solo law firms have staffs that need to be aware of AI risks and appropriate use.

Beyond this, and perhaps consistent with it, only 38% of solos and small firms encourage the use of AI within a defined framework, putting them at risk of competition from firms that do.

Another interesting finding is that almost half of those using AI are using generic platforms like ChatGPT or Copilot. Clio makes the point in its report that these tools aren’t made for legal work and create additional risks. I’m not sure I buy this completely since the type of legal work done by small firms and solos may not require the same level of protection provided by expensive enterprise platforms. Solos and small firms focus more on individual and small business matters, family law, simple trusts and estate and even criminal work to keep going. It’s easier to fuzz up client identity and ask generic questions to get the information needed. But there is still the risk that the AI tool will provide inaccurate information.

So putting this together, you have lawyers using AI in ways that may be creating risks that threaten profits and even survival if things go bad. But that’s not the worst of it.

Using AI But Not for Profit

There is a fundamental economic fact facing law firms that bill by the hour. As perceptively stated in the Clio report, “AI creates a paradox. The more efficient you become, the less you bill. Time saved on research, drafting, and administration doesn’t automatically translate into revenue unless that added capacity gets filled with new work.”

Or the work gets billed differently through the use of things like flat fees or task- or value-based billing. Again, Clio puts it well: “If AI helps you complete a billable task in one hour instead of five, you’ve effectively handed your client an 80% discount.” This despite the fact that Clio found 71% of clients actually prefer flat fees.

But here’s what else Clio found: 86% of solo firms and 78% of small firms have not adjusted their pricing models to account for AI. Only about a third have increased their revenues with the use of AI. Almost a quarter say AI has had no impact on their revenue. It’s business as usual.

So, the good news is solos and small firms are using AI. The bad news is they aren’t necessarily using it safely or effectively. The even worse news is that they aren’t using it profitably.

An Opportunity and Threat

Tools that save time as AI does, open up a significant opportunity. But only if that saved time is used effectively to do things like enhance business and client development. Things that lead to more revenues.

Moreover, AI opens up the chance to do work profitably that before AI could not be done in profitable ways. And no question, there is a vast underserved legal market that could be tapped into with the right approach.

Which leads to the absolute necessity for small firms and solos to rethink their billing models. AI enables access to these new markets but only if firms drop the reliance on the billable hour model. With AI, the billable hour model prices many would-be clients out of legal services, on the one hand, and leads to a drop of profits for the lawyers, on the other.

All of which points to the need to find different models. And soon. There will no doubt be those who figure this out and run with it. One only need look at a firm like Morgan and Morgan to see the power of disruption a sea change in thinking can bring.

Morgan and Morgan was founded as a small law firm in Florida. But its leadership saw an opportunity to capitalize on aggressive advertising and to build a consumer-facing national brand. It disrupted the plaintiffs’ contingency fee market.

Someone somewhere will see similar opportunities for disruption with AI and pricing. Especially since most potential clients are hungry for a billing model not based on time spent.

And it won’t necessarily be the traditional law firm model that does it. Think H&R Block that disrupted the tax return preparation model. Or TurboTax that disrupted H&R Block. The point is that rethinking how solos and small firms provide their services and determine value could lead to some big winners and losers.

Certainly, Thomson Reuters and Clio are selling AI practice management tools and hence, you have to take with a grain of salt some of their survey results. But it’s pretty clear that the solo and small law market is not capitalizing on the opportunities AI holds. That means they may be ripe for the same kind of disruption Morgan and Morgan brought for the plaintiffs’ practice and H&R Block and TurboTax brought to tax preparation.

You have a market ignoring in large part a huge group of those with legal needs. You have a billing model most of your consumers and potential consumers don’t like. And you have technology that makes it possible to reach that market and serve those needs and wants. Someone will pounce. It has happened before. It will happen again.

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.

The post Solos And Small Law Firms: A Market Ripe For Disruption? appeared first on Above the Law.