The findings of a recent survey from Deloitte Legal could spell trouble for law firms as in-house legal departments look to do more with AI and less with outside counsel. While many of the findings in the report are forward looking and are predictions rather than what has yet happened, the currents appear strong.

The fact that the survey and conclusions from it come from Deloitte Legal says a lot. Deloitte Legal is the legal services arm of the Big Four accounting firm Deloitte. Deloitte Legal itself does not provide legal services, at least currently, in the U.S. Instead, it is in the business of consulting on practice management matters. It is definitely not a law firm.

Deloitte Legal and Deloitte have the ear of corporate America and know its overall business goals and visions much better than law firms. They can offer a less biased view than that of law firms and vendors.

The survey itself was of some 100 legal department heads across nine industry sectors according to Deloitte Legal. It also conducted informal interviews of an unspecified number of law firm leaders, although I got the impression that was more of an afterthought rather than a focus. The title of the report, “The AI Imperative: Reshaping of the Legal Industry,” perhaps says it all.

First Things First

First things first. According to Deloitte Legal, only 2% of those surveyed report no AI adoption at all. That means that almost every legal department has, and to some extent is using, AI. Indeed, 79% report their AI investment increased just since last year. And with all this, the expectations of what outside providers should be doing with AI is or will be fundamentally altered.

Granted, so far legal departments have been focused more on the technology and little (7%) on training. But that will no doubt change. As in-house becomes more proficient with AI and their knowledge and a sophistication grows, they will undoubtedly demand more AI sophistication and use of AI from outside counsel.

The Legal Department Experience

What in-house legal is seeing is critical: a substantial increase in their own productivity and a reduction in legal costs. Seventy-eight percent believe AI will reduce costs further in the future. As might be expected, 66% of those surveyed expect insourcing of work from outside providers to grow.

The respondents also believe that within two to three years, 28% of legal work will be automated. Not surprisingly, the respondents estimate that in the next three years, outside legal spend will be reduced 20 to 40%. Simple math would tell you that this is not good for outside counsel. Less work to do due to automation and less work to do because legal departments will be doing more.

Moreover, most in-house legal folks believe that legal teams in general will shrink in size with new roles cropping up. Also spells trouble for law firms if it’s true. Less need for lawyers, fewer people billing hours. Expectations of more for less from clients. And while legal workloads may grow, more of that work will be automated, handled by AI, and done in-house.

But What About Law Firms?

But what are law firms doing? It’s by and large the same old, same old. The legal department people surveyed say 58% of their law firms rarely or never discuss AI benefits with them and only 4% say they have experienced any benefits whatsoever from outside counsel using AI. Talk about sticking your head in the sand.

And the billable hour and leverage models that have made law firms rich? Eighty-five percent of those surveyed say AI is going to change how law firms price work and the share of work billed by the hour is expected to fall from 72% now to 44% in two to three years.

That’s a big hit. Deloitte describes the challenge facing law firms this way:

The impact of AI on law firms is potentially seismic. The prospect of technology that can compress the time taken to complete legal work creates an inherent tension: if the same output requires fewer hours, how does a firm protect its revenue whilst still passing the benefits of efficiency on to clients?

Duh. I think the answer is a lot of law firms will be screwed if they continue to operate as they always have.

As for the leverage model, Deloitte puts it this way: “The longer-term structural consequences is a move away from the traditional legal pyramid, with large number of junior lawyers at the base, towards a leaner diamond model.” That also spells trouble since it is that leverage model that has enabled many law firms and lawyers to grow rich.

But Why?

So, given all this, why have only 4% of those surveyed seen any benefit from outside counsels’ use of AI? To state the obvious, it’s because law firms aren’t taking advantage of AI. That begs the bigger question, why not?

First and foremost, it’s the money. To paraphrase an oft quoted saying: it’s hard to convince a room full of millionaires what they are doing is wrong.

But more than money, it’s cultural. Most Biglaw firms’ culture is built on the billable hours and the leverage model. It governs compensation and advancement. It governs organization. It governs who has power and clout. And in my experience, those with power and clout aren’t about to give it up. Combined with a consensus model that slows down progress and you see the ostrich taking shape.

But the legal departments themselves share in the blame. As the report notes, businesspeople (think C-suite) in most organizations can tell in-house legal what to do. It is definitely not a consensus discussion when the CEO says cut costs. The same should be true with respect to the in-house and outside counsel relationship. When a $5 million client says use AI or else, it gets outside lawyers’ attention. So the fact that only 4% of the respondents have seen a benefit from their outside lawyers and only 58% say their law firms have raised the use of AI, it’s in large part due to in-house not demanding change.

But lest outside firms get too comfortable, businesspeople may be on the cusp of not blindly following their in-house counsel recommendations for how work gets done and divvied up with outside counsel. C-suite leaders will recognize the efficiencies and cost reductions that AI may bring and will demand that their legal departments achieve it. That will trickle down hill to increased demands on outside counsel.

So Where Does That Leave Law Firms?

Certainly, there will be some work that outside counsel currently do that won’t change much. Bet-the-company litigation where the incentive of in-house legal is to leave no stone unturned. But for everything else, the seismic change Deloitte suggests may become a reality.

Smart firms will read the Deloitte report and the tea leaves and prepare for change. But I’m not sure large law firms can make the change until it’s too late. These firms according to Deloitte “will wait for the client to raise AI, and in doing so, will cede control of the conversation entirely.” In addition, some firms will try to trumpet their AI proficiency that really isn’t there under the mistaken impression that in-house counsel won’t know the difference. While that may have sometimes happened in the past with other technology, it would be a mistake with AI where legal departments are so far ahead.

But some firms, perhaps the true AI first firms or smaller boutique firms, will grasp the opportunity and play to in-house counsel desires and expectations. These firms will succeed. Deloitte says their success will lie “in their ability to harness their institutional intelligence to search and utilize knowledge assets, redesigning of workflows, business model innovation, and most importantly, achieving adoption at scale.”

And if Deloitte and many others are wrong, they can still offer a new business model that’s more efficient, less costly, and achieves better or just as good a result.

The other option: stay an ostrich while others pass you by.

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.

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