Right before ClioCon and the release of Clio’s Legal Trends Report, an interesting article appeared. Both the Clio Report and an earlier one from 8am showed billable hours going up, even though AI was supposed to bring them down, a paradox which Joe Patrice discussed in a recent article. The article I’m referring to suggests we aren’t seeing, and may never see, the across the board efficiency gains from AI so many predict. Why? Because we’re humans. Gulp.
The article was by Torsten Slok, the chief economist and a partner at Apollo Global Management, a major alternative investment manager. Prior to Apollo, he worked for 15 years at Deutsche Bank. Before that, he was with the International Monetary Fund and the OECD.
So he’s no dummy. But he is known for challenging conventional wisdom. My kind of guy, since over the years I’ve too often found that so-called “conventional wisdom” is, well, just conventional folly.
Slok’s Swimming Against The Stream
Slok’s recent article certainly challenges what most people are thinking these days. He bluntly argues, “Despite massive investments and widespread hype around artificial intelligence, the technology has delivered zero financial payoff to corporate America outside of tech.”
Whoa. Zero? That can’t be, right? I mean, AI is supposed to have disrupted work and just about every business. But Slok says the data show that revenue per employee and profit margins have remained largely flat among S&P 500 companies outside the Magnificent Seven (think Apple, Microsoft, Nvidia, etc.). And importantly, says Slok, “there are still no signs of AI boosting productivity growth.”
What does that mean? “With no impact on the bottom line, mainstream corporate America is pulling back and starting to view token spending not as a source of growth but as a cost center that weighs on margins.” (Tokens being the meter that runs every time you use an AI tool. I know, these guys can never use a term that we all understand.) That, in turn, means that mainstream corporate America may soon decide it doesn’t need the new shiny AI toys. And won’t be willing to pay for them.
But That’s Not All
But that’s not all, says Slok. He speculates that turning AI into revenue growth and higher profit margins may not be as easy as everyone thinks:
AI may be a great calculator, but in business, intelligence is mostly judgment. Judgment depends on context, and the answer varies with which human or which model you ask. Perhaps most importantly, AI does not understand accountability, trust, culture, unwritten rules, ethical trade-offs or fairness, all of which shape reputational risk and ultimately drive revenue growth and profit margins.
Emphasis in original.
Hmm. Judgment. Context. Ethics. Sounds like things most agree lawyers provide.
AI and Legal
Which is why Slok’s ideas are particularly chilling when it comes to AI hype in legal. Certainly, AI can boost profits in most any law firm by automating back-office tasks. But that mostly cuts costs. It affects revenue only indirectly, by giving the revenue producers more time to bill hours. Which may explain what Clio and 8am are seeing. But beyond that, you run square into a paradox. Every billable hour AI saves is an hour of lost revenue. There is no getting around it.
And as the cost of AI tokens goes up along with the price of those fancy AI tools, law firm management may ask a legitimate question. Why should we be buying stuff that’s just going to reduce our profits?
So unlike corporate America, where AI could conceivably increase revenue per worker and profit margins (even if it hasn’t yet), given the predominant law firm business model, it may never do so.
Of course, that’s not the end of the story. You still have those law firm customers: the clients. Clients who could start demanding to see AI use reflected in their bills. Or they will vote with their feet and go to firms where they do see it. Or do more in-house.
Law Runs on Judgment
But that’s where the other part of Slok’s hypothesis comes into play. Perhaps even more so than in any other business, judgment is critical to the successful handling of most legal problems. And things like context, trust, culture, and ethics go hand in hand with the exercise of that judgment.
It’s the ability to predict what your client will want, even before they know it. It’s the ability to predict what your adversary will do. (There’s nothing like telling your client at what point the other side will seek settlement. And being right.) It’s knowing the difference between a fair and achievable result and one that will never happen. It’s the basic understanding of ethics.
Judgment Translates Into Value
So even if AI can reduce hours (and there’s some question about that; stay tuned for more in my next article), the price of that judgment could go up. Way up. Judgment becomes more valuable when everyone else is thinking with AI. And as its price goes up, the savings from AI go down.
Moreover, since so much of law hinges on judgment, judgment that AI can’t provide, even widespread AI use would do little to reduce the value and overall cost of legal services. And if AI doesn’t reduce the client’s cost, the client has little reason to demand it. Or for law firms to buy those shiny new toys.
In addition, even if legal America ever figures out how to make alternative fees work effectively, there will still be a premium on that judgment built into the fee.
It’s Still All About Us Humans
As the Clio study shows, the simple fact is that AI has not yet produced the same kind of savings on the substantive side that it has on the back-office side. And if people like Slok are right, then adoption of AI on the substantive side may be slow going. And that wholesale reduction in fees may never happen, at least in the ways we think.
All of which is to say that it may not yet be time to accept all the conventional wisdom and AI gushing that’s going on. AI may transform legal, but it probably won’t do it in ways that can be and are being predicted. Unless it somehow replaces judgment and a human’s ability to understand another human. Which is what practicing law is all about.
In a world of conventional wisdom, it’s nice to have someone like Slok track mud all over the carpet.
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 It All Hinges On Judgment. And Human Connections. appeared first on Above the Law.
Right before ClioCon and the release of Clio’s Legal Trends Report, an interesting article appeared. Both the Clio Report and an earlier one from 8am showed billable hours going up, even though AI was supposed to bring them down, a paradox which Joe Patrice discussed in a recent article. The article I’m referring to suggests we aren’t seeing, and may never see, the across the board efficiency gains from AI so many predict. Why? Because we’re humans. Gulp.
The article was by Torsten Slok, the chief economist and a partner at Apollo Global Management, a major alternative investment manager. Prior to Apollo, he worked for 15 years at Deutsche Bank. Before that, he was with the International Monetary Fund and the OECD.
So he’s no dummy. But he is known for challenging conventional wisdom. My kind of guy, since over the years I’ve too often found that so-called “conventional wisdom” is, well, just conventional folly.
Slok’s Swimming Against The Stream
Slok’s recent article certainly challenges what most people are thinking these days. He bluntly argues, “Despite massive investments and widespread hype around artificial intelligence, the technology has delivered zero financial payoff to corporate America outside of tech.”
Whoa. Zero? That can’t be, right? I mean, AI is supposed to have disrupted work and just about every business. But Slok says the data show that revenue per employee and profit margins have remained largely flat among S&P 500 companies outside the Magnificent Seven (think Apple, Microsoft, Nvidia, etc.). And importantly, says Slok, “there are still no signs of AI boosting productivity growth.”
What does that mean? “With no impact on the bottom line, mainstream corporate America is pulling back and starting to view token spending not as a source of growth but as a cost center that weighs on margins.” (Tokens being the meter that runs every time you use an AI tool. I know, these guys can never use a term that we all understand.) That, in turn, means that mainstream corporate America may soon decide it doesn’t need the new shiny AI toys. And won’t be willing to pay for them.
But That’s Not All
But that’s not all, says Slok. He speculates that turning AI into revenue growth and higher profit margins may not be as easy as everyone thinks:
AI may be a great calculator, but in business, intelligence is mostly judgment. Judgment depends on context, and the answer varies with which human or which model you ask. Perhaps most importantly, AI does not understand accountability, trust, culture, unwritten rules, ethical trade-offs or fairness, all of which shape reputational risk and ultimately drive revenue growth and profit margins.
Emphasis in original.
Hmm. Judgment. Context. Ethics. Sounds like things most agree lawyers provide.
AI and Legal
Which is why Slok’s ideas are particularly chilling when it comes to AI hype in legal. Certainly, AI can boost profits in most any law firm by automating back-office tasks. But that mostly cuts costs. It affects revenue only indirectly, by giving the revenue producers more time to bill hours. Which may explain what Clio and 8am are seeing. But beyond that, you run square into a paradox. Every billable hour AI saves is an hour of lost revenue. There is no getting around it.
And as the cost of AI tokens goes up along with the price of those fancy AI tools, law firm management may ask a legitimate question. Why should we be buying stuff that’s just going to reduce our profits?
So unlike corporate America, where AI could conceivably increase revenue per worker and profit margins (even if it hasn’t yet), given the predominant law firm business model, it may never do so.
Of course, that’s not the end of the story. You still have those law firm customers: the clients. Clients who could start demanding to see AI use reflected in their bills. Or they will vote with their feet and go to firms where they do see it. Or do more in-house.
Law Runs on Judgment
But that’s where the other part of Slok’s hypothesis comes into play. Perhaps even more so than in any other business, judgment is critical to the successful handling of most legal problems. And things like context, trust, culture, and ethics go hand in hand with the exercise of that judgment.
It’s the ability to predict what your client will want, even before they know it. It’s the ability to predict what your adversary will do. (There’s nothing like telling your client at what point the other side will seek settlement. And being right.) It’s knowing the difference between a fair and achievable result and one that will never happen. It’s the basic understanding of ethics.
Judgment Translates Into Value
So even if AI can reduce hours (and there’s some question about that; stay tuned for more in my next article), the price of that judgment could go up. Way up. Judgment becomes more valuable when everyone else is thinking with AI. And as its price goes up, the savings from AI go down.
Moreover, since so much of law hinges on judgment, judgment that AI can’t provide, even widespread AI use would do little to reduce the value and overall cost of legal services. And if AI doesn’t reduce the client’s cost, the client has little reason to demand it. Or for law firms to buy those shiny new toys.
In addition, even if legal America ever figures out how to make alternative fees work effectively, there will still be a premium on that judgment built into the fee.
It’s Still All About Us Humans
As the Clio study shows, the simple fact is that AI has not yet produced the same kind of savings on the substantive side that it has on the back-office side. And if people like Slok are right, then adoption of AI on the substantive side may be slow going. And that wholesale reduction in fees may never happen, at least in the ways we think.
All of which is to say that it may not yet be time to accept all the conventional wisdom and AI gushing that’s going on. AI may transform legal, but it probably won’t do it in ways that can be and are being predicted. Unless it somehow replaces judgment and a human’s ability to understand another human. Which is what practicing law is all about.
In a world of conventional wisdom, it’s nice to have someone like Slok track mud all over the carpet.
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 It All Hinges On Judgment. And Human Connections. appeared first on Above the Law.
