Law Firms: The Shape of Things to Come

In our forthcoming publication, we contend that GenAI will forever change how legal services are delivered and will force law firms to re-engineer the legacy law firm economic model.  In a GenAI-powered legal industry, the much-maligned billable hour revenue model will cease to be the predominant way that law firms are compensated. Instead, the legal industry will need to develop new ways to demonstrate the value of their services.

There are countless critics of the law firm economic model built upon billable hours, but, like democracy (which is, as Churchill pointed out, ‘the worst form of Government except for all those other forms that have been tried from time to time…’), the billable hour metric, at its worst and with all of its flaws, still persists. None of the other value metrics, such as outcome-based fees, gainsharing, or volume discounts, tried by non-contingency-fee law firms has become particularly popular. For decades, we’ve known that the billable-hour economic model is fraught with inefficiency and poor scalability, talent retention challenges, disincentives to innovate, and ethical concerns around reasonable billing, but the needle hasn’t moved much, if at all, partly because of the unpredictability of work volume when handled by humans. Law firms still tend to bill by the hour, and law firms are still shaped in a way that reflects what Marc Galanter and Thomas Palay have termed the ‘tournament of lawyers’.

Often referred to as the ‘pyramid’ model, this common law firm shape is a highly leveraged structure where throngs of lower-level legal professionals have historically handled an enormous volume of routine, low-value tasks at handsome hourly rates, generating high-value invoices that benefit mostly a small group of equity partners sitting at the pyramid’s apex. The more associates who are billing time at the bottom of the pyramid, the more money the partners at the top of the pyramid can make. Once junior legal professionals master the scutwork, they get higher-value work, but they also start competing against each other to see which ones will stay at the firm and eventually get to the top of the pyramid. And one of the main criteria for advancement?  Billable hours. So lies the dilemma. The ‘road to riches’ in the legal industry is predicated on collecting revenue generated by billable hours whether or not the work handled during a billable hour translated to true value for the client.

To date, law firms have been slow to change the billable hour model because there has been no external factor that has had the muscle to catalyze change. Clients have not had the collective fortitude to effectuate a change. Despite their recognition of the shortcomings of the billable hour model, law firms have not changed the model because, after all, it is making them wealthy.

But we think that GenAI will change the legacy economic model because we are beginning to see widespread adoption of GenAI as a legal service delivery tool. When GenAI tools are used in the delivery of legal services, all of the frailties in the billable hour economic model are exposed. When routine work moves from humans to computers, the bottom tier of the pyramid will no longer generate the rich results that law firm partners want. GenAI can competently handle baseline work; therefore, the firm will need fewer low-level associates. How will a firm make money when its baseline budget shrinks because GenAI software is generating good first drafts, and clients are asking the firm to use software to complete tasks that first- and second-year associates used to do?

We predict that clients with leverage will insist that law firms use GenAI, not junior legal professionals, on routine low-value tasks and that large clients with the right resources will start to pull certain types of work back in-house, perhaps by having a combination of inside lawyers and GenAI develop first drafts, and then handing those drafts to a law firm to ask, ‘how can you improve on this draft?’ Either way, workflow process changes of this nature will eventually drive law firms to change how they deliver legal services and how they account for the value that they deliver to clients. Therefore, law firms must figure out how to bill for GenAI-enabled tasks while finding ways to describe their own value-added services.   

The winning law firms in this new type of tournament will be the ones that anticipate this change in client behavior. Some are already shifting their own mix of work, commoditizing parts of it, such as first drafts of routine documents and “first pass” document review and leaving other parts ‘bespoke.’ The beauty of commoditized work, in additional to being predicably income-generating, is that it frees up lawyer time to think about more novel questions and perform more complex work. If law firms of the future are focused only on high-value, sophisticated work, then they may be able to justify significantly higher hourly rates for that work in a manner that keeps the firm’s budget stable while increasing the net actual value that the law firm is providing to its clients.

It’s possible, too, that the Jevons effect will also increase the amount of commoditized work that a firm can produce. The Jevons effect occurs ‘when technological progress increases the efficiency with which a resource is used (reducing the amount necessary for any one use), but the falling cost of use induces increases in demand enough that resource use is increased, rather than reduced.’ Combine an increase in the ability—and the demand!—to perform certain routine work with the amount of time freed up to do more bespoke work, and you can predict that some firms will bifurcate their fees: flat-fees for certain work and billable rates in the $3,000-$5,000 range for work that truly needs deep experience and creativity. This shift in billing proves a point that we’ve made in an earlier article: that the fallacy of the billable hour is that all time at a person’s given rate is equally valuable. The shift in billing also makes law school professors nervous about their graduates’ job prospects, but that’s a topic for another day.

Imagine a law firm pyramid where the bottom few layers are all GenAI robots (the robots can’t think—they only mimic—but they can often generate useful first-draft material). That pyramid won’t support current law firm economics, so what other shapes might work? In our paper, we discuss diamond shapes, rocket shapes, cone shapes, and starfish shapes. It’s too soon to know what shape might predominate. Client demand will affect a firm’s shape. But this time, we think that client pressure is actually going to make a difference in how law firms build their internal financial models.

The authors’ complete paper is available here.

Nancy B. Rapoport is a UNLV Distinguished Professor and the Garman Turner Gordon Professor of Law at the William S. Boyd School of Law, University of Nevada, Las Vegas.

Joseph R. Tiano, Jr is the Founder and CEO of Legal Decoder, Inc. and an Adjunct Professor of Law at the Arizona State University Law School.