In the world of work, few things drive more irate after-work conversations amongst founders than billable hours from lawyers.
The billable hour emerged in the early 20th century as legal work became more complex and lawyers needed a way to pin value to effort. Whilst Investment Bankers stuck to the success-based fees, lawyers chose Father Time. On an IPO, even if it fails to launch, the lawyers are the only ones that get paid because of the billable hour.
In my experience, it is an odd measure because, on the one hand, I have found that an experienced partner on a deal is invaluable. They are true partners to a company, and can give you that one insight on a deal or structure. What I have found the best lawyers do is use judgement to push, often times, illogical humans to get a deal closed by knowing when to stand their ground and when to let go. There are times they can help you get rid of or add in a specific clause that would make or save a company millions of dollars. Their hourly rates are confusing in those cases because it almost doesn’t seem fair. These are important but are rarer in frequency up against the other line items in “the bill”. Clients are often left pulling their hair out when they get billed for that same lawyers’ team to read and reply to emails or attend calls. Why am I paying you to read your email? Because the billable hour is king. It’s a mess of contradiction. Joy and frustration in fifteen-minute increments.
From my simple outside view, Law firms work in a highly effective way. You have the large firms who come with a highly authoritative and valued “stamp of approval” for their advice. Their partners win business based on their history, experience and relationships and thus add to “the stamp” another layer of value and feel good. Once they win the matter, the partner leverages an army of junior lawyers to do the “real” work (by the hour), often summarising, writing and editing draft after draft of some document. The partner is there to hold the client’s hand, structure the deal and oversee the juniors’ work. The firm then bills the client for all this “effort”.
This has been the cosy, if somewhat uncomfortable, story for 100 years. That is until generative AI came along and launched a Magic Circle-sized grenade at the entire industry.
I have spoken to several partners recently at some of the leading law firms in the world. They are categoric in saying that even today, without being trained on reams of internal data, generative AI is about as good at a first draft as a 5th-year lawyer. Think about that just for a second. In the grand pyramid that is the law firm, technology has just come about that could categorically wipe out 50-60% or more of staff today.
Perfect, fire the juniors and enjoy higher margins, right? Wrong. The industry has painted itself into a corner by tying itself to the billable hour, not to output or performance. If a Shareholder Agreement, which used to take three juniors and ten days in a pre-AI world, can now be done in 5 mins using LawGPT, what am I charging for? The bulls out there will claim that Partners will merely raise their prices. Nonsense. Blowing harder on a forest fire won’t make it go out.
So what now?
I think the industry will be one of the first of the white-collar service industries to face some serious questions. If I owned a leading law firm, I would be excited about this, not scared. Strategically, the move seems somewhat apparent but culturally challenged.
(a) Understand that your moat is data, reputation and expertise. To maximise the data, you need more business. You can go after more business as you are no longer constrained by the billable hour; firms can be far more cost-effective. Moving downstream and opening up their hybrid public/private LLM to more potential clients who want “the stamp” makes sense. All commoditised work will become more or less self-serve with some oversight, BUT it will be highly profitable.
(b) Move to bill on outcomes and value-added, not hourly. This would be a seismic shift in the legal world, but I think it’s not a case of IF it’s a case of when this will happen. Large law firms are working on the best deals and know the latest and best practices or specific matters. This hive mind (aka data) should be woven together as a service. This is the ultimate way to leverage reputation, data and expertise.
(c) Train lawyers differently. It will no longer be appropriate for a junior lawyer to do the typical lawyer grind-up to partner. Firstly, there will be fewer of them, but those that are there will need to do far more exciting/challenging work. They will need to learn to leverage the hive mind and focus on edge cases where AI doesn’t have enough data to be useful.
If I were a young person who was interested in Law right now, I would be spending all my time learning how to use and leverage data and AI. If you combine that knowledge with someone with the people skills to bring in business, they would be the face of a very powerful future of Law.
The end of Junior lawyers
Great piece, Billy. I wish that healthcare was as simply structured as most law firms - health systems are slower to hear the oncoming train, much less react.