According to a report, Wall Street banks are starting to demand that law firms pass along productivity gains they are realizing from GenAI.
As reported by Casey Newton and Alexander Dumont of Project Counsel Media (In the U.S., Wall Street banks tell Big Law: “Cut your fees! AI is doing all the work!”, available here), heavyweights like Goldman Sachs, Morgan Stanley, and Citigroup have demanded that law firms cut costs because AI now automates the routine “gruntwork” that junior associates used to bill for by the hour.
Morgan Stanley and Citigroup have told major law firms they want to set up new payment arrangements that would save them money.
Goldman Sachs had asked law firms how much the technology was saving them and expected to share in those benefits, according to people aware of the move.
The pressure from some of Big Law’s most valued clients could help overturn the financial model at the heart of the legal industry. Under the so-called leverage model, firms maximise profits for equity partners by billing hourly for work done by large numbers of more junior lawyers, often working late into the night at rates that far outstrip the cost of their salaries.
Much of that work, such as research, document review, assessing contracts and trawling through litigation discovery, can now be done far more quickly using AI. Adam Meshel, global head of legal at Citigroup, said:
“If the number of hours they’re working on a matter has come down because of AI, then our expectation is for costs to come down significantly per transaction”.
He said the bank had amended its existing bidding process for law firms by asking those law firms to explain during the process how much they were saving using AI.
A “different working model” based on that approach would probably be in place within a year, Meshel said, adding that he wanted it to be worked out collaboratively so that it would work for both the bank and its outside lawyers.
Eric Grossman, Morgan Stanley’s general counsel, said:
“Top lawyers have for a long time been compensated on the foundation of associates billing for long hours. The ability to complete tasks more quickly marks a fundamental altering of the revenue foundation for these mega firms. Their compensation model is now extraordinarily unstable”.
Grossman said the bank was willing to continue to pay large sums for the judgment and talent of the best lawyers, but that by the end of this year most external legal work would now be tendered through competitive bidding processes and paid for using alternative arrangements such as fixed fees. The bank has had a competitive bidding processes for some matters.
That should cost the bank less, he said, but law firms could remain as profitable as before if they use AI to work on more matters and reduce costs.
Hourly fees at top law firms have surged in recent years, in part to finance a war for talent in which they have poached rivals’ star partners with eye-watering pay packages.
Average hourly billing rates for associates at the largest US law firms hit $798 this year, up 33% since 2023, according to the legal technology company Persuit. The rate for partners has risen 29% in the same period.
It looks like the “persuit” (see what I did there?) of higher billing rates is being noticed by Wall Street banks, who say that it’s time to pass some of the savings from AI along to the client. A nightmare for law firms, right?
Well, at least some of them are already making changes. Almost half of large law firms said AI had already affected their pricing model, according to a survey carried out this year by Citi’s law firms group, a unit of the bank that serves lawyers and firms. Then again, some law firms expect associates to continue working long hours on matters despite the use of AI.
Oh, and there’s always the possibility of more corporations taking legal work in-house. Steven Croley, Ford’s general counsel, said the carmaker was hiring more in-house lawyers and doing more legal work internally in circumstances where AI makes it cheaper to do so, reducing its use of outside law firms.
As the authors note in the “further thoughts” section of the article: “We suspect it will not be as cut and dried as all this… demanding a discount for speculative AI efficiency gains is like expecting a discount because lawyers replaced typewriters with word processors in the 1980s, or transitioned from faxes to email in the 1990[s].”
I agree with them. It’s not a nightmare for law firms just yet. But I do think they will have to reinvent themselves and their value to clients and billing models will have to adjust. If you’re a lawyer at a law firm, sleep easy…for now. 😉
So, what do you think? Are you surprised that Wall Street banks are demanding outside counsel firms change their billing practices? Please share any comments you might have or if you’d like to know more about a particular topic.
Image created using ChatGPT, using the term “robot banker tearing up a bill handed to it by a robot lawyer”.
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