The impact of AI and cloud computing on lawyers, fees and IT budgets

Circuit board with large microchip with initials AI on top

Paul Longhurst writes...

At a recent conference for a group of law firms where the subject was (no prizes for guessing) AI, there was a reasonably widely held view that, over time, this technology would replace some of the lawyers that are currently engaged to generate and check contracts and the like. It is not a huge leap to see that in time, and even if lawyers are redeployed, more will be done by the same or fewer people.

Take, by way of example, a complex sale and purchase agreement that forms the core part of a merger deal. It is unlikely that this will be created in its entirety by AI-based tools within the next few years. However, it is reasonable to assume that the most standard parts of the document could be generated by a machine using data from a file opening process and precedent clauses from a knowledge library.

At the other end of the scale, high-volume low-margin work is ripe with data containing patterns that could be used to assist in early diagnosis of a case to allow both settlement and challenge decisions to be made with little to no human input. This could leave a smaller number of experienced lawyers to assess more difficult cases.

The upshot is that fewer people are likely to be needed to handle the same number of matters, or the same number will be able to take on significantly more work. The resource pool is shifting from 100% human 50 years ago, via an increasing mix of people and IT tools, to... where? Time will tell, but it is clear that the cost basis for law firms needs to reflect a change in the billable hour – it may be that this disappears altogether for more repeatable caseloads while it increases for any highly skilled work that remains beyond the reach of computers.

Another factor at play here is the transition from on-premise systems to cloud-based SaaS (software-as-a-service) applications – where the former included a one-off perpetual licence with annual maintenance charges, the latter is now subscription based. Richard Kemp’s article on trends in the legal sector (Tech Law Trends 2024 – Kemp IT Law) points out the investment that Amazon, Google and Microsoft are making in cloud technologies which underpin the cloud SaaS systems law firms are increasingly rushing to. The problem for suppliers and law firms alike is that costs are often subject to one of these behemoths, leaving less room for price discounts and limited to zero capacity for negotiating terms.

We therefore have a move towards an increasing use of technology in place of lawyers at the same time as the cost of that technology is increasing. On that basis, I suggest it would make sense to review the level of IT budgets which law firms have stubbornly stuck to for far too long. The oft used level is about 4% of turnover and certainly below 8%, while Statista.com claims that, in 2023, the average for financial services was already at 15%, healthcare at 13%, transportation at 11% and retail at 10%.

If you want your law firm to be a participant in the brave new world rather than a bystander, it makes sense to re-evaluate the level of investment you deem necessary to keep up – not just for systems, but also for the hybrid legal technologists who will be required to help firms configure these tools to meet the needs of their clients. These ‘hybrids’ are likely to be knowledge lawyers on steroids, helping you to create the templates and processes that reflect both the firm’s specialisms and values alongside those client needs. And here is where I will hand over to Richard Kemp from Kemp IT Law to get his view on the challenges that firms face when signing up to these services.

Richard Kemp writes...

Law firm tech spend is increasingly divided into three main areas – IT systems, legal technologies and cybersecurity.

Firms’ key objectives from their investment in IT systems are to centralise processes and improve client account management. Firms continue to spend more each year on their PMS (practice management system), CMS (case management system) and DMS (document management system) workhorses but, as Paul notes, legal is a laggard compared with other sectors.

Investment in legal technologies to improve service offerings remains frothy at the moment as we push through the AI hype cycle. But it’s evident that firms see tech-led innovation in service enhancement as a key element in their growth strategy. In the mid-market and above, investment in software for due diligence, litigation discovery, compliance and contract analysis is increasing sharply as a result. In volume markets like personal injury, insurance, debt recovery and conveyancing, IT investments to enhance scale and improve insights from data are also quickly on the rise.

With enterprise-scale cyber-attacks perennially newsworthy, firms see reducing cybersecurity risk as a top-3 challenge and, surprisingly or not, it’s this area that firms are currently investing in most.

Across the board, contracting patterns to support law firm IT and technology are continuing to develop quickly, and firms can easily find themselves with a bottom drawer full of contracts signed years ago where the service provided today bears little relation to what they signed up to. This may happen where:

the provider has been taken over and applies new contract terms imposed by its new owner;
the service may have migrated from on-premises to in-cloud;
the firm itself may have merged;
the contract contains linked-to standard terms that the provider can change unilaterally.

IT teams are understandably nervous about raking over these contracts, especially where they underpin the firm’s core IT systems but making sure they remain fit for purpose is a key part of effective governance. Here the solution is probably a spring clean of the firm’s most important contracts and managing the relationship with the provider to make sure they’re up to date.

With the cloud has come a whole new way of contracting for law firm IT. Firms will have an office productivity workhorse – typically Microsoft 365 – where the service will either be bought direct from Microsoft or indirect from the firm’s reseller. Understanding the (increasingly elaborate) service level and pricing mechanics here will be key.

For other cloud services, the firm will likely be buying a SaaS from its provider, who in turn will likely be buying PaaS (platform-as-a-service) and IaaS (infrastructure-as-a-service) from one of the big three vendors – AWS, Google or Microsoft. This can rapidly become complex where the firm has different tenancies with the same or different providers for different parts of the service it’s buying and where these services communicate (by APIs or otherwise) with separate services that the firm uses.

There are loads of pitfalls to avoid here. The start point is a good, easy to understand, functional description of what the provider is contractually committing to supply as the foundation for the deal. This will enable the firm to surface dependencies on other providers, spot any gaps in the offering and identify any links (e.g. APIs) to related services which haven’t been thought about or costed. The description should be verified, ideally during the selection process, to make sure that what the firm thinks it’s buying and what the provider thinks it’s supplying are the same thing. In our experience, it can be surprising just how different these can be.

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