Billable hours. Everyone knows this phrase is the key driver to a lawyer’s earnings capacity. And nothing could be more true than a lawyer servicing private equity. Historically, these are some of the hardest working — and best paid — attorneys in the industry. But that may change in the not-too-distant future, thanks to today’s favorite buzzword: artificial intelligence.
There’s a growing belief that AI-powered tools will transform the way lawyers work while altering the fundamental economics of legal services.
Pricey Lawyer Fees
In 2023, corporations across the country spent a total of $59 billion in legal expenses, according to a recent CounselLink report. The past two years have seen a significant rise in hourly rates across the industry, and M&A lawyers are at the top.
M&A activity requires “significant partner engagement” according to the report, which is why legal firms in this segment of the industry are the most expensive. The median hourly rate for a M&A lawyer is just above $700 an hour.
The median associate at an M&A law firm earns more than the median partner at any other firm. Even paralegals – entry-level legal assistants – earn more than their counterparts in other firms.
As a consequence, private equity firms and corporate acquirers face higher transaction costs for M&A activity. The average U.S.-based private equity firm spends $10.5 million annually on outside counsel legal fees and roughly $353,000 for each M&A transaction. Costs can rise significantly if the M&A activity requires more integration or is in a heavily-regulated industry such as healthcare, according to EY.
Despite these hefty compensation packages, the legal services industry has failed to attract young talent. The stressful nature of legal work has pushed the average associate turnover rate across law firms to 25 percent, according to the Thomson Reuters Institute’s 2022 report. The talent shortage is so acute that even senior partners are leaving firms that do not have enough associates to support their work, according to a report by LexisNexis and Bloomberg Law.
These cost and talent pressures make the legal industry ripe for disruption from artificial intelligence.
AI-Powered Law Firms
In March 2023, Goldman Sachs (NYSE: GS) studied the impact of emerging AI tools and platforms on various industries. It found that 44 percent of legal tasks could be automated with AI tools, second only to administration tasks at 46 percent.
Some law firms have embraced the trend ahead of their peers. Sean Buckley, hiring partner at Dallas-based law firm Dykema, says the company has been experimenting with various niche AI tools for nearly two years.
“The rate of innovation and vendors and platforms popping into the space and what they can actually do is frankly a little mind-blowing,” he says. “If we’re doing a deal and there are 200 leases that have to be reviewed to determine the assignment provision or figure out operating expenses, that used to be an incredibly manual process. And now there is technology that allows that to be more efficient and allows you to quickly find that provision. Grab it, pull it, put it into a grid section reference and link it specifically into that deal room. So, that process may have taken tons and tons of hours and manual review previously. All of a sudden there’s been an acceleration of efficiency.”
Goodwin, a firm with over 2,000 lawyers, has a separate team dedicated to exploring AI applications in law. So far the team has been approved to use ChatGPT, Microsoft CoPilot, Bing Chat Enterprise and CoCounsel (for litigation matters) and has licensed platforms such as Kira, Luminance and Henchman.
In June, LexisNexis announced it would acquire Henchman to enhance its core platform with AI capabilities. “Now, we’ll be able to address one of our legal customers’ top requests – to have searchable internal firm data, combined with our current drafting and AI offerings, allowing legal professionals to rapidly extract language and insights, and generate higher quality work using both internal data and LexisNexis solutions together,” says LexisNexis Chief Product Officer Jeff Pfeifer.
All these platforms leverage AI to identify and extract information to streamline and enhance accuracy during contract reviews (such as M&A due diligence) and contract drafting,” says Joshua Zachariah, a partner at Goodwin’s public M&A/corporate governance practice and co-chair of the firm’s global M&A group.
“Through experimentation with generative AI, Goodwin has observed certain enhancements to personal productivity, assistance with brainstorming and ideation, first drafts of simple documents (for example, e-mails) and simple presentations,” he says. “However, we have not yet observed new, transformational changes to comprehensive legal work flows. To the extent Goodwin attorneys use efficiency enhancing technologies of any kind, efficiencies gained are reflected in fewer billable hours for specific tasks and client invoices are reflected accordingly.”
In other words, AI is enhancing the work of experienced lawyers, but is not ready to replace them or work unsupervised. Experts we spoke with echoed the sentiment that these new tools are promising but limited which makes full integration challenging.
When it comes to using AI for legal work, Dykema’s Buckley sums up the industry approach: “Trust, but verify.” He compares the work done by AI to that of an entry-level associate with limited experience and the need for supervision.
“I don’t believe that artificial intelligence is anywhere near ready to be making truly high-level thinking decisions,” says Geoff Dover, founder of Heirloom Family Office and Heirloom Fair Legal, a litigation finance tech platform. “I think it is a very useful tool for people, it will help senior lawyers make better decisions. AI will replace some of the grunt work being done by the juniors. But I think it’s at least a decade away from being able to truly add high level thinking value to processes.”
