A
new
Thomson
Reuters
Report
reveals
a
fundamental
disconnect
between
what
law
firms
believe
about
AI
and
what
clients
may
soon
demand.
This
disconnect
exposes
an
uncomfortable
truth
for
firms:
future
legal
work
will
require
less
time
with
fewer
lawyers
and,
conceivably,
less
revenue.
It
creates
a
gap
can’t
be
closed
simply
by
raising
rates
and
cutting
expenses.
Instead,
it
may
require
a
different
business
model
altogether.
The
Thomson
Reuters
Report
The
report
is
entitled
2026
Report
on
the
State
of
the
US
Legal
Market
and
was
done
in
partnership
with
Georgetown
Law
Center
on
Ethics
and
the
Legal
Profession.
Thomson
Reuters
(TR)
is
a
significant
legal
vendor
and
has
invested
heavily
in
GenAI
tools.
With
many
vendors,
that
often
would
mean
looking
at
reports
like
this
with
some
skepticism.
But
I
have
found
the
TR
reports
and
analysis
to
usually
be
sound
and
well-reasoned.
This
one
is
no
exception.
Some
Key
Facts
The
TR
statistics
are
revealing.
According
to
the
data,
“The
average
law
firm
celebrated
13.0%
profit
growth
in
2025
[with]
firms
of
all
different
shapes
and
sizes
finding
ways
to
capitalize
on
opportunities.”
It’s
the
strongest
demand
growth
in
more
than
a
decade.
Work
and
revenue
are
pouring
in.
As
a
result,
firms
are
racing
to
capitalize
by
loading
up
on
talent
and
technology.
Technology
spending
is
up
nearly
10%
and
talent
costs
up
8.2%
over
2024.
Hourly
rates
have
also
increased
dramatically.
Profits
are
also
soaring
and
to
be
blunt,
partners
are
sitting
fat,
dumb,
and
happy.
According
to
the
report,
many
have
concluded
that
throwing
money
at
technology
and
talent,
raising
rates,
and
watching
the
profits
roll
in
is
working
out
just
fine.
There’s
no
reason
to
change
anything.
But
there’s
more
to
the
story.
A
New
Sheriff
in
Town
There’s
a
new
sheriff
in
town
and
it’s
called
AI.
For
harried
GCs
who
need
to
reduce
spend,
AI
may
be
the
efficiency
tool
to
do
just
that.
If
GenAI
can
reduce
the
lawyer’s
time
spent
on
a
given
task
from
25
hours
to
10,
for
example,
that’s
a
real
savings.
Run
that
across
all
matters
and
you’re
talking
real
money.
Here’s
how
TR
puts
it:
Now,
the
use
of
advanced
AI-driven
technology
like
generative
AI
(GenAI)
represents
something
different:
A
technology
that
can
draft
briefs,
analyze
contracts,
and
synthesize
case
law
in
ways
that
can
actually
alter
how
legal
work
gets
done.
For
an
industry
that’s
operated
essentially
the
same
way
since
Langdell
introduced
the
case
method
in
the
1870s,
this
is
uncharted
territory.
Trouble
on
the
Horizon
But
TR
offers
some
more
facts
that
could
spell
trouble.
First,
“The
surge
in
demand
that’s
lifting
profits
to
record
heights
stems
not
from
economic
health
but
from
chaos
—
trade
wars,
regulatory
upheaval,
and
geopolitical
tensions
–
all
of
which
require
constant
legal
navigation.”
But
“firms
are
spending
like
the
current
revenue
conditions
represent
a
permanent
shift
rather
than
a
temporary
spike.”
And
“many
GCs
are
finding
themselves
squeezed,
with
stagnant
budgets
having
to
somehow
withstand
the
increased
weight
of
the
moment.”
Many
GCs
are
signaling
that
big
cuts
may
be
ahead.
As
a
result,
TR
predicts
a
significant
correction
may
be
in
the
offing.
Okay,
we’ve
seen
this
before.
Think
2007
before
the
great
recession.
Or
2021
before
the
inflation
tsunami.
But
this
time
there
may
be
a
more
fundamental
and
long-lasting
change.
The
Response?
Meh.
The
law
firm
response?
TR
labels
it
“defensive.”
Firms
view
the
reduced
hours
now
spent
on
matters
due
to
AI
as
somehow
being
worth
more
since
they
will
not
contain
more
strategic
analysis
and
less
document
drafting.
So,
the
reasoning
goes,
they
can
just
raise
rates
to
make
up
the
difference.
But,
as
TR
succinctly
describes,
the
rub
is
“clients
may
not
agree,
and
firms
aren’t
yet
making
this
case
confidently.”
And
it’s
a
hard
case
to
make.
Much
of
the
15
hours
saved
in
our
example
was
likely
work
of
associates
so
the
final
10
hours
of
a
partner
should
have
already
been
of
strategic
value.
Moreover,
the
billable
hour
model
is
based
on
time
spent.
The
truth
is
it
took
less
time
by
more
than
half.
You
can’t
raise
your
rates
so
that
you
get
the
same
amount
of
revenue
when
you
didn’t
work
as
much.
And,
if
you
could
just
raise
rates
to
make
up
the
difference
in
revenue,
the
client
gets
no
benefit
from
AI
efficiency.
Don’t
think
they
are
going
to
buy
that.
The
other
problem
is
that
the
math
doesn’t
work.
Let’s
assume
a
lawyer
bills
$300
per
hour.
A
brief
takes
25
hours
to
write.
If
that
lawyer
does
all
the
work,
their
bill
for
the
brief
would
be
$7,500.
But
with
AI,
the
actual
lawyer
time
to
prepare
the
brief
is
now
10
hours.
To
generate
the
same
amount
of
revenue,
the
lawyer
would
need
to
raise
their
rate
to
$750
an
hour.
That’s
more
than
double.
Now
run
that
across
an
entire
firm
and
all
matters
and
you
can
see
the
problem.
Already
budget-conscious
clients
at
some
point
are
going
to
draw
the
line
and
not
approve
rate
increases,
increases
the
firms
say
they
need
to
maintain
the
same
profit
levels:
Clients
aren’t
eager
to
see
all
their
productivity
benefits
flow
straight
to
law
firm
profits.
Nor
are
they
prepared
for
the
sticker
shock
of
a
$2,000
hourly
bill
from
an
associate,
even
if
what
they’ve
accomplished
in
that
time
may
have
taken
10
hours
to
complete
previously.
TR
labels
this
an
absurd
tension:
“a
full
90%
of
all
legal
dollars
still
flow
through
standard
hourly
rate
arrangements
—
the
same
billing
structure
that’s
dominated
since
the
1950s.
This
creates
an
almost
absurd
tension
that
sees
firms
deploying
technology
that
can
accomplish
in
minutes
what
once
took
hours,
then
trying
to
bill
for
it
by
the
hour.”
So,
firms
may
simply
not
be
able
to
generate
the
same
amount
of
revenue.
And
if
TR
is
also
right
about
a
coming
downturn
in
demand,
that
will
further
constrain
law
firms.
They
won’t
be
able
to
close
the
revenue
gap
with
increased
work.
And
don’t
forget,
AI
is
also
enabling
GCs
to
do
more
and
more
in-house.
Let’s
Just
Cut
Costs
That
leaves
cutting
expenses.
Using
AI
to
cut
back-office
expense
helps
some
but
it
may
not
be
enough
to
offset
what
could
be
a
significant
revenue
loss.
And
cutting
associate
expense,
on
the
other
hand,
means
fewer
hours
billed
or
even
decreased
quality.
And
long-term
contracts
and
leases
reduce
other
cost-cutting
opportunities.
Not
to
mention
the
fact
that
according
to
TR,
firms
have
already
spent
more
or
less
like
drunken
sailors
on
technology
and
talent
thinking
the
present
boom
time
will
continue.
Certainly,
there
is
reason
to
question
whether
GenAI
will
really
make
the
impact
many
claim,
as
Melissa
Rogozinski
and
I
have
written
in
our
multipart
series.
But
putting
all
the
TR
conclusions
together
suggests
a
perfect
storm
that
leads
inevitably
to
one
conclusion:
decreased
profits
and
need
for
lawyers.
But
there
is
a
way
out.
A
New
Reality
The
above
scenario,
if
correct,
hinges
on
one
thing:
the
continued
wholesale
reliance
on
the
billable
hour
model.
As
long
as
revenue
and
profit
depend
on
the
number
of
hours
billed,
there’s
no
escaping
the
possibility
that
AI
tools
may
reduce
the
time
needed
to
be
spent,
billable
hours,
and
correspondingly,
profit
and
revenue.
And
when
that
happens,
partner
draws
are
reduced.
If
you’ve
ever
sat
through
a
partners
meeting
where
it’s
reported
that
results
didn’t
meet
budget,
you
know
hell
hath
no
fury
like
what
happens
next.
But
if
you
move
away
from
a
business
model
based
on
hours
billed
to
one
based
on
value
provided,
the
matrix
changes.
A
value-based
system
focuses
on
things
like
alternative
billing
models
that
incorporate
notions
of
exposure
and
risk
sharing
in
determining
fees.
Success-based
fees
and
bonuses
allow
firms
that
bring
true
value
to
clients
to
be
rewarded
based
not
on
time
spent
but
on
the
value
they
provide.
Such
a
move
requires
a
cultural
shift
that
won’t
be
easy.
The
Culture
Shift
This
kind
of
change
will
require
a
sea
change
in
firm
culture.
That
culture
now
rewards
via
compensation
and
advancement
those
who
spend
more
time
working
a
matter
instead
of
less.
A
change
to
a
value-
and
results-based
model
will
be
a
tall
order
for
law
firms
who
equate
hours
billed
with
ability.
It
also
means
looking
at
profitability
differently.
TR
puts
it
this
way:
“[It]
means
modernizing
pricing
models
that
no
longer
match
how
legal
work
is
done,
strengthening
client
trust
in
an
environment
in
which
legal
buyers
are
increasingly
selective,
and
deploying
technology
in
ways
that
deliver
measurable
value
rather
than
marketing
gloss.”
None
of
that
will
be
easy.
It
has
to
start
with
firms
taking
a
long
hard
look
at
reports
like
those
provided
by
TR
and
recognizing
some
tough
realities.
It
means
changing
how
they
have
done
things
since
the
1950s
and
the
only
system
they
know.
It
means
shifting
from
a
model
that’s
brought
unfathomable
riches.
It
may
mean
some
economic
hits
and
reduced
expectations
that
are
uncomfortable.
Perhaps
hardest
it
means
changing
law
firm
culture
from
top
to
bottom.
But
for
those
who
plan
and
work
hard
to
shift,
it
may
mean
survival.
Stephen
Embry
is
a
lawyer,
speaker,
blogger,
and
writer.
He
publishes TechLaw
Crossroads,
a
blog
devoted
to
the
examination
of
the
tension
between
technology,
the
law,
and
the
practice
of
law.