This time is different

Why generative AI will reduce the need for large armies of junior associates

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This week I’m going to elaborate on some of the posts I’ve been sharing on LinkedIn and Twitter about how AI will impact Biglaw, based on off the record conversations with a variety of players within the legal ecosystem. My goal is to share details behind my thinking, and address counterarguments that popped up in response to my posts.

Let’s get into it.

Biglaw: An incredible distribution channel

I’m not sure everyone appreciates how much distribution power large law firms have. There’s a reason why senior associates who are good enough to run an entire matter can’t just quit and earn the same amount of money as a partner at their old firm. It’s not just about how competent you are. It’s also about whether clients trust you enough to handle their matter.

That trust comes from the firm’s brand. Which is made up of a collection of individual, personal brands & relationships of the attorneys at the firm. Clients “don’t hire the firm, they hire the lawyer” but if you have a collection of these talented lawyers, the trust starts to rub off on the firm’s overall brand over time. Each of today’s most successful firms started off as a tiny group of superstar lawyers. Eventually the positive traits associated with these lawyers rubbed off on the entire firm.

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Monetizing the brand

How does a positive law firm brand get monetized? Well, consider when the firm handles a matter for a corporate client. The actual work involved is likely too big for a single lawyer—even if he/she is a superstar—to handle themselves. It requires help from an entire team. Which includes associates, but also other partners with relevant expertise.

This team of lawyers then does the work—and in effect, generates hours that are effectively “sold” to clients. It’s important to note that the hourly rate of these lawyers reflects more than just the work they do—it also reflects the value of being “plugged into” the firm’s distribution channel. Without the distribution channel, it’s unlikely that lawyer would be able to charge the same hourly rate on the open market.

Incidentally, this split in value—part lawyer, part firm—is a reality that many junior associates don’t recognize. You are not being paid $250,000 a year because a law degree from some top ranked school is inherently valuable. You’re paid that amount because plugging you into this powerful distribution system yields enormous economic value. The firm will share some of the rewards with you, but understand that without the firm’s distribution—your economic value is much smaller.

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What happens when you add AI to the mix?

Here is where it gets interesting. So far I’ve been explaining how (I think) things work. Now I’m going to speculate a bit, about the impact of generative AI. I believe that the junior associate role is most at risk of being negatively impacted by technology.

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Before I explain why, let me provide some context about where I think juniors fit in.

An inexperienced junior associate is really there for two reasons: (1) to do work and (2) to generate billable hours. For (1) the work they do is largely drafting documents and summarizing information. I predict that pretty soon, generative AI will be just as good—if not superior—to any inexperienced associate. So the need for them will go down over time.

To be clear, I don’t think anyone’s getting fired because of AI any time soon. But I do think we’ll see demand shifts from the clients and on the “cost” of producing legal work. I expect layoffs to continue, and when demand returns, these roles will *not* be backfilled.

Won’t that cut into revenue?

Lots of credible people disagreed with this conclusion when I posted it on Twitter and LinkedIn. The gist of their argument depends on (2), that Biglaw still needs juniors to generate billable hours. If you replace them with technology, there will be fewer hours to bill out to clients, cutting into revenue—which the firms won’t let happen.

My response? Not necessarily. There is a way for firms to become more profitable by reducing junior associate headcount. And there's precedent for it. Law firms will do exactly what they've been doing with equity partners. They will reduce headcount while raising hourly rates for those who remain.

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Not only does this stabilize revenue, it keeps a lid on costs.

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In other words, they’ll sell fewer hours at a higher price.

Another objection I heard about has to do with succession planning. If the firm gets rid of juniors, who will lead the firm in the future? How will future lawyers be trained? Well, I don’t think AI will come close to getting rid of *all* juniors. Plenty will remain. Firms just won’t need as many as they used to.

What can we expect from Biglaw?

I believe what’s taking place in the labor market gives us hints to where things are headed. Biglaw continues to lay off associates while offering exorbitant compensation packages for lateral partners with portable books of business. They get how important distribution is. That’s why they’re willing to pay ridiculous premiums to “purchase” revenue from these rainmakers. Without distribution, law firms won’t be able to find buyers for the hours they’re selling.

Interestingly, and anecdotally—the most forward looking firms have success by finding other things to sell.

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Many firms have created complementary lower-cost services to provide to their clients. Which includes captive ALSPs, non-lawyer consultants, or technology-enabled products, like Neuron from Wilson Sonsini. These firms recognize you can do things other than constantly raising hourly rates which erodes goodwill with clients.

It might seem riskier or less profitable in the short run. But in the long run—the goodwill you generate from solving more problems at a reasonable price point, solidifies relationships with GCs. Which compounds a firm’s distribution power.

Are things really different now?

Before I wrap up I want to address one of the biggest objections to my prediction. Many credible people believe that commentators overestimate the impact of technology. Over the years we’ve seen lots of innovation, but law firms remain unaffected. What makes it different this time?

My answer? Lots of other unprecedented trends are taking place right now too. In addition to this wave of AI, there are two key trends worth paying attention to:

• First, the word is starting to get out that Biglaw's competitors are getting better. It used to be that “low cost providers” (e.g. ALSPs) were filled with lower quality talent, and were highly unreliable.

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  But these days, with Biglaw laying off experienced, talented attorneys en masse—you’re going to see these “free agents” flock to ALSP marketplaces, contract attorney roles, etc. Frankly, ALSPs will start taking market share from Biglaw firms with weak distribution or weak pricing power.

• Second, the rise of legal operations means clients are far more savvy about outside counsel spend. In the past getting a matter involved a senior partner knowing some GC from law school. But now with legal ops in the driver’s seat, we’re going to see more scrutiny on outside counsel bills. High stakes matters will remain with Biglaw, but a lot of other legal work will not. Especially when the legal departments themselves start leveraging generative AI.

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Conclusion

What does this mean for you? If you’re in-house, I would embrace legal ops and start exploring new options for how to get work done. You’re probably best positioned to see the field and confirm (or disconfirm) what I’ve been seeing and hearing. I’m headed to CLOC next week, so I’ll be sharing more about what my legal ops people are saying / thinking about.

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If you’re at a firm, everything depends on what value you bring to the table. If you’re involved with distribution, you will be fine. Maybe you’ve got a book of business, or maybe you’re known for having rare, and in-demand expertise. But if you’re someone who does work and merely “generates hours” at a firm, watch out. You might be in for a bumpy ride.

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Latest News

• The WSJ published an article called “End of the Billable Hour? Law Firms Get On Board With Artificial Intelligence” which had some decent observations about the potential impact of AI. However, there was literally no evidence of AI ending the billable hour, except a couple of throwaway quotes by people who provided no justification for it.

• A recent study by BakerGilmore, as reported by The American Lawyer, says that in-house attorneys who went to a “top 50” school and a “top 50” firm before moving in-house earned 76% more than those who didn’t.

• According to the Financial Times, Gen Z lawyers and law students are far less interested in working for Biglaw than earlier generations. I shared my reaction on Twitter and the comments were really interesting to say the least.

• The latest U.S. News law school rankings are finally out, and you can read more about it here. Seems like a bunch of schools opted out of reporting, leading to a big shuffle in the rankings (leading me to post this meme on Twitter). My view is that all of this will just drive more attention to the rankings—so in the end, U.S. News wins.

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What do you think?

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1. Consider Wachtell. Today they’re known for more than just their individual lawyers—there’s definitely a brand. But it wasn’t always like that. Check out this fascinating article Keeping a Butterfly and an Elephant in a House of Cards: The Elements of Exceptional Success, especially the part called How Wachtell Works.

2. This is why many lawyers are trapped in the gold handcuffs of Biglaw. They can’t bring their skills elsewhere and command the same level of compensation.

3. One person suggested that paralegals, rather than associates, are more at risk. I disagree. Paralegals bring a ton of specific knowledge and expertise to the table. They know how everything works—ranging from how to file motions with small state courts, to how specific partners like to format drafts. Which means they are difficult to replace.

4. Note that for equity partners, the firms don’t let go of them. Instead, they get de-equitized, or get non-equity partner titles. And then the firms raise the bar on what’s required to make equity partner.

5. For example, let’s say a firm used to have 2 junior associates without AI, each billing $1,000/hr. Firm replaces them with 1 junior associate with AI, who now bills out at $2,000/hr. Both are equally productive. Revenue remains the same, but you now need less office space, have lower recruiting costs, etc. This is an oversimplified example, but you get the gist of it.

6. In tech, successful companies can continue to grow revenue after you’ve saturated your market by raising prices, finding new markets, or selling more products to your core audience. I expect the same to happen in the legal industry.

7. For a deeper dive on “low cost providers” check out Your Margin Is My Opportunity

8. There might be a third, even more powerful trend that I’m still thinking about. It has to do with online communities and social media creating like-minded people to congregate easily. I might write about this in a future article.

9. Personally, I think AI’s impact on in-house is the most interesting part of the entire story. It holds the potential to impact the demand for law firms and outside providers. Everything in the media right now focuses on AI’s impact on the “supply” side, ie. how legal work gets produced.