AI use skyrocketing at North American law firms

The use of artificial intelligence in legal practices is surging.

According to Clio’s latest Legal Trends Report, 79 per cent of North American legal professionals reported incorporating AI tools into their daily work this year — up from 19 per cent in 2023. Within that group, 25 per cent have adopted the technology widely or universally.

Lawyers are most likely to trust AI to generate marketing content, find information in documents, find client and case matter information, create and run reports, and sync information across tools. Legal industry analyst Jordan Furlong says this shift may be driven by how well GenAI’s capacities adapt to lawyers’ work tasks, which shows how much impact it will likely have.

As AI becomes more mainstream in legal processes, clients are also getting on board, with 70 per cent preferring or being neutral towards firms that use it.

The skyrocketing adoption of AI has the potential to disrupt how firms operate the business side of things, as nearly 75 per cent of the tasks currently being billed could be automated.

A 2023 Goldman Sachs report found that 44 per cent of legal work could be automated, replacing 40 per cent of employees in the sector. However, these challenges are balanced by opportunities because lawyers and staff spend considerable time on tasks that do not generate value for clients or firms.

Furlong says lawyers should consider how to constructively use the time freed by these technologies, as it’s an opportunity to create value.

The portion of billable tasks that could be automated is substantial. Those most suited to automation include analyzing data and gathering, documenting and recording information. These tasks generate approximately US$36,000 per lawyer annually, so automating some of them points to a potential annual revenue loss of US$27,000 for every lawyer billing by the hour. The upside, however, is the opportunity to focus on more high-value work like consultation and advice, which are significantly less suited for automation with existing tools.

In an environment where 75 per cent of hourly revenue could be automated and 80 per cent of revenue comes from hourly work, it’s no surprise that the report found flat fee billing is also on the rise. Firms are charging 34 per cent more of their cases on a flat-fee basis compared to 2016.

Flat fee work is billed more quickly, and its realization rates are converging with hourly billed work, which suggests firms are becoming better at managing and invoicing these cases. Flat fee bills are almost twice as likely to be paid almost immediately, and there are opportunities for firms to get better at collecting payments for flat fee cases, which is likely to be worth pursuing as the median case value of flat fee cases is higher than hourly cases. Clients also prefer flat fee arrangements, but so far, only 31 per cent of firms offer them.

The trends report found law firms aren’t particularly responsive to potential clients, something the Clio team has observed since 2019.

Of the 500 law firms emailed this year, 67 per cent didn’t reply to messages seeking representation. Only 40 per cent answered the phone when called, and only 12 per cent responded to messages, which means potential clients could not reach 48 per cent of firms by phone. Firms that responded to client queries often didn’t provide the requested information.

The report’s authors say firms that prioritize responding to client queries could have a significant competitive advantage. They encourage them to explore technological means to better reach these clients, including chatbots, e-signatures, online search ads, online schedulers, online intake forms, and text messaging.

Software is the fastest-growing category for firms when it comes to spending money. That’s a wise investment, as firms that spend more on software and marketing have above-average utilization rates (+37 per cent) and earn higher profit margins (+21 per cent).

Although software spending growth has continuously exceeded revenue growth in recent years, firms are encouraged to see this as a way to build long-term success through technology-driven efficiencies and plan for software spending to increase over time.

“Investing in technology, investing in productivity, enhancing methodologies and technologies and procedures is a very good thing, and every law firm should be doing it,” says Furlong.

But a word of caution: Not all expenses have the same payoff, so it’s wise to look to high-performing firms for guidance on prioritizing expenses. These firms spend more on software and marketing, which allows growth while increasing efficiencies.