Why AI Might Actually Create More Work for Lawyers

27:52They will be able to see the terms of every deal we've recently done. Clients care a lot about our market knowledge. They care what are the reasons that they're willing to pay law firms at the exorbitant rates we charge. is because you have at-the-market knowledge that they can't possibly have on their own because for many of them, this is a one-time deal. For us, we do it every day, and they expect us to know what the market terms are. Using this technology, I can make sure every junior lawyer has access to all of the knowledge of our entire firm in doing similar types of deals or litigation or bankruptcy proceedings.

28:36as opposed to just having to walk through the halls and try to find somebody who's done it before and just talk to them about what they've done. You will now have access to basically a dashboard with all prior documents. And I think that makes you much smarter, faster. We could have a separate conversation about the cognitive load from that, right? There was a lot of value in my having downtime to blackline, right? It was like relaxing. This was going to be my next question, which is lawyers have to be very detail oriented. Yes. Right. And one of the arguments for having to do all this grunt work like hand deliver ISDA agreements or, you know, review trusts and things like that was that, like, it teaches you to focus.

29:22Yeah. And it teaches you to look out for that missing comma that's going to cost you like five million dollars.

29:27Tracy Alloway:You know, I was thinking about that, as you were saying, that documentary on Netflix from like 15 years ago about the sushi guy. Or it's like all these chefs who, it's like, okay, I'm going to teach you to make sushi. First spend 15 years like learning how to like clean rice or whatever it is. And then we like get to sushi. Or like thinking about musicians and it's like it's no fun to do scales, right? But you do it and you build some sort of like deep understanding. And it's like that feels like the equivalent of what like the black lining is. So what happens if people aren't doing as many repetitive tasks?

30:01I worry about that as well. And I'm not sure what the answer is from a behavioral psychology perspective. Because I think you're right. Doing those scales is important. I don't know. We're talking about simulators. To simulate doing a deal, there's nothing like actually doing a deal. Right. And actually negotiating with somebody on the other side who's a jerk or somebody on the other side who's really nice, but, you know, bamboozles you by being so nice. And the human element of this all is still really important. And the human interaction with your client, with the adversary, you know, you need to get that experience and you need to have the touch and feel.

30:52with the advances in AI just over the past six months or a year. You can see a time when the drafting is largely delegated to the machine. You still have to be careful. As you said, the commas, I can see AI screwing up commas. AIs don't know how to add, right? And they make silly mistakes all the time. So you got to learn to be careful. I do worry about it becoming too easy to just fall into the trap of trusting what it tells you rather than thinking above it. So I don't know the answer to your question, but I have the same concern you do.

31:30Tracy Alloway:I want to get into like the various tools and infrastructure you have, you know, because we're a markets and finance podcast. So people want to know what the trade is, obviously. But before we get into that specifically, when we did our last episode about AI law, our guest, Joel Wertheimer, he's a civil rights lawyer in New York City. And one of the points that he made is that sometimes clients come with him with cases, often maybe like suing the city over like police misconduct or something like that. And the client might have a good case on paper, but the potential damages are so small that it's uneconomical to pursue it, even though clearly there's a legitimate case.

32:18Tracy Alloway:If we're sort of, as Tracy mentioned, the Jevons paradox of all this, do you see this? It's like, OK, you collapse the price of certain types of legal work. Does that expand the number of theoretical cases or I guess you're not deals that, oh, let's take a look at this deal. There's some like minimum upfront cost that's going to be the same. Let's take a look at this deal that then compensates for the reduced number of hours that you charge. I think so. I think that the Jevons paradox applies to legal. in the example I gave you with the client who had thousands of trust agreements that needed to be reviewed.

33:00When we gave them the first quote, we didn't say we didn't want to do it. The client said at that price, we're not going to do it because the downside risk isn't high enough to justify the price. But when the price came down by 70%, they said, oh yeah, at that price, we'll do it. So at, and let's just use fake numbers, at$10 million, they said, no, we're not going to do it. And we had, our revenue was zero. When it came down to$3 million, they said, that's worth it. And we had$3 million of revenue. So that's the Jevons paradox in action. Over the past 25 years, e-discovery has ballooned the cost of litigation, to your point, right?

33:44Electronic discovery run amok has made it virtually impossible to bring a sophisticated litigation for under a few million dollars in legal fees and in just the discovery expenses alone or millions of dollars. If we can bring, say, two million of discovery costs down to 200 ,000, it does change the calculus for both on this.

34:12Tracy Alloway:Lawsuits are a lot more economical to file. Exactly. Just what American means. Everyone is going to love that aspect of AI. Isn't that fantastic? But you raised it in a virtuous example with a civil rights lawyer. But I think it's also true for large corporates who were abandoning things before. So, yeah, you can debate whether it's a social good to have more litigation. But if I'm speaking on behalf of a law firm that has a large litigation department, I do think that the potential for increased litigation does outweigh the loss of really boring, mundane hours reviewing documents. In the, I'll go back to the patent example I gave you earlier, where we do see over time the cost of being able to prosecute a patent application coming down dramatically through the use of AI.

35:11And that same client who told me two weeks ago that they've really noticed an increase in the quality of a work product also told us that because they're using AI in their own work, they're seeing a quadrupling in the number of inventions that their engineers and scientists are coming up with. And the number of patent requests that they're getting internally from their engineering team has quadrupled. And we're going to ultimately be able to lower the cost of each of those. So the clients are able to do more and create more economic activity, which is virtuous. And a lot of that will require some legal work, even though each unit of legal work will cost less.

35:59I expect we'll be doing more of it. So, you know, that should preserve the ability of lawyers to do OK economically. Well, how do you see AI shifting, I guess, the balance of power or balance of work between external law firms versus in-house lawyers? Because you could imagine a scenario where I'm a big company, I have a couple or maybe five ex-big law lawyers who work for me, and because so much of the work is now automated, they can use AI, they don't need to go to a big law firm to do a lot of the grunt work, as you put it earlier. Yeah. And I think you're going to see the – so the other side of the Jevons paradox is you will see larger clients that have dedicated legal teams keeping more of the routine legal work in -house.

36:54You mentioned ISDAs before. Most banks, for example, have brought all their ISDA and derivatives work in-house. You'll probably see more of that, and you'll see more end users on the fund side doing that internally rather than sending it out, although we have a terrific derivatives group. You may see that in some other areas as well. But again, where you really need market breadth and you need market knowledge, I think outside law firms will still be able to provide a lot of value and a lot of outside kind of independent perspective and independent advice that is hard to do inside.

37:50This episode sponsored by Jace Medical. It's 11 p.m. The pharmacy is closed and you need meds now. That's exactly why Jace Medical helps you prepare before emergencies happen. With the Jace case from Jace Medical, you can get 10 emergency medications and treatment options for over 50 infections shipped to your home after an online physician evaluation. Whether you're traveling abroad, stuck during a storm, or dealing with a fast-moving infection, Jace Medical helps you have medication on hand when it matters most. Go to Jace Medical at Jace.com. That's J-A-S-E dot com. Join the thousands who trust Jace Medical and get your Jace case now at J-A-S-E dot com.

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39:05Tracy Alloway:Let's talk about your tech stack, so to speak. You mentioned lawyers talking to Claude. I know that there are applications or companies like Harvey, which are sort of like built on top of some of the frontier models. There are questions about, do you need these application layers? I'm also interested in whether like when it comes to ingesting your own internal data, whether like open source AI models will play a role in that. Why don't you give us the overview of your firm? What is the sort of essence of your tech stack that you're using?

39:45So you actually want me to name products?

39:47Tracy Alloway:Yeah, sure. Yeah, why not? Okay. Yeah, you mentioned Claude, but I'm really good. I did mention Claude, but we also – so we use a lot of different products at the moment, probably too many. And over time, that will narrow. We are a Harvey shop. Okay. Um, we, uh, we, um, almost all of our users, our lawyers use Harvey regularly. We also use Microsoft copilot in the outlook suite or the office. Can you, for our, um, non lawyer listeners and me, and I assume most of us, like what does a Harvey offer that is not offered when someone interfaces with the model directly? Um, with the model being a frontier model.

40:27Tracy Alloway:So instead of using Fable or OPUS 5.8 or GPT 5.8. What happens when I use a model that powers Harvey? Within Harvey, and I think this is true of Legora as well. Legora is the other big one. Yeah. You can pick which frontier model you want to use. You can choose Chat or Claude, for example. And I think Gemini and some of them as well. But what a Harvey adds is, number one, a security layer that is much more robust than the other models. and that is super important for a law firm. We're able to control our own data set and make sure that it's not going up to the internet and that our client information is not going out to the internet at all.

41:15We have sessions that do not even connect to the internet. It is much more robust and one of the things that our clients often don't realize is that if they're using, especially a consumer grade CLAW or ChatGPT, they often are losing attorney-client privilege by asking a consumer model their questions. We are, number one, focused on the security layer and the ethics layer, and that's super important. And a Harvey or a Legora or Westlaw has co-counsel, all are very security conscious. So it gives us that. It allows us to have playbooks that we can share among our team so that people can see the projects that we're building, which I think is harder to share in some of these other models directly.

42:07And what at least Harvey provides is basically a rag layer on top of the AI frontier model.

42:14Tracy Alloway:Retrieval augmented generation. Wow. Okay. I don't know. Yeah. I don't know. I barely even know what it means, but I think it's cool to say. It's a rag layer. Right. That has been trained on legal stuff. Okay. Right. So it's much more fine-tuned to law. And out of the box, it comes with some of the things lawyers like to do, like look at clauses in merger and acquisition agreement. It has a better understanding of nuance in reviewing deposition transcripts. But we're seeing some of the main uses are creating a project for if you're a litigator. I'll give some litigators some airtime too here. Not just talk about deals, loading all of the pleadings, the briefs, all of the transcripts and the back and forth between lawyers into a project in a Harvey.

43:04And then when you are drafting a pleading or a brief, it's able to retrieve for you the quotes in the deposition transcripts that support what you're trying to argue. So rather than spending tens or hundreds of hours trying to find those, it's using the intelligence to find it for you. Claude could do that as well, but Harvey does it, I think, a little better. And it's collecting knowledge and allowing you to share the playbooks more easily. Yeah, I wanted to ask you about the security and privacy aspect of all of this. So how much of AI adoption in the legal industry is actually, I mean, law is a very heavily regulated industry itself.

43:51So how much AI adoption is, I guess, constrained by things like malpractice risk, you know, data concerns, accountability? Is that a real limitation for you? So two years ago, in my role, I talked to our malpractice carriers and our underwriters out of Lloyd's of London and go visit with them. And they always ask questions about the things that they're worried about. Two years ago, they were worried about, are you letting your lawyers use AI? And is that creating risk for us? Now they're asking, you let your lawyers use AI, right, to make sure they're doing things right. Because it's becoming part of mainstream and it is becoming an assumption that you're not going to be doing some of these tasks without having AI assist you in doing them.

44:51So it's going from a insurer's saying, oh, don't use that stuff until it's proven, to you have to be using it. And the clients are doing the same thing, right? clients that 18 months ago were saying, don't use AI for our work, are now saying, well, you've got to be using AI to try to cut down the cost of the work. So we've seen that shift over the past two years pretty dramatically. That has changed. But clearly, we emphasize to our lawyers all the time that you've got to be double-checking this stuff. And there's no excuse for filing a brief for pleading in a court that cites, you know, made up hallucinated cases.

45:34They're just too embarrassing. It is embarrassing. We have too many tools at our immediate disposal to be able to catch that. And yeah, systems break down and somebody is trying to draft something and file it, you know, in an hour and they get hallucinated cases slip in. But it's not.

45:57Tracy Alloway:So I want to ask you a question. I asked Goldman CEO, David Solomon, this on an episode. One of the things we're seeing actually in a lot of industries, including the legal industry, is like the rise of like these superstar hires, right? And you see them like reported in various publications. Some big name lawyer gets some crazy salary to go to or signing bonus or whatever, kind of like, you know, like we see in some of the hedge fund space. When I see these things and when I think about AI and you mentioned, It's like, oh, here's this knowledge pool or here's every – we're going to – the junior lawyers are going to get access to all these templates.

46:32Tracy Alloway:And I'm thinking like if I'm this guy, like do I want to share all my templates and knowledge with the firm? But if I don't, if everyone thinks that – then these tools don't really work, right? If you don't have like a culture of like contributing insight and knowledge back to the firm, there's no franchise value and you're definitely not going to get anything out of AI or in terms of like meaningful, I would think. Maybe we'll get some. Does this create any tensions? And when you're thinking about the firm, maybe not this year, but down the road, how to make sure that the interests of the firm are aligned with the interests of the partners?

47:06That is a huge issue. It's not a technological issue. It's a human issue, right? Lawyers tend to be highly autonomous creatures, right? And successful law firm partners tend to be even more highly autonomous and generally take the view, you're not going to tell me how to practice law. My husband used to get calls from – when he was a junior lawyer, he would get calls from one of the partners out on their fishing boat on weekends assigning work. Very autonomous.

47:36Tracy Alloway:Your husband worked at our firm? No, not at all. You think like an evil you kill environment in many cases like – yeah. Right. And, you know, many people would say, especially at our firm, that one of the secrets to our success is that we, a term we use often is we let the horses run. Right. You let people go do their thing. And clients love that and love the entrepreneurial energy. And now with AI, we're saying we need you to share all your knowledge. So the culture clash there is significant. Interesting. And I think that's a real challenge. Now, when you talk about the NBA-type hires or NFL-type salaries that you're seeing, perhaps some of the motivation for that is getting their knowledge into the systems, right?

48:31If you can get some of these superstars and kind of put their name on your AI tools and say that so-and-so recently did a deal that had these terms, the client's going to be super impressed by that. And maybe that's part of the value add. And maybe that creates even higher comp numbers for superstars. I want to go back to, I guess, my first question about billable hours. In the age of AI, if we're seeing pricing actually compressed, if we're seeing a sort of maybe democratization of legal tools, maybe uncertainty over case results starts to collapse as well. Would you maybe finally see a shift away from the billable hours thing?

49:19Maybe. And you should, right? We should be able to move to project-based pricing or outcome-based pricing. I think that that will finally take off. There will still be a lot of instances where hourly rates apply. And I think you're going to see a continuing huge increase in hourly rates at top-tier firms. And I think we're already seeing it. If you look at data from 2025 as published by the American Lawyer, average hourly rates in 2025 went up by 10.1 % at the largest firms in the United States. And at the top 20 firms by profitability, they went up even more. And that doesn't make sense in a year when CPI went up by around 3%, right?

50:10I've never seen that kind of gap between CPI and average rates. One of the things that might explain it is that the billable hour has actually become more productive and more valuable because of AI tools. And I think you'll see that continuing at an ever faster pace. So I would expect those hourly rates will continue to go up, yet the price for the things that clients actually want to buy, which are solutions to their business problems, are going to come down because they will take far fewer hours.

50:40Tracy Alloway:I want to ask you one more question about your tech stack. There's a couple other things that are sort of happening. One is obviously this idea that, well, if you use an open source model, unlike, say, Claude, then you can really train, bake all your knowledge into the model itself. And so you're not just sort of doing the retrieval augmented generation where the model essentially is like combined with a search engine, but it's actually like baked in. And you can actually do that. There was a really interesting paper from Bridgewater, et cetera, recently where they talked about doing this. And then, of course, like just in general, setting aside open source versus closed source and model, it's like we do see this thing.

51:30Tracy Alloway:And we mentioned Kirkland Ellis in the beginning. Eventually, you hit a scale where it's like, no, you want to just, you know, you don't just want to be, you know, build your own Harvey or whatever it is and actually internalize some of the infrastructure or spend and like actually truly customize this, et cetera. And arguably, it's never been easier to build software, et cetera. I'm curious, like, okay, as a 400-person firm, obviously, in your view, getting a lot of value already out of AI. What comes the point where you would think, you know what, we want to start building some technology in-house, including perhaps a homegrown version of one of the models trained on your proprietary data?

52:16So we definitely want to connect these proprietary models to our data and use that to help train the model. But training from scratch a model, Kirkland announced they're spending$500 million over five years, right? It costs something like a billion and a half dollars to train a model. One and a half billion, right? So even that would take Kirkland 15 years of investment. I don't see us really training our own models. I see us doing some customized solutions on top of existing models. I see us certainly doing our playbooks so that there'll be the Loewenstein-Sandler M &A playbook that's customized for our firm and our market knowledge.

53:02But I don't think we're going to really build our own as much as modify and customize. Loewenstein-LLM. Loewenstein-LLM. That's right. That's not happening. We've always – I mean we may – LLPs to LLMs. We might white label an existing one and come up with a fancy name. But I don't think that's realistic for a firm of our size. I don't think it's even realistic for a Kirkland. So we'll see how that shakes out. But I don't see us building our own. I do want to mention one thing, though, that's related to both of your points. All of these models that law firms have been using have been at the enterprise level have been basically all-you-can-eat pricing.

53:40Yeah, yeah. Right? They're all going to be switching to token-based pricing. You know, Claude is doing it first.

53:48Tracy Alloway:but do you think you could see sicker shock is like oh you know what i thought we were getting i thought we were able to do all these trusts at 30 of the cost right but it turned out that was subsidized it turns out there's actually gonna be 130 of the cost or 90 of the cost so i don't think we yet know what the actual cost is that's not if it's not subsidized by outside investors, right? I don't know that we really know what the optimal combination of labor and capital and robot capital is because we don't know the true cost, especially if we kind of hit this energy grid wall where it just gets more and more expensive to run these models.

54:32Tracy Alloway:And today, July 8th, you do not yet have visibility from any of your partners into like the true cost of this stuff? I mean, you know. If they have to make a profit per token? Right. We don't know. Interesting. You know, I know from my IT person who I was talking to yesterday that so far this month, my use of Claude has used up$36. That's not too bad. But that's what July 4th weekend in there, right? And it was only on the 7th or only three business days that I was actually using it. But so that's not so much. Two minutes of your billable time. Yeah, exactly. But I don't know where that pricing is ultimately going to go.

55:12And so we don't know how that story is going to play out two years down the road.

55:17Tracy Alloway:Gary Wingens, thank you so much. That was a really helpful conversation. Really appreciate it. Great being here. So thanks for having me.

55:37Tracy Alloway:Tracy, it's really interesting that we really don't even know anything about the economics of AI yet because of like how much like, you know, these all you can eat models and like how that's all going to shake out. I don't know. Well, it reminds me a lot of what happened with Uber and the food delivery apps where basically venture capital was subsidizing everyone's ability to order food at home. And then when it actually came time to prove the business model and generate some profit, we saw the cost of food delivery go up and use of it go down. Yeah. Also, same with oil. Yeah. And the fact that like capital markets subsidized losses for years and years with oil.

56:17Tracy Alloway:And now we're getting, you know, similar examples there. And then on the flip side. So let's say that like, you know, the historical price is like token prices continue to drop at a very high rate. On the flip side, we get a lot more lawsuits. And so on the flip side, like this is like, OK, this is, you know, the Jevons paradox is like good news. it turns out there's going to be plenty of human labor in the future. Bad news. There's going to be a hundred more frivolous lawsuits and patent counter challenges that you never had to do. And that's what we're doing now. This is what I worry about on a wider scale, because if we talk about AI as this productivity enhancement, you could have a situation where AI is just used to expand bureaucracy forever and ever and ever.

57:04So not just frivolous lawsuits, but like maybe human resources, things like that. I always wanted to write an article about how like human resources ate the U.S. economy. Yeah.

57:14Tracy Alloway:Well, think about like, you know, you could imagine like, okay, every worker at a firm gets access to Claude or something like that. And on day one, it's like, oh, this is great. I like, I just condensed eight hours of labor into two hours of labor, et cetera. But then suddenly like all of the other people that they're working with who are fighting for the same promotions also just condensed eight hours of labor into two hours. And so it's like, well, I'm trying to get that promotion. You just find new work. And you just like find more and more work. That scenario in which like all of us suddenly feel like life is easier because of AI, like I got to say that feels like, you know what?

57:53Tracy Alloway:I did actually have a – I needed to change a flight recently and change a round-trip ticket to a three-way ticket at the last minute. And that was like a very daunting thing to me to do on the Delta.com website. And so like I asked like Chad, you could see the steps like what on and it was really helpful. It was like go to this page in the bottom right. There will be a thing. This is what you click to like change one leg of the thing. And like it worked exactly as it. So it's like there was an example where it's like, OK, this actually eased some psychic attacks. But generally speaking, this future where it's like life just gets much easier because of AI feels like at a minimum, it's a long way off.

58:34No, the future is a Jevons paradox for like administrative overhead and busy work. That's how I feel at the moment. Shall we leave it there?

58:41Tracy Alloway:Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at CarmenArmond, Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks. and Kevin Lozano at Kevin Lloyd Lozano. And for more OddLots content, go to Bloomberg.com slash OddLots where we have a daily newsletter and all of our episodes. And you can chat about all these topics 24-7 in our Discord, discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we talk about the future of the legal industry, then please leave us a positive review on your favorite podcast platform.

59:18And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

1:00:00This episode sponsored by Jace Medical. It's 11 p.m. The pharmacy is closed and you need meds now. That's exactly why Jace Medical helps you prepare before emergencies happen. With the Jace case from Jace Medical, you can get 10 emergency medications and treatment options for over 50 infections shipped to your home after an online physician evaluation. Whether you're traveling abroad, stuck during a storm, or dealing with a fast-moving infection, Jace Medical helps you have medication on hand when it matters most. Go to Jace Medical at jace.com. That's J-A-S-E dot com. Join the thousands who trust Jace Medical and get your Jace case now at J-A-S-E dot com.

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