View / AI is the business-model shock law firms need

It’s easier to change the law than the firms that practice it, an old industry saying goes. Teleport a lawyer from the 1970s to a big law firm today and the work looks basically the same, except with better pay (shockingly at the high end) and computers. Young lawyers still toil over documents, billing their time in six-minute increments. The money funnels up, and then out at the end of the year to pay partners, and the whole thing starts over.

Law firms for decades have run like Marxist collectives, and about as efficiently. They don’t invest for the future, because historically there was little to invest in (there’s not much capex in the contract-review world) and no outside pressure (US rules prevent private equity from getting into the business). Antiquated, if noble, feelings of professional ethics also rein in profit-maximizing efforts, as does the fact that the law draws people who aren’t, by nature, profit maximizers: Those people become investment bankers.

AI is a swift kick in the business model. I can’t think of an enterprise more vulnerable to this new technology, which can already do the day-to-day job of most of its people at a fraction of the cost but requires real investment and long-term planning.

“Why fix what isn’t broken?” went the thinking, Rachel Proffitt, the CEO of Silicon Valley giant Cooley, told me on the latest episode of Compound Interest. “But [AI] may force the conversation, to really ask ourselves, ‘is it in fact not broken?’” (Read more from that conversation below or listen here).

That was never going to last forever, and I’ve long suspected we’d see an effort led by more commercially minded firms to get the ownership rules changed. But now, there’s finally something to spend money on besides bonuses, and the legal world will bifurcate quickly into theose firms that can afford those costs like Kirkland, whose $500 million AI investment bogey has rattled competitors, and those that can’t. The latter camp will try to consolidate its way toward scale and financial security (we’ve got a scoop on one of those in today’s newsletter).

When I called Ryan Daniels, the co-founder and CEO of Crosby, an AI-native law firm, I expected to hear skepticism that big law firms could change — or even wanted to. But he said he’s been surprised at the urgency from firms like Kirkland and Cooley, which is building an AI-powered self-service portal for simpler legal work.

“What clients are really paying for is ‘this person seems to know what they’re talking about, and they told me it’s OK,’” Daniels said. “Everything else collapses to the cost of a token.” Firms that get there faster will win this round; the next round is a race to control the layer of good judgment on top.