44 ASIAN LEGAL BUSINESS – JULY 2024 WWW.LEGALBUSINESSONLINE.COM THE BACK PAGE PRICING AI-DRIVEN LEGAL SERVICES IS NOT ABOUT COST RECOVERY BY WILLIAM JOSTEN The legal market is rife with questions about how legal services will be priced as artificial intelligence (AI) becomes a more dominant force in how legal work is performed. Given the data that the Thomson Reuters Institute analyses and our expertise in the economics of law, hardly a week goes by without someone posing the question: “What impact is generative AI (GenAI) having on law firm billing?” The truthful answer is not much… yet. The biggest reason is that so much of this technology is new. Recall back to early 2023 and how infrequent conversations were around GenAI — then, an idea that was largely synonymous with ChatGPT, prior to the proliferation of large language models and tools we’ve seen since. It wasn’t until just a little over a year ago that the topic really burst onto the stage once ChatGPT was launched in November 2022. Product offerings specific to the legal market followed closely behind but were really only fully available in the later part of last year. Law firms must recognise that GenAI remains largely in a definitional period. Law firms and clients are still exploring exactly what GenAI is, what use cases it will most appropriately help, what risks users need to be cautious about, and more. No one is certain of the answers to any of these questions yet, but most legal industry observers are in agreement that the work being done today will lay the groundwork for what an AI-driven future looks like for the profession. Recovering the costs of AI technology For more than 30 years, law firms have engaged in the practice of recovering costs they ostensibly incur on behalf of their clients — costs that range from online legal research services to photocopies to long-distance phone calls. The costs of advanced AI technology should not be lumped into this category. Grouping AI in with items like long distance phone calls and photocopies applies a 30-year-old mindset to a brand-new technology. For the most part, clients have begun to largely obviate the question of cost recovery on their own through the implementation of outside counsel guidelines (OCGs). Law firms that choose to add their shiny new AI tech tools to their list of line-item disbursements risk having such tools treated similarly by OCGs. After all, the client would only be following the law firms’ lead in defining the value of the tools. However, none of these scenarios needs to be given an opportunity to become reality. It is up to law firms to determine how they choose to define the value of their new technologies. If law firms choose to focus on the value of the output — the speed of the result, the breadth of access to knowledge, both in word and deed — then clients will likely follow suit. Clients will also likely have a hard time arguing that a more comprehensive and faster answer to their legal issues is equivalent to a photocopy. That’s not to say that recovery of some costs is totally out of the question. I recently spoke to a gathering of highly experienced pricing professionals who were in full-scale agreement that, generally, AI should not be treated as a disbursement. However, they also agreed that if a particular technology had to be purchased for a particular matter or on behalf of a particular client and did not have broader application within the firm, such a purchase could reasonably be billed back to the client. However, in most cases in which the technology has broad application across the firm, these experienced pricing pros agreed that billing it back to the client would not be a wise approach. Indeed, one participant likened it to law firms adopting laptops. GenAI is simply the next evolution of necessary technology, and no firm would have considered applying a per-minute or per-login charge to a client’s bill for every time a lawyer used a laptop when working on a client’s matter. The impact of GenAI on law firms’ billing practices will likely be in an evolutionary state for quite some time to come. It is important, however, to begin that process on the right foot. Or, perhaps more aptly, not on the wrong foot. William Josten is Manager of Strategic Enterprise in Thought Leadership for the Thomson Reuters Institute. He consults with law firms nationally on issues related to law firm profitability, pricing, and cost recovery. A version of this piece was originally published by the Thomson Reuters Institute. Reprinted with permission. Asian Legal Business is seeking thought-provoking opinion pieces from readers on subjects ranging from Asia’s legal industry to law firm management, technology and others. Email ranajit.dam@tr.com for submission guidelines.
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