Wall Street banks are pushing large law firms to cut fees, arguing that the business model that has enriched top lawyers for decades is not sustainable in an era of AI.
Morgan Stanley and Citigroup have told major law firms they want to set up new payment arrangements that would save them money, the banks’ in-house lawyers told the FT.
Goldman Sachs had asked law firms how much the technology was saving them and expected to share in those benefits, according to two people with knowledge of the matter.
The pressure from some of Big Law’s most valued clients could help overturn the financial model at the heart of the legal industry. Under the so-called leverage model, firms maximise profits for equity partners by billing hourly for work done by large numbers of more junior lawyers, often working late into the night at rates that far outstrip the cost of their salaries.
Much of that work, such as research, document review, assessing contracts and trawling through litigation discovery, can now be done far more quickly using AI.
“If the number of hours they’re working on a matter has come down because of AI . . . our expectation is for costs to come down significantly per transaction,” Adam Meshel, global head of legal at Citigroup, told the FT.
He said the bank had started asking law firms to bid for work, explaining during the bidding process how much they were saving using AI.
A “different working model” based on that approach would probably be in place within a year, Meshel said, adding that he wanted it to be worked out collaboratively so that it would work for both the bank and its outside lawyers.
Top lawyers have “for a long time been compensated on the foundation of [associates billing for long hours],” Eric Grossman, Morgan Stanley’s general counsel, told the FT. “Their compensation model is now extraordinarily unstable.”
The ability to complete tasks more quickly could mark “a fundamental altering of the revenue foundation for these mega firms”, he said.
Grossman said the bank was willing to continue to pay large sums for the judgment and talent of the best lawyers, but that by the end of this year most external legal work would be tendered through competitive bidding processes and paid for using alternative arrangements such as fixed fees.
That should cost the bank less, he said, but law firms could remain as profitable as before if they use AI to work on more matters and reduce costs.
Goldman Sachs asked law firms for information about how much more efficiently they were able to complete tasks because of AI, people with knowledge of the matter said. The bank declined to comment.
Hourly fees at top law firms have surged in recent years, in part to finance a war for talent in which they have poached rivals’ star partners with eye-watering pay packages.
Average hourly billing rates for associates at the largest US law firms hit $798 this year, up 33 per cent since 2023, according to the legal technology company Persuit. The rate for partners has risen 29 per cent in the same period.
Wall Street banks are among Big Law’s most important clients because of their scale and the range of tasks for which they need legal advice, from navigating the close regulation of the banking industry to dealing with everyday financing transactions, litigation, white-collar investigations and M&A.
Almost half of large law firms said AI had already affected their pricing model, according to a survey carried out this year by Citi’s law firms group, a unit of the bank that serves lawyers and firms.
So far, “it’s around the edges”, said Gretta Rusanow, head of advisory services for the law firm group. “We’re not yet seeing a formalised, firm-wide shift towards alternative fee arrangements, but it is likely to come,” she said.
“We’re likely to see more of a hybrid approach . . . [with] fixed fees for routine work and the billable hour for more complex work.”
Some law firms have already started hiring fewer new graduates than before. Forty-seven per cent saw a smaller intake of summer associates — the entry ticket to Big Law jobs — this year than last, the Citi survey found, and 49 per cent will have a smaller class next summer than this year.
However, some law firms expect associates to continue working long hours on matters despite the use of AI.
“Some tasks are low-hanging fruit, you can do [them] more quickly now,” said Sam Newhouse, global vice-chair of Latham & Watkins’ M&A and private equity practice.
“But what do you do when you’ve done that? A lot of our sophisticated clients are using the extra time and the extra data . . . to their strategic advantage. If you’ve got a chance to go through every merger agreement that ever existed and work out what position have people taken . . . it helps them strike better deals.”
Concerns about legal bills in a world of AI have rippled out into other industries too. Steven Croley, Ford’s general counsel, told the FT the carmaker was hiring more in-house lawyers and doing more legal work internally in circumstances where AI makes it cheaper to do so, reducing its use of outside law firms.
While law firms were using AI, he said, “it’s not showing up in billing relief or greater efficiencies that are obvious to us as their clients”.
He said AI would probably upend Big Law’s business model. “The pyramid economic model [of law firms], I would not bet on that,” he said. “It will be a shock, it will be a shift of the tectonic plates.”
Additional reporting by Akila Quinio
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