Generative AI’s challenge to legal sector’s alternative providers

Companies’ in-house lawyers have long allocated high-volume, low-value tech-based work to legal service providers rather than to fully-fledged law firms — because doing so has been cheaper and more efficient. But, now, generative AI looks set to change the economics again, and affect these alternative providers as much as the rest of the industry.

New artificial intelligence tools are already disrupting the former disrupters, by enabling clients of so-called alternative legal service providers (ALSPs) to bring more of their work in-house. This, in turn, is starting to influence the nature of the work being outsourced to the service providers and their pricing models. There is a sense that generative AI could render unprepared providers obsolescent.

Luis-Xavier Hernandez, group general counsel for beauty and wellbeing at Unilever, says the global consumer goods company has already deployed more than 400 AI systems across its whole business and the legal team is planning to use the technology to deliver services to the organisation in a more “efficient, simplified and digitally enabled way”.

Unilever has set up dedicated teams in Bengaluru, Mexico City and Barcelona that are “equipped with generative AI tools and are made up of lawyers who are responsible for a range of diverse legal tasks”, Hernandez says. Unilever’s own lawyers and legal tech experts have already increased efficiency and streamlined work practices, he adds.

Bringing more legal tasks in-house has generated immediate benefits in terms of cost, quality, engagement and speed

By bringing more of these tasks in-house, the group is relying less on the alternative legal service providers for contract drafting and negotiation, social media compliance audits, and certain intellectual property and privacy-related matters.

That has generated “immediate benefits in terms of cost, quality, engagement and speed”, says Hernandez. In managing contracts, for example, he cites cost savings of between 60 per cent and 80 per cent, and says the speed of getting the work done has increased by 25 per cent.

At US-based law company Elevate, chief executive Liam Brown and innovation vice-president Pratik Patel say they are watching the use of generative AI tools by companies’ in-house legal teams to assess whether it could eliminate the need for outside service providers. But Elevate is not going to rush into reinventing what it offers, adds Patel.

As one of the largest alternative legal service providers, with $100mn in revenue in 2023, the company is content to adopt “a second-mover approach” that will yield the best results in the long term, he says.

We will pick the right race cars

Generative AI tools will be a critical component of delivering legal services at all levels, Brown and Patel believe. But, with the technology advancing so quickly — “it literally changes every month”, says Patel — Elevate aims to preserve its position of being “trusted by household brand corporations and law firms”.

To do this, the company will study the generative AI tools that emerge and then “pick the right race cars”, Patel explains. The aim is that it can eventually provide the “race car drivers” for any tool that clients choose.

The strategy involves employees becoming knowledgeable about as many AI tool iterations and applications as possible — “instead of jumping head first into any one solution too soon”.

This considered approach is also favoured by Ed Sohn, who leads the innovation team at Factor Law, a 10-year-old alternative legal services provider that employs more than 450 lawyers, contract experts, technologists, and process consultants.

In February, Factor Law launched The Sense Collective, a collaborative effort with a group of in-house legal teams to explore generative AI. The initiative’s aims include: to establish best practices and objectives for generative AI tools; to develop enthusiasm and skills among employees as prospective users; and to update a list of any new tools that developers are creating and introducing.

The best alternative legal service providers should be getting ahead of impact on workloads

Factor Law hosts the initiative and has invited general counsel from businesses such as Intel, DXC Technology, Microsoft, Adobe, CrowdStrike, Ford, and Anglo American to participate.

Since it launched, earlier this year, Sohn has visited the legal leadership team of 13 of the venture’s 17 corporate members. Generative AI is going to have a big impact on the workloads of alternative legal service providers, he acknowledges. “And the best ALSPs should be getting ahead of that,” he argues.

The legal services market was already evolving in response to in-house teams’ demands for greater efficiency, Sohn points out — and generative AI tools will act as “a catalyst” on those trends.

But Sohn also predicts that the tools may lead to more opportunities, and more work overall, because they will greatly increase the amount of data available, and work at higher speeds.

That likelihood was driven home for Varun Mehta, Factor Law’s chief executive, during a recent conversation with the chief investment officer of a large New York private equity firm. Mehta says the executive told him that the firm expects the 100 deals it reviewed last year will multiply to 500 this year, and those deal reviews will cost 20 per cent to 80 per cent less — all thanks to generative AI tools.

“Each one of those deals is going to need a [non-disclosure agreement] . . . [and] a side letter or an engagement letter,” Mehta notes. And that work will have to be assigned somewhere, he explains, whether in-house or to an alternative legal service provider.