Today, Thomson Reuters, and the Center on Ethics and the Legal Profession at Georgetown Law has released the 2024 Report on the State of the US Legal Market.
The report opens with the sobering tale of the collapse of Pan American Airways because leaders stuck with an old strategy and failed to pivot as more nimble competitors emerged and an oil embargo changed the economics of international travel. We have seen this executive paralysis and failure to recognize the emergence of a market disruptor repeatedl: Kodak, Blockbuster, Swiss watchmakers … the theme documented in Clayton Christensen’s book “The Innovator’s Dilemma.”
The report continues the warning by noting how several fundamental shifts in the market threaten to upend traditional law firm business models, most notably the emergence of Generative AI. Law firms continue to inflate the rates balloon and clients wield market power in demanding higher discounts to deflate the increases.
Shifting market factors include:
• Legal work continues to move down-market towards smaller firms as clients seek greater efficiency and better value-to-cost balance.
• Clients are increasingly enforcing budget caps and Outside Counsel Guidelines (OCGs) to reduce costs.
• Transactional practices, which fueled much of the legal market’s growth in recent years, have seen demand slowing in favor of counter-cyclical practices. Transactional practices include corporate work such as M&A, as well as real estate and tax. Counter-cyclical practices, such as litigation, bankruptcy, and labor & employment, tend to perform better in difficult economic conditions. Demand for litigation, in particular, was up 3.2% through the end of November, reaching a 15-year high.
• Rapidly rising rates are being offset by lower realization and higher expenses, challenging profitability, although expense growth is slowing.
Generative AI Scenarios
If you only read one part of the report, skip ahead to the hypothetical generative AI scenarios.
The Win-Win 1. It significantly enhances both client value and law firm profits by increasing efficiency and reducing costs for firms, and enabling higher-quality advice, faster service, and more creative solutions.
Clients Win 2. Clients derive a disproportionate share of the benefits of generative AI by getting greater leverage in competitive pricing and an increased ability to bring work in-house.
Meh 3. Generative AI finds utility in law firm areas such as knowledge management and search, as well as operations, marketing, IT.
The report accurately notes that we are in the early days of AI adoption. Most firms are still grappling with an array of ethical and client disclosure issues which accompany any adoption of Generative AI. However the report warns leaders against ignoring the potential disruption to the traditional law firm business models.
Download the 2024 Report on the State of the US Legal Market here