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01 March 2020

Advances in artificial intelligence fuelling law firm profitability fears, survey finds

Poll of top UK law firm finance directors identifies advanced tech as top three threat to profits

By Dr David Cowan

Photograph of the City of London

The City of London: top law firm financial directors are worried about the impact of AI advances on their business Shutterstock

More than one in four large UK law firms believe advances in artificial intelligence (AI) and machine learning pose a significant threat to their profitability, according to research published today.

The survey of 25 financial directors at top 100 UK law firms by Thomson Reuters found 28% identifying AI and machine learning as a profitability risk making it their third-highest concern behind ‘downward pressure on fees from clients’ (46%) and ‘competition between law firms over fees’ (39%).

Other factors causing high levels of concern are credit risk of clients (26%) and Brexit (24%) – although the UK’s exit from the EU is also identified as a growth area for legal work, alongside IP and privacy.

The challenge from Big Four accountancy firms, however, remains a relatively low-level threat (8%) in the eyes of FDs while the financial impact of the spread of the coronavirus wasn't included in the research.

Samantha Steer, director of large law strategy at Thomson Reuters, said: “Properly deployed, AI should allow law firms to both lower their cost base and win new work.

“However, law firms also know that not all of the investments that they make in developing AI technology will necessarily produce a return, and talent in this area is expensive. That makes some firms nervous about building software from scratch themselves.”

Asked how they were most likely to respond to a profitability squeeze, the most popular measure - chosen by 69% of the respondents - was cutting unprofitable services, up from 42% looking to make cuts five years ago.

More than half the respondents (56%) would be likely to put more work through junior staff to improve profitability while half (50%) would use technology in more areas of their business. 

Just under half (47%) would be likely to make lateral hires of senior teams from rival firms.

IP, GDPR and Brexit were identified by the respondents as the most likely areas of legal work to grow -  chosen by 57%, 56% and 47% of the respondents respectively - while construction (25%) and commercial property (40%) were most likely to decline, according to the research. 

The number of respondents expecting IP work to increase in the next year was up sharply from just 8% last year as areas of tech innovation such as electric cars, autonomous vehicles and AI continue to generate record levels of patent applications and other IP work.

The expected rise in privacy work comes against the background of mounting GDPR fines imposed by regulators across the Europe.

Research published by DLA Piper in January found that EU regulators had so far imposed fines of €114m for GDPR breaches.

Last week, UK top 50 firm Kennedys spun off its AI-powered claims management services into a separate vehicle, Kennedys IQ

Further reading on AI

More women must enter male-dominated legal tech to guard against AI bias, conference hears

EU unleashes ambitious AI regulatory agenda 'to make tech optimists of us all'

Law firm investment in automation lagging behind other sectors, survey finds

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