The Rising Influence of AI on Cost Reduction in Legal Divisions

Corporate legal departments are increasingly leveraging the power of artificial intelligence to expedite their operations. These in-house teams now use AI-driven tools to formulate legal documents and assess contractual terms more efficiently than ever before. This internal elevation of efficiency is mounting pressure on their external law counterparts. Traditionally, legal expenses for outside law firms represent substantial outlays for most enterprises. However, AI is now enabling in-house attorneys to significantly curtail these expenses.

Consider the example of Doug Mandell, the chief legal officer at Inflection AI, a company specializing in chatbots. While developing a new data security policy, he employed a smart tool from GC AI, a legal technology startup. This AI solution processed his notes and background data to produce a draft policy. Mandell then edited it in Google Docs before approaching an external law firm for a final review. Earlier, Mandell would usually email external counsel with potential ideas, leading to prolonged billable hours. Now, he provides them with a foundation draft.

Mandell emphasizes that the role of external counsel isn’t eliminated, but the process is now optimized to the company's advantage. Despite AI's entrance in the legal domain, adoption remains uneven. Tools that boost attorney efficiency are not readily accepted by firms billing by the hour, while in-house teams see such tools as essential for improvement. Speed, rather than duration, is their measure of success because delays can result in lost deals or prospects.

Bogomil Balkansky, a venture capitalist with Sequoia Capital, discusses the evolving landscape. His firm has backed several legal tech ventures, explaining that the current climate pushes in-house teams towards rapid technology adoption, which streamlines tasks previously spanning days into mere minutes, transforming them into enhancers of speed rather than bottlenecks.

Today, many corporate legal teams have access to tools that prepare legal drafts, ensure compliance, and cross-compare agreement terms. These software solutions scrutinize contracts meticulously, ensuring alignment with internal guidelines and aiding negotiation strategies. This shift is compelling legal tech firms to rethink product development and marketing strategies.

Startups like Harvey have expanded from serving prominent law firms to catering to the internal legal mechanisms of large corporations, including Walmart, General Mills, and Bayer. John Haddock, Harvey's chief business officer, highlights enhancing in-house team effectiveness as their core aim, not substituting external counsel. The objective is to free up in-house teams from monotonous, labor-intensive tasks that consume valuable time.

Cecilia Ziniti, previously associated with Amazon and Replit and now heading GC AI, notes the dwindling of billable hours due to the implementation of AI tools. A survey revealed that 14% of legal teams witnessed reduced external legal spending post-adoption, with GC AI increasing its yearly income remarkably.

At companies like Gusto, AI is ingrained in routine legal functions. Dina Segal, their chief legal officer, manages a team using AI to stay informed of the constantly changing landscape of employment laws and benefits. This tech-mediated vigilance allows legal experts to invest more time in advisory capacities instead of endless rule monitoring.

Gusto's engagement with outside legal advisors is reserved for critical, intricate strategic moves. Even in such instances, discussions are well-informed by existing regulatory analyses, allowing a more informed starting point rather than beginning from ground zero. Segal attests to the substantial productivity gains this approach yields.

The accelerated pace of in-house legal departments is subtly setting new standards for the external firms they collaborate with. Many general counsels are currently evaluating potential law firms on their AI utilization before finalizing partnerships.

This shift is occurring amidst stagnant or decreasing budget forecasts. A recent Thomson Reuters survey highlights this, noting that a mere 35% of large enterprise general counsels plan for increased legal expenditures in the coming year. This situation forces clients to make profound decisions about which firms deserve their investment.

Mandell of Inflection AI insists on knowing the crucial boundary: he's willing to pay for astute legal insight rather than routine document reviews. In critical scenarios demanding decisive judgment, his faith remains in human expertise, despite AI's growing footprint.