Wall Street banks push Big Law to cut fees because of AI

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.