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| Aebra Coe covers large law firm business for Law360 Pulse |
The concern is that AI will lead to efficiency gains and as a result, law firms' net hours could suffer and revenue could decline if the billable hour model isn't adjusted or done away with completely, said Jim Roney, a managing director at investment bank Piper Sandler, which provides services for law firm MSO deals.
"PE firms are looking at the billable hour and they're concerned that it may not be durable because of AI," Roney said.
Personal injury law firms, which rarely bill by the hour, have been a common target for private-equity firms dipping their toes into investing in law firms via management services organizations or MSOs.
Some recent MSO investments include those made into the management services of personal injury law firms Rafi Law Group, Hughes & Coleman Injury Lawyers and Dudley DeBosier Injury Lawyers.
Global investment firm Blackstone took a different tack, investing last November in Norm AI, which is affiliated with corporate and financial services boutique Norm Law. Norm Law, which was founded by former BigLaw firm partners, bills itself as an AI-native law firm and charges based on client outcomes rather than the billable hour.
Rimon Law, another law firm that accepted an investment for its back-office operations in 2021 — long before peer firms — also relies heavily on alternative-fee arrangements.
Looking at the broader expanse of law firms that represent companies of all sizes, the billable hour is the dominant method used to charge clients. A recent report by LexisNexis' CounselLink found that alternative fee arrangements account for 6.3% of total spend by corporate clients.
Additionally, billing rate hikes have been a driving force recently in significant increases in law firms' revenues and profits.
Law firms have regularly posted annual demand increases of between 1% and 3% in recent years, while lawyer productivity has fallen. At the same time, annual billing rate increases have hovered around 10%, according to reports from Wells Fargo Private Bank's legal specialty group.
"What AI introduced could be a fundamental change to the practice of law and law firms' economic engine, the billable hour," said Chris Batz, an adviser on law firm MSO deals, referring to the potential efficiencies that could reduce hours billed.
Some private equity firms, however, see an opportunity to guide law firms through the transition to alternative fees as needed with the advent of AI, said Lee Minkoff, a managing director on the investment team at Renovus Capital overseeing its professional services vertical.
Often, private-equity investors work with organizations to streamline their operations, introduce new technologies and find new ways to generate revenue, said Scott Mozarsky, co-CEO of investment bank Jegi Leonis.
"Private equity and other financial sponsors, where they like to come into a situation at an organization is where that organization is at a bit of an inflection point," Mozarsky said.
Hunton Andrews Kurth investment and M&A partner Austin Maloney said all the private equity firms that he's spoken to about opportunities in the law firm space have expressed that there are efficiencies to be gained in BigLaw, whether that's through technology, billing changes or other methods.
Many believe, though, that plotting a predictable map for BigLaw is "complicated by the looming threat of AI and how that shakes out," Maloney said.
"I've talked to investors on both sides of that coin," he said. "Some are bullish on AI as an accelerant to BigLaw as an investment. Some are, I don't know if bearish is the right word, but want to be more in a wait and see mode."
Viewpoints of the six people who spoke to Law360 Pulse for this article on what the future holds for the billable hour varied from "it will be dead in 10 years" to "it will be here when our grandchildren are practicing law." However, everyone agreed that with AI it is likely there will be a shift away from the current levels of reliance on hourly billing.
Many private-equity firms are not hesitant to invest in the MSOs of general practice law firms, and in fact are eager to do so, said Crispin Passmore, a consultant who works on MSO deals.
"Does it lead to investors hesitating? I don't think so," Passmore said. "But they want to have a thoughtful answer. Firms need to have a thoughtful answer around AI [and how it impacts their business model]."
Roney echoed that sentiment, saying that while it's a consideration, it's not a dealbreaker for many of the investors he speaks to.
"There are plenty of big, credible private equity firms that can buy law firms [via an MSO] that are ready to do it yesterday," Roney said.
The Bottom Line is a column by Aebra Coe. The opinions expressed are those of the author and do not necessarily reflect the views of Portfolio Media Inc. or any of its respective affiliates.
--Editing by Alex Hubbard.
For a reprint of this article, please contact reprints@law360.com.
