Implications & Opportunities of AI & Blockchain Technologies on the Legal Industry

“Of the many diverse and fascinating challenges we face today, the most intense and important is how to understand and shape the new technology revolution, which entails nothing less than a transformation of humankind. We are at the beginning of a revolution that is fundamentally changing the way we live, work, and relate to one another. In its scale, scope, and complexity, what I consider to be the fourth industrial revolution is unlike anything humankind has experienced before.”- Klaus Schwab, Founder & Executive Chairman, World Economic Forum[1]

 Digital Transformation – The Fourth Wave

           Over the past decade, global enterprise has entered what many economists, scientists, developers, politicians, and industry leaders recognize as the “fourth industrial revolution,” or what Klaus Schwab, the Founder and current Executive Chairman of the World Economic Forum, describes as emerging technologies that “are drastically altering how individuals, companies, and governments operate, ultimately leading to a societal transformation similar to previous industrial revolutions.” The first industrial revolution, marked by the invention of the steam engine and the beginning of industrialization, eventually enabled the mass production of goods and services (the second industrial revolution), followed by the founding of the information age through the rise of digital technology (the third industrial revolution).

           Today, the third wave is powering a new technological revolution of emerging fourth wave transformational vectors, including artificial intelligence (AI), robotics, IoT, and blockchain, blurring the lines between the physical and digital spheres. According to Schwab, there are three distinct factors or characteristics that shape the fourth transformation. These characteristics include: 1) velocity (the fourth wave is “evolving at an exponential rather than a linear pace”), 2) breadth and depth (combines “multiple technologies that are leading to unprecedented paradigm shifts”), and 3) systems impact, which involves “the transformation of entire systems, across and within countries, companies, and industries.[2]

    The rapid pace at which disruptive technology is changing entire sectors of the global economy reflects the premise of Moore’s law, developed by the co-founder of Intel in 1965. Moore’s law states that the advancement of the microchip every two years will create more capacity, allowing us to operate faster and more efficiently for half the cost of the prior period. In addition to velocity, Moore’s law is reflected in the reduced time required for new technologies to penetrate markets and achieve mass adoption, or the breadth and depth outlined by Schwab. Emerging technologies, including AI and blockchain, reflect all three characteristics of the fourth revolution and have the power to transform enterprise, including the professional services sector and legal services industry.

Given the velocity and breadth/depth of disruptive change, law firms must identify the implications and opportunities of AI and blockchain technology integration, to be prepared to shift with the market and maintain a competitive advantage in three areas: 1) internal efficiency and productivity, 2) talent acquisition and management, and 3) client service.

AI Implications & Opportunities

           Globally, law firms are recognizing the essential importance of AI integration, specifically machine learning (ML) and predictive analysis (PA), to garner insights, alleviate internal and external pain points, and operate more competitively through increased efficiency and effectiveness. According to Statista, approximately half of law firms worldwide are actively engaged in exploring AI/ML integration, have one or more AI/ML tools in production or pilot project in place, and/or have a defined group within the firm that is testing AI/ML solutions. At the same time, there has been a significant increase in investment in legal technology companies and platforms focused on leveraging AI/ML to automate certain functions or supplement core activities within the legal services environment. Between 2017 and 2018 alone, investment in integrative legal solutions utilizing AI increased 76.6%, from $233 million in investments distributed across 61 deals in 2017 to more than $1 billion invested across 40 deals in 2018.

           Although still in the early stage of testing and adoption, the firms that will maintain a competitive edge once mass adoption occurs are already leveraging ML applications, to improve internal efficiency, productivity, and reduce the opportunity cost of time-consuming, repetitive functions. For example, AI-enabled speech recognition software has the potential to save attorneys and professional staff hundreds of hours by automating daily transcription requirements. Automating this task could be especially beneficial within litigation departments or other regulatory-heavy practice areas that demand a high volume of form-filling and filing. Time saved by automating, or partially automating, this activity can be re-assigned to other areas that generate value and revenue for the firm, including client relations or new business development initiatives.

           ML software capable of streamlining workflow (particularly research projects) is another application with the potential to increase attorney and staff productivity and positively impact the bottom line by re-capturing billable hour time. Instead of relying on staff to sort or search manual or digital files, AL-enabled software can be used to identify, pull, and send relevant information. For example, when documents are scanned, “AI-enabled software can automatically route them to the appropriate destination or person based on pre-programmed parameters such as a client or case number.”

           AI-enabled software can also be applied to address a primary concern in the legal services industry, which is the secure storage and protection of client data and IP. The digitization of client files and migration to cloud-based storage systems during the third transformation initially raised many questions and privacy concerns from practitioners, association leaders (including the American Bar Association and State Bar Associations), and legislators regarding the privacy and protection of personally identifiable information (PII), as legal professionals are mandated to ensure that all client information isn’t just securely stored but also securely managed, internally and externally.

While cloud-based document and data management is now widely accepted, AI can enhance security by systemically identifying and categorizing sensitive or privileged information through automatic key-word searches, preventing the unintended public distribution or sharing of information with unauthorized parties or opposing counsel. The unintentional sharing or transmission of privileged information and PII is a risk for all law firms, from both a malpractice as well as brand management/reputation perspective. Firms can use AI-enabled software to prevent this scenario, essentially reducing risk and avoiding the time and resources consumed (and productivity lost) when having to mitigate a crisis after it’s already occurred.

           For a firm to realize the benefits that come with improved AI-enabled efficiencies and productivity, successful autonomous integration requires shifts in workforce development and talent acquisition processes. According to a recent PwC report, one of the greatest risks for firms seeking to integrate AI/ML is not learning from “failed tech transformations,” which typically occur for two reasons. First, from an operating perspective structurally or culturally, members of the firm are accustomed to working in silos. Second, integration and ownership processes are assigned to a particular department instead of being distributed and embedded throughout the firm.

           For AI/ML integration to become a point of differentiation and advantage for firms, collaboration among different teams and departments (depending on the solutions application) will be required, as each will be responsible for understanding the algorithm, and knowing how to interpret the results. To ensure standardization and consistency, firm managers must take a multidisciplinary approach through the facilitation of cross-departmental training and collaboration. In this scenario, organizations and firms “will have to think less about job titles, and more about tasks, skills, and mindset, which means embracing new ways of working” and, therefore, new approaches to workforce makeup and development.

           One of the benefits of engaging this process during the early adopter phase is workforce readiness when mass adoption and full systems impact phase occurs. According to Dr. Stephanie Tellex, Assistant Professor of Engineering at Brown University and expert on human-robot collaboration, while increased autonomous processes will eliminate some jobs, if employees are retrained to become more skilled workers, it can also boost firm productivity.[3] By investing in AI/ML technology and training, employees have the opportunity for upward mobility into higher-skilled positions, and the possibility of then generating higher returns for the firm, and increased value for firm clients.

           For example, if a paralegal that typically bills at $90/hr. is able to recover ? of a workday by leveraging autonomous systems to complete administrative tasks, those hours can be re-allocated to work on higher rate, substantive client matters or communication. The increased capacity of the paralegal also increases the capacity of the billing attorney, who can now assign work to the paralegal at their lower rate. The upside of the increased value generated for $180 is passed to the client, and the attorney has increased capacity to work on matters for other clients with higher fee structures, higher customer lifetime value (CLV), or focus on other revenue-generating activities for the firm. The increased value generated for the client also supports client retention, which is essential to maintaining an advantage in a saturated and competitive legal market, especially for high CLV clients.

           Converting potential job losses into opportunities for shared value among the firm, its workforce, and its clients through AI/ML integration also advances firm CSR, especially for law firms registered as B-corporations. Certified B-Corp law firms, which are growing in the US, are required to demonstrate a commitment to “people” and “planet” in addition to profit by ensuring that firm practices are in alignment with social values, and a reduced impact on the environment. With its focus on “people,” B-Corp law firms are well-positioned to emerge as industry thought leaders by demonstrating how AI/ML integration can be leveraged not only to prevent job loss but fuel job promotion. This will be an increasingly important role as approximately 47% of US jobs are at high risk of automation in the next 20 years, the majority of which are in the professional services sector. Research conducted by Muniz indicates that wages have maintained stagnant in the US since 1973, despite increased productivity, due to technological advancements replacing jobs faster than unskilled workers can be retrained. Creating shared value through AI/ML integration is an opportunity for firm differentiation by preventing and mitigating/off-setting the broader economic impact of job losses and wage stagnation due to autonomous technologies.

           In anticipation of Schwab’s assertion that the fourth revolution will result in the transformation of “entire systems, companies, and industries,” firm talent must be trained on the impact of AI solutions for enterprise. Attorneys and professional development staff should be well-versed on the disruptive potential and relevance of AI/ML applications as it relates to their specific practice areas, the industries within which their clients operate, and anticipated shifts in the regulatory environment. Attorneys that already have experience with AI/ML applications in their daily operations will have a value-add advantage when counseling clients on the legal and regulatory considerations for their businesses. However, as the sector continues to grow, clients will eventually expect counseling on AI/ML practices to become standard service. AI funding investment in the United States has grown from less than $1B in 2011 to more than $9 billion in 2018. According to PwC, 67% of executives believe that AI will “help humans and machines work together to be stronger using both human and artificial intelligence,” and as of 2018, 54% of executives surveyed, across industries, indicated that AI solutions implemented in their businesses had already increased productivity.

           Due to the speed at which advancement and adoption are outpacing emerging technology legislation and case law, there is also an opportunity to identify talent (either through in-house development, lateral hiring, or both) capable of setting legal precedent in this area, to position the firm as an industry leader and capture market share. Identifying talent (in-house or lateral) with an academic or business background in AI/ML, existing book of business, and the potential to establish a new practice area within the firm should be considered. This new practice group should maintain a cross-servicing function within the firm as it relates to emerging technology trends, applications, and ongoing training and professional development for in-house attorneys and staff.

Blockchain Opportunities & Implications

           Blockchain is another disruptive technology transforming companies and industries, including the legal services sector. Within the next three years, the size of the blockchain market globally is expected to achieve 800% growth, hitting $23.3 billion by 2023, underscoring the three dimensions of the fourth transformation. The United States, which holds 40% of worldwide investment in blockchain technology, is expected to register double-digit growth by 2023 as several states move toward the legalization of Bitcoins and private investment in applications for government and enterprise continues to drive the sector.

     In the past decade, the opportunities of blockchain integration have extended beyond cryptocurrency, due to its potential to make business operations more accurate, efficient, transparent, and secure.[4] According to a recent study by Deloitte, nearly one-third of professional services firms anticipate investing $5 million or more in blockchain initiatives over the next twelve months, as “momentum has begun shifting from ‘blockchain tourism’ and exploration toward the building of practice business applications.”[5] In the same study, 53% of firms responded that blockchain technology has become a “critical priority for their organizations in 2019,” reflecting a 10-point increase over 2018, and 83% responded that they saw “compelling use cases for blockchain,” up from 74% in 2018. The opportunities and implications of blockchain technology as it applies to the legal industry include how firms serve clients, and how the firm is managed in terms of efficiency and productivity and talent acquisition and professional development.

           As blockchain becomes standardized practice, particularly in transactional environments, the firm needs to stay abreast of changes in the regulatory landscape to serve clients across various industries effectively. Understanding the value and process of blockchain integration is especially important for the long-term satisfaction and retention of clients operating in the fin-tech space (currently leading the industry in both adoption and investment), or whose operations involve complex supply chains. These clients will require their counsel not only to be conversant in the technology, but to know which laws apply to blockchain depending on whether the application is for internal operations, or a “smart contract” to manage external 3rd party transactions.

           While enterprise adoption and integration are currently outpacing regulatory or legislative recognition in most states, engagement in the space is essential for the firm to remain competitively positioned post-adoption when this gap is reduced, as the impact of blockchain on clients’ business interests is inevitable. Some states are already addressing regulatory barriers to blockchain integration, including Delaware, which just recently passed a law that now allows corporations to list shareholders and other corporate records on the blockchain. The legislation was a significant development as it relates to the breadth and depth dimension of the fourth transformation as Delaware incorporates more than two-thirds of Fortune 500 companies.

           It is in the firm’s interest to identify lateral talent hires with experience in smart contracts to establish a practice within the firm that can cross-service clients, and serve as a professional development resource for attorneys within other practice groups. While the adoption of smart contracts will reduce the time required for an attorney to draft a traditional contract, oversight and representation will still be required, including in matters that lead to the need for dispute resolution. The time saved representing clients using smart contracts can be re-allocated to more productive or higher revenue-generating activities or client matters. As smart contracts have the potential to reduce the need for complex litigation (due to the fixed, un-editable nature of the record and full transaction history), there is also an opportunity to develop or acquire attorneys interested in developing a mediation practice, to capture share of what is likely to be a growing segment of the legal market due to smart contract adoption.

[1] Schwab, Klaus. The Fourth Industrial Revolution. Crown Business Publishing, 2017.

[2] Schwab, Klaus. The Fourth Industrial Revolution. Crown Business Publishing, 2017.

[3] Tellex, Stephanie. “Learning Models of Language, Action and Perception for Human-Robot Collaboration.” Brown University Lecture, 2019.

[4] Herlihy, Maurice. “Blockchain and the Implications for the Future of Work.” Brown University Lecture, 2019.

[5] Herlihy, Maurice. “Blockchain and the Implications for the Future of Work.” Brown University Lecture, 2019.