Cosmonauts
- The times are a-changin' for elite corporate law firms, under pressure to adopt new tech.
- Michael Gerstenzang, senior partner at Cleary Gottlieb, says firms must evolve their business model.
- He's seen firms adapt before. He once drove his firm to intentionally cannibalize its own business.
The billable hour has long powered Big Law's profits. Now, one law firm leader says artificial intelligence is putting that model under pressure.
Law firms are spending heavily on new tech as clients demand legal work faster and at lower cost. As software takes over more routine tasks, Michael Gerstenzang, the former longtime managing partner of Cleary Gottlieb, said firms will gradually move away from billing by the hour and toward pricing based more on speed and results.
The shift could also erode Big Law's traditional advantages of scale and staffing, he noted, opening the door for smaller, tech-savvy firms to compete.
"Clients aren't going to continue to pay first and second year associates these very high rates for due diligence," Gerstenzang said, if rival firms can do it better and cheaper with software.
In January, Gerstenzang ended a nine-year run as managing partner of Cleary Gottlieb, a white-shoe law firm of 1,100 lawyers. Through three terms at the helm, he guided the firm to over $1.7 billion in gross revenue and spun out a subsidiary that uses technology to handle routine legal work. His new role as a senior partner puts him closer to his firm's tech and innovation initiatives.
The threat to the billable hour
For decades, elite corporate law firms have relied on armies of associates and the billable hour to sustain high profit margins. The model bases pricing on a number of factors, including the hours logged to get the job done. "It creates a kind of incentive for inefficiency," Gerstenzang said.
He sees AI as the force most likely to change that. Routine work like M&A due diligence, he said, can be done better with software that can comb through data rooms and search for substance, not just keywords. He explains that his firm's tech-driven subsidiary, ClearyX, performs this work for about half the cost of traditional junior associates.
More importantly, he said the work is higher quality because, as he put it, "technology doesn't get tired, doesn't get distracted."
Cosmonauts
Cleary Gottlieb rolled out software from Legora, a fast-growing legal-tech startup, firmwide last year. The company's software can help lawyers review documents, compare contracts, perform research, and draft briefs. Cleary Gottlieb has also purchased a smaller number of rival Harvey's software licenses, among other tools for specialized practice areas.
Ultimately, clients want problems solved, and risks managed, and the hours a lawyer spends at a desk are no longer the right measuring stick for that output.
Gerstenzang believes the traditional billable hour will be replaced by a new market norm that emphasizes actual outcomes. Cleary Gottlieb is already using fixed fees and a subscription model for certain types of work. And while there is a lot of industry hand-wringing about what exactly replaces the hourly model, he dismissed the panic. "It's not like the laws of physics," he said.
Eat or be eaten
Law firms, he noted, that don't figure out how to execute the routine work better, faster, and cheaper using technology will find clients simply take that work elsewhere. He's seen it before.
In his second or third year as managing partner, a private equity firm and "serial acquirer" that routinely hired Cleary Gottlieb told the firm it was taking its due diligence work to a smaller, cheaper shop. Worried that other firms would siphon more work over time, Gerstenzang pitched his executive committee an idea: "Let's imagine the business that puts Cleary Gottlieb out of business, and then let's build that."
Cleary X is a non-law firm entity that offers lower-cost due diligence and contract review. Since its launch in 2022, it's grown to about 40 people who have worked on hundreds of corporate matters. The team uses a mix of off-the-shelf tools and custom software.
Building on that momentum, early last year, Cleary Gottlieb bought a small software developer, Springbok AI — a rare move for a law firm. The "acqui-hire," as Gerstenzang put it, added 10 data scientists and engineers to its staff.
For years, scale has been a major advantage in corporate law. The biggest firms could throw huge teams of lawyers at deals and justify the cost. But as software absorbs more of that labor, Gerstenzang said, smaller firms may be able to compete for work that once belonged almost entirely to the giants.
He pointed to litigation as a preview. Over the last two decades, technology has helped litigation boutiques challenge much larger firms by reducing the need for expensive law libraries and other overhead. He thinks corporate law could be next.
"We're going to have some new players that are not behemoths, but are the Davids versus the Goliaths," he said, "and they're going to be very successful."
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