Wall Street giants like Goldman Sachs, Morgan Stanley, and Citigroup are demanding that elite law firms cut their fees, citing the transformative impact of artificial intelligence on legal work. These banks contend that AI has sharply reduced the time and effort required for "gruntwork" such as legal research, document review, and contract analysis, tasks previously performed by junior associates on an hourly billing basis. This pressure from major clients challenges the long-standing "leverage model" of Big Law, where firms maximize profits by billing extensively for the hours of junior lawyers.
Citigroup's global head of legal, Adam Meshel, stated that if AI reduces the hours spent on a matter, the bank expects a significant decrease in costs per transaction. He indicated that Citigroup is already modifying its bidding process for legal services to include inquiries about how firms are leveraging AI for cost savings. Similarly, Morgan Stanley's general counsel, Eric Grossman, believes that AI fundamentally alters the revenue foundation for mega law firms, making their traditional compensation model "extraordinarily unstable." Grossman noted that while the bank is willing to pay for top legal talent and judgment, most external legal work will soon be tendered through competitive bidding and alternative fee arrangements, such as fixed fees.
This shift comes as hourly billing rates for associates at major U.S. law firms surged, with average rates hitting $798 this year, a 33% increase since 2023. Partner rates also rose by 29% in the same period. While some law firms are beginning to adjust their pricing models, with a recent survey by Citi's law firms group showing that almost half of large firms have seen AI impact their pricing, a majority (58%) have not cut rates, and 34% are actually charging more. This indicates a growing tension between clients seeking to capitalize on AI efficiencies and firms aiming to retain productivity gains as increased margin. Ford's general counsel, Steven Croley, also mentioned the carmaker is hiring more in-house lawyers and bringing legal work internally where AI makes it more cost-effective, further reducing reliance on external firms.
