Three of Wall Street's largest financial institutions are pushing elite law firms to reduce their hourly billing rates, arguing that artificial intelligence is significantly decreasing the time and cost associated with routine legal tasks. Goldman Sachs, Morgan Stanley, and Citigroup are pressing their outside counsel to cut expenses as AI accelerates work in areas such as legal research, document review, and contract analysis.
Adam Meshel, Citigroup's global head of legal, stated that if AI reduces the number of hours lawyers spend on a case, the expectation is for costs to decrease proportionally. Citigroup has begun requiring law firms bidding for its business to detail their AI-driven savings. Meshel anticipates a "different working model" will be in place within a year, emphasizing a collaborative development of new arrangements with external lawyers.
Morgan Stanley plans to put most of its outside legal work out for competitive bids by the end of 2026 and explore alternatives to hourly billing, such as fixed fees. According to General Counsel Eric Grossman, the firm's compensation model for top legal partners is becoming "extraordinarily unstable" due to AI's impact on the traditional business model, which often relies on billing by the hour for large teams of junior associates.
Grossman noted that AI's ability to expedite legal work could fundamentally alter the revenue structure of major law firms. However, he also indicated that Morgan Stanley remains willing to compensate leading attorneys for their specialized judgment and expertise. Firms, he suggested, could maintain profitability by leveraging AI to handle more cases while simultaneously reducing their own operational costs, even as clients pay less.
Goldman Sachs has also inquired with its outside law firms about the efficiency gains realized through AI and expects to benefit from these improvements. Data from Citi's law firms group indicates that nearly half of large law firms surveyed this year have already seen AI affect their pricing strategies.
Experts suggest that while measuring every minute saved by AI may be challenging, law firms can compare matters based on overall hours, staffing, turnaround times, and costs. Major banks possess sufficient purchasing power to demand such metrics and incorporate them into competitive bidding processes. The increasing efficiency of AI in legal work is expected to drive a reassessment of the billable-hour model, as clients are unlikely to continue paying for services that can now be completed in a fraction of the time.
This shift occurs as hourly charges at large law firms have seen a significant increase. Since 2023, associate rates have climbed by 33% to an average of $798 per hour, with partner rates increasing by 29% during the same period, according to data reported by the Financial Times. Wall Street banks are crucial clients for these firms, utilizing their services for a wide range of matters including financing, mergers and acquisitions, litigation, and white-collar investigations.