A&O Shearman invests $1.1bn in AI

A&O Shearman will invest $1.1bn in its artificial intelligence strategy over the next five years, as law firms jostle to come out on top in an AI arms race.

The “magic circle” law firm told the FT that partners had committed to the investment this autumn, the majority of which will come from each practice spending at least 3 per cent of billable time on building AI tools for their area of law, as well as funds for the technology.

Practice heads will be able to decide how the 3 per cent target is delivered, either assigning people to work on it full time or spreading it across associates and partners. The firm will monitor each practice’s hours to ensure the commitment is met.

David Wakeling, global head of AI at A&O Shearman, said that this was not about telling everyone to “use AI more” but “redesigning the service completely”.

“We think it is a mistake to chase the latest AI model constantly or to get a thousand AI models . . . it’s all about leveraging teams of lawyers’ expertise into specific AI systems that team uses,” said Wakeling. “We’ve been accelerating our AI strategy with much more clarity as to what’s going to make the difference in the business.”

The firm also introduced AI usage as a bonus and performance metric for associates, partners and business functions this summer, with different weighting given to tasks such as personal productivity versus creating contract precedents and prompts for wider team use, said Wakeling.

A&O Shearman was an early adopter of AI among big law firms, becoming the first customer of Harvey, the legal AI tech start-up now valued at $15.5bn, in 2022.

Most large law firms are now using either Harvey or its European rival Legora, as well as a mixture of other general-purpose tools such as ChatGPT and their own bespoke software. Those efforts are part of a rush among the world’s top firms to develop and deploy AI tools in order to create efficiencies, generate revenue and protect themselves against disruption.

A&O Shearman worked with Harvey and Microsoft to create ContractMatrix, a contract drafting and negotiation tool, which it has sold to clients. The firm has also created other tools aimed at more senior legal work, in a bid to create revenue from AI disruption.

Wakeling declined to provide financials for the firm’s ContractMatrix products, citing commercial sensitivity; however, he said that revenues were in the “tens of millions of US dollars” and had increased ninefold in the past year compared with the previous 12 months.

The firm, the result of a combination of the UK’s Allen & Overy and New York’s Shearman & Sterling in 2024, said ContractMatrix had also recently won a multiyear mandate for a global financial institution in a blind evaluation process. The product beat the client’s own internal data science team, specialist legal AI systems and foundation model providers.

One of the key questions for law firms is how far pricing will move away from the billable hour as clients push for more “value-based” costing. A&O Shearman said fixed-fee income had increased 15 per cent in the last two years, partly due to AI; however, the majority of fees continued to be based on the billable hour.