The Legal Industry Has a Data Problem AI Can’t Fix

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[00:00] Hotpur, thanks for joining this afternoon.
[00:03] The owner's mind.
[00:05] And actually I guess it's evening your time, right?
[00:08] Just hit 10pm.
[00:10] Oh my goodness.
[00:11] Well, I appreciate you carving out time because that doesn't sound like a lot of fun
[00:16] to be sitting on the computer talking to me at 10pm.
[00:19] So thank you.
[00:20] What do we start just with a quick intro?
[00:23] Who you are, what you do, where you do it?
[00:25] Sure.
[00:26] In brief, I'm a computer scientist at heart, worked in the city at an investment bank,
[00:32] ended up as a lawyer, and then decided to figure that out a way of combining the two together.
[00:38] So, technology has turned a lawyer and finally living the dream and putting them together.
[00:43] And I guess the environment is such that it's a good time to be doing that.
[00:47] It's very true. With AI and you and I had a great conversation the last time,
[00:52] And I spent years in financial services also.
[00:56] It's a very different world in terms of focus on data hygiene and data quality.
[01:03] It's a very high.
[01:03] People talk about legal being highly regulated.
[01:06] They have no idea about highly regulated until you're in a bank.
[01:11] You've got the alphabet soup of regulators.
[01:14] FNRA, FNSA and SEC, OCC, Federal Reserve. Those are just the big ones. Then you have local
[01:24] regulators. It's quite a, there's a lot of scrutiny in financial services. And, you know,
[01:31] I joined financial services right before 9-11 and shortly before SARBANES OXLY and the USA Patriot
[01:42] that was a direct result of 9-11 and the amount of scrutiny around, you know, anti-money laundering.
[01:51] So I spent time in anti-money laundering. Actually, most of my time at Bank from America was in AML.
[01:56] And the amount of focus on terrorist financing, which is a subset of AML, AML started really to bust up organized crime.
[02:07] And, you know, Terrace Financing was a later development.
[02:11] And after 9-11, that became a top three risk for financial institutions.
[02:18] And we had to start paying really close attention to anything related to KYC, which is
[02:24] know your customer.
[02:26] And quite honestly, the data wasn't there to really be compliant with KYC.
[02:34] We had to do a lot of work.
[02:35] But we're still, we were still much further ahead than law firms are today.
[02:41] You know what, I'm processing what you're saying.
[02:43] Look, I was front of this IT, right?
[02:45] I can have building, what, pricing derivatives quite frankly, right?
[02:50] And I felt we didn't take data seriously either.
[02:53] It was actually the financial crisis that forced us to take data seriously.
[02:58] I completely agree in terms of the impact 911 had in terms of AML and making sure that data
[03:06] hygiene was right.
[03:07] But the financial crisis brought it home to me, up to these financial institutions,
[03:13] also through things such as BCBS 239 and forcing data governance, data cleanliness, where
[03:19] it really mattered and led to financial stability.
[03:23] And the other reason I was chuckling is a teacher at the University of Syria, a teacher
[03:27] and technologies for us for us for us and financial regulation and fin tech policy which kind of go through
[03:33] you know go hand in hand with that. And my students are always amazed when I talk about some of the legislation that came in the
[03:38] Teraia anti-terrorism, to a financing etc. Because I talk about Lans Bankie, the Icelandic Bank that collapsed and when they couldn't get
[03:46] deposits back to the the savers in the UK or or in Europe outside of Iceland. They pulled up terrorist legislation to say
[03:55] give it back, et cetera.
[03:56] And I'm just smiling because a lot of these things are now coming together, right?
[04:01] And you talked about highly regulated industry.
[04:04] It's all starting to come together.
[04:06] But you know, there are definitely those moments where you see, you know, it progressing.
[04:12] And I suppose you're probably struggling to do one of these podcasts these days without talking about AI.
[04:18] And, you know, data is key as part of it, right?
[04:21] And I think that's going to be a big moment as well, right?
[04:24] And I just wonder whether in podcasts in the decades time, right?
[04:28] For Bisuna, people are going to be having that moment about law.
[04:33] Yeah, it was.
[04:34] So I was there for through 2008 as well, left shortly thereafter,
[04:40] and the stress tests that the regulators were applying
[04:44] to financial institutions to ensure the OCC's mandate
[04:49] is safety and soundness.
[04:51] And yeah, so it's interesting how, yeah,
[04:54] Sharbing Soxley was a big wave of, I would say,
[04:58] controls and data quality, and then a whole
[05:04] another wave with the financial crisis.
[05:07] And we have not had that sort of event in legal yet.
[05:13] I mean, we've had events, right?
[05:14] I don't know if you remember the Panama Papers.
[05:16] I don't know when that was.
[05:17] was seems like it was 10 years ago. And I think that was a awakening of risks, like, you know,
[05:26] existential risks to law firms, you know, a breach could mean a really, it could be a really
[05:34] big deal for, for a law firm. But, you know, the blocking and tackling data that sits in the DMS,
[05:41] you know, taking info security kind of out of the system, just the data hygiene of it,
[05:45] But there's been relatively little consequence for law firms to not really invest there.
[05:54] And as a result, they largely haven't.
[05:56] And now we're in a place where there is a cost associated with the lack of data hygiene.
[06:03] And that's AI, which is kind of what you're talking about.
[06:07] But I think we need to look at it from the in-house angle that has seen that, certainly with
[06:12] in financial institutions. So, you know, I always thought, look, I started my journey into law
[06:18] in 2003. Yeah, that's when I had this wake up moment and felt reading some of
[06:22] the Scandinavian and the end of lawyers, etc. I felt that lawyers had to wake up and worry about
[06:27] the data. But that was very much from the perspective of a bank needs to know what these things are,
[06:35] what these influential instruments are, and quite honestly, they're just contractual obligation.
[06:40] So that brings legal into what running a bank needs as part of it.
[06:47] But it was, you know, in the financial crisis, what we saw is all of a sudden, those terms that went in and there was particular term called rating downgrade clauses.
[06:57] is that actually I remember being on the convent at a bank and I had the audacity as far
[07:03] as the traders go to dig my heels in and staying in line with credit policy and saying
[07:11] we can't put this rating downgrade clause it. It basically said that if the bank gets
[07:15] downgrade it so many notches then the counterpart has the right to terminate which sounds
[07:20] reasonable right? It's a material change in the credit worthiness of who you're facing and
[07:25] therefore, you know, the whole commercial deal is a different one. And I'll never forget
[07:30] that the trade had pulled me aside and said, what the hell act for? If this happens,
[07:36] I'm not there, you're not there. None of us are there. Who cares? And, you know, it's really
[07:42] interesting to me that you have fast forward financial crisis occurs. Regulation comes in, a lot of
[07:48] regulation comes in and you know you're now asked to stress test you're said
[07:53] what if there were a three-notch downgrade under these clauses so your the
[07:57] banks creditworth in a scoised out we want you to tell us how much money goes
[08:03] out of the door as a result right what is the financial impact and we want you to
[08:07] take a percentage of that and set that aside as a regulatory capital so all of a
[08:13] sudden that clause that someone said well unless it happens at which point
[08:17] the end of the world is there as far as we're concerned so we just don't need to work as we're not around at that point.
[08:21] All of a sudden it's been pushed on to saying to you in-house legal team but we need to know about this
[08:27] because it's got a consequence not now. Not when the downgrad or some nuclear event happens
[08:36] but it's got an impact now because we're forced to say well what if the world's conditions change right
[08:40] because we don't want another financial crisis.
[08:43] So, you know, I saw in-house teams having to worry about that.
[08:49] And coming back to what you were saying, the problem is that, you know, I think law firms
[08:54] kind of neglected that.
[08:56] And the lawyers were one step removed because they were just solving the legal problem
[09:00] of documenting these things.
[09:03] And not feeling, you know, the idea that if you could understand what was in these agreements
[09:09] and you could merge it with transaction and trade data, then it gave it meaning.
[09:14] You know, so, you know, again, I remember being back at Alan Novery and, you know,
[09:22] found that we finished a big secure translation deal.
[09:25] I was, I was, found myself as being an expert on derivatives in the context of secure
[09:30] organizations. We're going to niche of niche area in many ways.
[09:33] And there was this ridiculous,
[09:36] for what ridiculous, a very important form
[09:39] that the client in house legal team needed to fill out.
[09:42] That frankly, was a very thorough summary
[09:46] of the terms that I as external council
[09:48] was putting into the documents for them.
[09:51] And I remember talking to get this in house lawyer
[09:54] and just saying to him, well, what did I fill it out?
[09:57] And he said, what do you mean?
[09:59] I said, well,
[10:00] being asked to put it into a system you're side. I've just drafted all of these documents.
[10:05] I know them in my sleep and if I don't, if I'm my sleep, then you've got to probably
[10:09] just send me the questions, send me a screenshot and as part of what we are providing,
[10:14] I'll get it to you. It was amazing how quickly that in-house lawyer gave it to me because
[10:20] they clearly hate to do it. But it was all about data by that point, right? Because, you know, it
[10:26] meant so much and I think it's actually quite sad for me that it's taken so long for law firms
[10:34] to recognize that and it's taken technology in AI to mature so to suddenly have its moment of
[10:42] the whole world, my children know about AI, find me a person that doesn't know about AI at the moment.
[10:48] And again, so many people that you speak to lawyers, when did AI happen?
[10:54] Yeah, 2020, 22, etc.
[10:57] Yeah, when touch your PT began public.
[10:59] No, they always been there for a long time, right?
[11:02] And the need for data has been there for a very long time.
[11:06] It's just the reason law firms haven't seen it
[11:11] is they've just worried about solving legal problems.
[11:14] And I actually think that's meant that they've not listened to their clients,
[11:18] the people they work for,
[11:19] that have been, you know, the digital agenda hasn't just arrived.
[11:23] You know, particularly in a bank, you don't just walk up with wards of cash and pass it over.
[11:28] You don't just do things manually.
[11:31] There've been systems and data for a very long time.
[11:33] But as lawyers, we've chosen to say, we'll sit in our ivory towers and continue working through words and words only and not data.
[11:44] Yeah.
[11:45] And you know, I had a conversation with Biharna Tilman, who was on the pod.
[11:52] He's actually on this week's podcast.
[11:54] Our episode will air in a couple of weeks.
[11:56] So we're recording on August 13th.
[12:00] That's a great episode.
[12:01] And the way Biharna described the legal department of the future
[12:09] was very different than what I experienced in my years
[12:13] in corporate America.
[12:13] So as part of my AML work,
[12:17] we had to engage with legal frequently,
[12:20] as you can imagine.
[12:22] And there was an absolute firewall between,
[12:26] even so I was in risk management,
[12:29] which is not in the business,
[12:31] where a risk management function
[12:33] that is aligned to various areas of the business.
[12:37] And we had to go through a firewall portal.
[12:41] We didn't have direct access to legal.
[12:43] Legal even had a separate reporting structure, right?
[12:47] that maybe dotted line into the CEO,
[12:50] but essentially reported to the board.
[12:53] And that created a very insulated legal function
[12:58] where, and you know, when Biano was describing,
[13:00] he was using an example of workday.
[13:03] Workday's legal function is extremely integrated
[13:07] into the business and is proactive, right?
[13:11] Not reactive.
[13:12] When we would engage legal was after something bad happened.
[13:16] And I feel like the future of the internal legal function, AI is going to enable, hopefully,
[13:24] hopefully they don't just reduce headcount and make no promises, right?
[13:30] Because public companies have investors to keep happy.
[13:35] But my hope is that AI starts taking away some of the grunt work that these legal functions
[13:40] have been bogged down in and allow them to get more integrated into the business and have
[13:44] conversations like the one that you described. Mark Shelton, who is GC at a Barclays head of
[13:51] the University of Pennsylvania, he had a lovely line we would always discuss. There's no P in
[13:55] league, right? It's cost. You know, I think that's the very future of legal making sure that we're
[14:04] aligning to solving problems with people and not getting caught up in the administrative piece and giving
[14:10] business meaning and outcomes to people. That is just so in good. I mean, my first client
[14:17] involved persuading a CFO that overcoming the legal problem was worth spending what we estimated
[14:26] would be $10 million on an AI system in 2011. This is, as I mentioned, you talked to people
[14:34] about AI today and when did it arise? According to the AI, I hadn't even been invented at
[14:39] that point, right? But it's all about bringing legal to the table and exposing and bringing to
[14:45] the table the value they can bring because when you merge that with other data, other information,
[14:52] it's suddenly very, very powerful. Yeah, there's no P in legal, but there sure can be a big L,
[14:59] right? So it's, I mean, the same is true with with risk management, right? There's no P in
[15:05] risk management, either. But if that function fails to do its job, you know,
[15:10] my listeners have heard me talk about the four lines of defense. So, you know,
[15:15] and Bank from America, we talked about the four lines of defense. First line of
[15:18] defense is the line of business. So, that's the consumer bank, the investment bank,
[15:22] the wealth bank. Then there's the second line of defense, which is the risk
[15:25] management function where AML sits in corporate compliance and regulatory
[15:30] relations, all those things. Third line of defense is corporate audit. Right? So I also spent several
[15:38] years in corporate audit. And if the first three fail, the fourth line of defense kicks in and
[15:42] that's the Wall Street Journal, because that's where you end up. If the first in, you know, talk about
[15:48] an L, you know, if the regulators were to come in and, you know, write a sanction or a cease and
[15:54] and to assist. I mean, this has happened at huge financial institutions. You don't hear about
[15:59] law firms having that level. It's very rare that you end up in the Wall Street Journal.
[16:06] But you're starting to hear about it directly related to AI with lawyers at white shoe law firms,
[16:14] submitting court documents with hallucinated citations. So I kind of feel like we're more vulnerable
[16:21] then we were now that we're becoming tech enabled as an industry would you agree?
[16:25] We are, but I think it's going to get worse because we're still solving legal problems.
[16:30] Actually, there's a journey, right? When we start solving big business problems and we get it wrong there,
[16:36] there's even further to fall. There's not to say we shouldn't be heading in that direction.
[16:40] I absolutely think we should be heading in that direction. But we've got to really understand
[16:46] how we change, how we operate the process by which we operate as lawyers and how we add
[16:53] that extra value. And for me, most of, you know, I can't claim to have seen all of the cases
[16:59] and you've probably seen Charleston's database, for example, of the hallucinations in various
[17:04] court cases, etc. A lot of them come down to process, come down to supervision, come down to
[17:10] lack of training, understanding that pressure on someone to deliver something and frankly
[17:16] not follow their training.
[17:18] You know, as practicing Lois, we've all had our moment where we've not spent the time
[17:25] and researched and done that.
[17:27] We typically did it in a moment of a low stakes and the partner we were working for and
[17:31] supervising corrected and got that.
[17:34] And I think too much of the profession is becoming a bit too lazy, seeing being well by the
[17:40] technology, being quite technical, being well by it and just making assumptions about
[17:47] what it can do and therefore what we don't need to do and forgetting that accountability.
[17:51] It's actually a topic very close to my heart at the moment.
[17:55] I'm the current co-chair of the Technology and Law Committee at the Law Society of England
[18:00] and we're currently pending the practice note for use of AI by the profession.
[18:06] And we really need, in my view, to really spell it out and educate around the expectations.
[18:12] I think we've unfortunately done a very poor job as an industry and the various bodies that take,
[18:19] you know, that are there.
[18:21] It's very easy to say, but you just, you're still accountable.
[18:26] We need to go further than that. Therefore, what do you need to do? I've run an exercise just a couple
[18:32] months ago for one of the top 20 law firms here in England and Wales. And I'm stunned at what I
[18:39] had to do. This was a project about helping them with their data strategy. It morphed into having to
[18:47] persuade the law as why data is important. I never thought I'd be in a world where I had to take the
[18:53] the SRA solicitor rules.
[18:56] And say, well, this is what happens if you don't get your data right.
[18:58] You overcharge a client.
[19:01] Guess for the consequences of that are.
[19:02] You mock up your client money in terms of,
[19:05] you know, how you deal with that.
[19:06] And again, you can be struck off there as part of it.
[19:09] I, even as someone who's been in the profession afterwards,
[19:15] I was truly stunned by how quick we were to distance ourselves
[19:20] since ourselves from data that would come to roost in a really poor way if we then overly
[19:27] AI through it. I've just worked with a convincing, they're a niche convincing firm.
[19:33] They decided not to go with the AI that comes within their practice management system.
[19:38] They decided not to go for one of the big boys with the adverts all over time, square, etc, etc.
[19:43] and they've decided to build it themselves.
[19:46] And it's interesting that there's a blank
[19:49] in their practice management system,
[19:52] that within, and I think you've got a data database
[19:56] background, it will probably get filled with some date,
[19:59] like if...
[20:00] first of January 1900 or something like that.
[20:03] You know, catching that later and figuring out why the AI went wrong and just setting these
[20:09] traps for you going forwards. There's a lot of nasties hidden there.
[20:13] And, you know, the tragedy for me is we somehow feel it is beneath us to roll up our sleeves and
[20:23] get the data right. You know, there's a sense of entitlement that I've studied so hard
[20:29] a clustergart of what is really long hours, this is my time, why are you getting me to fix the
[20:35] data? You know, in the stories I'm hearing around, you know, well, the partner just gives it to
[20:40] the PA to do. Even though the data and getting it right is so important. The associate gives it to the
[20:45] PA to do, you know, and creating this culture whereby we don't create that world where the PA
[20:53] can go say, well, how am I meant to answer this question? Because if you're not defined the data point,
[20:58] And the data governance isn't there.
[21:00] It's meaningless.
[21:01] Two, three, very good lawyers.
[21:03] If they did spend a time on it,
[21:06] would give you a different answer.
[21:07] And that played out.
[21:09] I talked about the bank where I was filling out that form around
[21:12] the rating downgraded clauses in the secretization
[21:14] hedging.
[21:15] For me, it was really insightful.
[21:17] And I remember very clearly, because I got this list of questions.
[21:20] What do you mean by that?
[21:22] And they honestly had no idea.
[21:24] Something as important as, well, what do you mean by
[21:28] what's the rating at which this happens?
[21:30] Because the document sometimes expresses
[21:32] when you hit this rating, then the action occurs
[21:35] or when you go below it, it occurs.
[21:37] And they'd not define that.
[21:39] So I could straightaway tell you that this bank
[21:42] is going to have inconsistent data
[21:44] because different people had answered it in different ways.
[21:47] The poor kind of quant downstream,
[21:50] which was throw back to my days,
[21:52] yeah, that led to my journey into the new firm.
[21:55] He just assumed there's a smart people
[21:57] and they know what they're doing.
[21:59] It's...
[22:01] The one thing I will say is,
[22:04] I'm very glad I followed my instinct,
[22:07] because I tried to work with lawyers
[22:09] when I was still on the technology side as a cont,
[22:12] UPS.
[22:13] And, you know, both internally and also working with industry players
[22:18] and leading law firms, except I struggled
[22:22] because the answer was, you're not a lawyer, you understand it.
[22:26] And my instinct was that I needed to become a lawyer such that they would even just listen to me.
[22:32] I mean, my wife's the one that paid the price, right?
[22:35] The story is that I proposed and apparently my next words as soon as she's executed, yes,
[22:40] was what I'm going to be a student and you're going to fund it.
[22:42] So my wife was the one that paid the price for it in many ways.
[22:47] But I think that was so important because even with being able to say that,
[22:53] But no, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I,
[23:23] the data governance data quality issues will surface.
[23:27] And you know, we're going to be, and we already are being very quick to blame the tools.
[23:32] And, and you should never be playing your tools, right?
[23:35] You've probably got the right of the wrong tool.
[23:37] And, and, and, and, and, and, and, and again, you know, a particular bug bear of mine is
[23:40] is people talking about AI and not realizing that it's, it's a sweet of tools and, and ways of
[23:46] working and it's not just about the tool but the process you work with it and the data
[23:50] to import, et cetera, gosh, you know, sometimes I'm saddened, right?
[23:55] Because we think that AI moment is hit, and I think it's
[23:58] in myself, we've got a long, long way to go.
[24:02] You know, and so many aspects of kind of the risks that you highlight.
[24:07] When I look at industries that have mature risk management practices, again,
[24:14] banks are at the top of that list.
[24:15] And think about the three I used for jokingly calling the Wall Street Journal,
[24:20] but let's take the three real lines of defense.
[24:23] You don't have those in law firms.
[24:27] I've never seen a law firm with a risk management,
[24:30] group of risk professionals that sit and align themselves
[24:34] to a practice area and work in tandem with the practice
[24:39] to ensure that all the compliance boxes are properly checked
[24:44] and then having on top of that and internal audit team
[24:48] that comes in and evaluates the control environment
[24:52] to ensure that the process is another set of eyes to say,
[24:57] okay, I know our policy says that we check our citations
[25:03] and that they're not fabricated.
[25:05] Let me see your controls.
[25:07] What happens if somebody ignores that policy?
[25:10] Let, that we've seen it play out many, many times now.
[25:14] you need those layers in order to ensure that the control environment fits the risk profile.
[25:23] And those, I think the reason that we don't have that is because partner capital would have to fund it.
[25:33] Right? Like that's a non, there's no P in that to your point. Right?
[25:38] And you know there haven't been a lot of else right there haven't been until recently that many
[25:46] What was I for the internet yeah see it in house so you know one bank that I was working with they had a
[25:56] Master agreement trading master agreement in place with the Royal Bank of Scotland now
[26:00] We have something called close-out netting and you normally get a legal opinion to say that you make
[26:06] you know, the close-outnessing is enforceable. Now these opinions run for the England
[26:11] of Wales opinion is close to 300 pages and a large investment bank will maintain about
[26:17] a thousand of these legal opinions and save about a billion dollars of regulatory capital
[26:23] if they can show they have a legal opinion that says that trading agreement is enforceable
[26:29] in terms of its close-outnessing provisions. So this bank said, yeah, we've got an opinion
[26:34] and they tick the nettable flag.
[26:36] I mean, that's the tragedy of itself, right?
[26:37] The law firm gets away with writing close to 300 pages,
[26:42] chuck it over the fence to the bank, who then has to turn it into a yes or no in their systems.
[26:47] So that is a live illustration for me of the law firm's sake note.
[26:53] This is where my role stops.
[26:54] And I'm not going to add any more value, right?
[26:56] I'm not going to be a real part of that billion dollar red cap saving.
[27:02] I'm only going to be involved in the very legal component of it.
[27:06] Now let me start with what happened here.
[27:09] It turns out that they did have a legal opinion,
[27:12] but in their systems they tracked it as saying that they had a close-out netting opinion for England and Wales.
[27:19] And I'll never forget that they were, I had to call up,
[27:23] that you see and say, you've got a problem here.
[27:26] And the regulators are not happy.
[27:29] And he said, well, what do you mean? I said, well, your agreements with the Royal Bank of Scotland,
[27:34] the clues in the name, Scotland.
[27:36] It's got a zake, it's only jurisdiction. You should be tying it to the Scottish opinion.
[27:40] There was no control framework to do that.
[27:43] And I tell you what it was, it was the lawyers were too lazy to,
[27:48] you thought it beneath themselves to get involved in the data.
[27:52] And the data didn't allow you to pick England or Wales, didn't allow you to pick Scotland.
[27:58] had you cater. Now if we are going to move to a world where we are helping solve the entire business
[28:06] problem, I'm going to have to, because otherwise our clients of lawyers, be it in house or be
[28:13] of law firms, they're going to say, well, I can do a lot of this stuff myself using AI, they're
[28:18] not going to be perfect, they're going to miss some of the nuances, but the cost saving is part of it,
[28:24] and it's so exciting. And there's no hiding that, right? You know, this these barriers that we've built up that
[28:30] men, people, because they've actually are not a lawyer. You don't get it. There's barriers that gone, right?
[28:35] You know, maybe all of a sudden, maybe all of a sudden, just wait, that will be available through
[28:39] hang on, right? She has a computer scientist, by the way, so it's maybe she could have said that.
[28:44] So, you know, it's going to come because we're going to have to chase the bigger piece of the business
[28:51] problem. And at that point, there's a lot more to gain, but there's a hell of a lot more to
[28:56] fall if we get it wrong. And then we're going to get the three lines of defense. We're going to
[29:01] get ways of working, and actually one of the things that I'm very passionate about is there's a lot
[29:09] of talk about smart contracts, etc. And a legal opinion is very much at the heart of what a lawyer
[29:16] they give their opinion on legal matters, right?
[29:19] And particularly in the US, it's a very established practice, and actually law firms have
[29:24] committees that talk about the risks and what they will accept and what they weren't
[29:29] except, et cetera, as part of it. And one of the things that I've been looking at for the last few
[29:34] years is smart legal opinions and how we can use that to connect the advice we give as lawyers to be
[29:42] more part of the business as part of it, as opposed to having all these intermediaries that
[29:46] have to, you know, this is crazy situation on these close-out nesting opinions, where, you know,
[29:52] these lawyers that do nothing but these close-out nesting opinions, pass it over to the bank,
[29:57] some of the biggest US banks have 20...
[30:00] people who just specialize in reviewing those opinions, full-time people. We're writing the advice
[30:05] in a way that it needs another set of lawyers to even read what it is and turn it into a yes or
[30:10] no before it even gets anywhere near to the business. It's just got to make its way into saying,
[30:15] well, what's the recap calculation? I've been exploring that as you know, I'm a professor at
[30:23] the University of Surrey, I'm supervising a PhD student who actually retired as a lawyer and
[30:29] you know, was one of these experts on close-out netting and got him to, he's just writing
[30:34] up at the moment and just trying to look for the possibilities here, right? You know, the
[30:39] lore changes, you know, how can we create a world where the lore changes, the legal opinion gets updated
[30:46] And it automatically causes some sort of action that means the business do the right thing because of what the legal advice says.
[30:55] I mean, it's not going to be straightforward. It's going to be forward with difficulties, but I love your positioning of the control frameworks that you need around there.
[31:05] But if you get that right, just think of the prize in terms of what we can achieve as part of it, right?
[31:12] in terms of law genuinely kind of accelerating how we empower business, how we empower, you know,
[31:21] it will have wider society benefits for law in many ways.
[31:25] Yeah, I think that's going to be one pressure that the legal industry is going to feel as
[31:34] the commodity work starts to get eaten away at, you know, there's going to need to be an
[31:40] elevation of use of lawyer lawyers brains and it's going to force them to be more integrated
[31:49] and more connected to the business. So, you know, as a being an entrepreneur for many decades
[31:54] now, I started my journey. I wasn't even enough to drink when I started my first business.
[31:58] So, it was a collection agency and we used to work with legal partners quite a bit, as you
[32:04] could imagine, then I went into the corporate world and then back as an entrepreneur. So, I've been
[32:09] And I've had lots of exposure to the relationship
[32:12] between client and external council,
[32:16] internal client to inside legal functions.
[32:19] And I can tell you that my experience
[32:22] has always been of an arms-length nature.
[32:26] And I think that I'm not alone in my feelings around that.
[32:31] So this is a great opportunity.
[32:34] I don't think that it's a lack of curiosity.
[32:37] I do feel that there are dynamics that make the relationship the way it is, you know,
[32:44] somewhat arms length, but I feel like the barriers between client and law firm are
[32:50] starting to lower as a result of technology and as we start to eat away at the lower tiers
[32:56] of legal work.
[32:57] There's only one direction to go and that's up the complexity scale and we're entering
[33:03] into a world now with AI, we're going to have a much more complex regulatory environment.
[33:08] I mean, think about just with robotics and self-driving cars and all of the new regulatory
[33:16] frameworks that are going to have to cover that and as the world gets more technical,
[33:20] it gets more complex.
[33:22] And I think it would be welcome by lawyers to engage and understand, engage with and understand
[33:31] the business in a deeper way.
[33:35] It's just, I think with law firms specifically, there is a cultural dynamic that needs to be pivoted
[33:45] in terms of how they engage with clients.
[33:48] I'll go back to B yarn again.
[33:49] The reason I asked him to be on the podcast is I saw another podcast he did and he had a
[33:55] real singer of the line.
[33:56] He goes, I have never seen an industry less curious about their clients than law firms,
[34:04] which I thought was interesting.
[34:05] And I think it's a perception, because I don't think it's a lack of curiosity.
[34:11] I think it's a cultural dynamic.
[34:13] I don't know, what are your thoughts on what's driving the perception of my legal partners
[34:20] aren't really that curious about how my business operates.
[34:25] just wanted to put out fires. I think it's been a function of the business model has been so good
[34:31] for so long and in terms of you know you bring in super smart academic insecure people put them
[34:40] into this hot house of being together a very culture of long hours and demands on billability
[34:48] that you don't have time to think and fail fast and be innovative in the true sense.
[34:55] And I think it means that we're always clutching at things and doing them at a supersonic speed.
[35:01] And another area that I work in is digital assets.
[35:06] So for me that's a nice mix, right? It's tech and increasingly a lot of law and regulation issues.
[35:12] I actually pleased to say that I've helped write the Vastables for the Philippines, SEC,
[35:17] recently and Cambodia and we've got a couple of other jurisdictions on the way that we're
[35:22] assisting with. And it's been a real struggle with, we need lawyers at the table there,
[35:29] because there are things that very much are there per view. But the understanding is so, so shallow.
[35:38] you know, when I talk about cryptocurrencies, et cetera, I ended up writing the compliance risk framework for
[35:45] block-fi. So they were one of the, you know, sort of all good until they took a loan from FDX and
[35:50] never had never had a good idea. But, you know, when you talk to people about what actually happens,
[35:58] you know, there's very little understanding and little curiosity that you need, you know,
[36:04] you get statements such as, well, it's immutable, but they're not really, but there's a whole load
[36:09] of assumptions that you've made in order to get there. And actually that reminds me, you know,
[36:15] now I'm kind of going down this this this this train of thought. That reminds me of the three financial
[36:20] crisis, you know, and and I think I said that I worked on these securitizations structures. And,
[36:26] you know, the rating agency were we're giving them AAA ratings and more AAA ratings and and
[36:32] And you know, because I did it one day and other people did it.
[36:37] And if you did ask the question, but how does it work?
[36:39] You know, kind of, why has it got a triple A rating?
[36:43] everyone will just look at you and and and and that's what I don't be stupid and and you're almost you had so much work you're you're
[36:49] encouraged not to be curious you know again and another very happy memory I have is you know one one of the big investment banks
[36:59] called up the other partner I worked for and said we need the documents done in you know overnight and we're going to close the entire deal tomorrow
[37:08] And I remember going into the partners office and saying, look, I've cancelled whatever plans
[37:15] I have this evening. I'm very very happy to do it. Please don't get me wrong, right? But I can
[37:22] honestly tell you, I don't think it's humanly possible to get all of the documents right?
[37:30] Just two complex and we really can't understand what's going on and I will be forever grateful for
[37:36] or that partner taking a view that, well, he listened to me.
[37:41] I'd like to think I don't that respect.
[37:43] And he knew that I was totally serious when I said, look, I'll do it.
[37:47] You know, that very deal, the law firm that did take it on ended up getting sued for negligence.
[37:53] And I can tell you exactly what it is.
[37:55] We don't create that space because of the business model for people to be curious.
[37:59] And the technology is moving so quickly.
[38:02] You know, I did a computer science career Cambridge.
[38:05] Cambridge. I had the benefit of one of my professors, Michael Lynch. I had
[38:09] Demis Hassabis in the years, a couple of years up from me, etc.
[38:13] You were amongst giants, right? No goal-pricer in
[38:17] as to be, etc. John Dalgman, who actually had Professor at Harvard in Medicine, then
[38:23] computer scientists taught me neural networks. He had come up with the neural networks to
[38:30] kind of ident virus recognition in the 90s. It's all about having that, people in technology are struggling to
[38:41] understand, to keep up with the changes that are happening. It's not impacting every aspect of our lives.
[38:51] It's just not possible for lawyers to say it doesn't impact us because our clients are using technologies,
[39:00] It's impacting us as lawyers.
[39:03] And it's a really scary time for me in that regard, right?
[39:08] Because you've got to change the model, right?
[39:11] And I think we're taking it to the extreme, right?
[39:15] Because every partner is saying, well, you know,
[39:18] asking Turkey's to vote for Christmas.
[39:20] And say, well, you know, it will be the next generation that needs to worry about it.
[39:23] Well, just let me get across the line and put my feet up in retire.
[39:27] And I don't think we're doing enough for the profession and
[39:34] realizing that the pace of change at the moment is just,
[39:38] we just can't afford to do that.
[39:41] Yeah, so speaking of that and the next generation,
[39:46] I recorded an episode that should be out ahead of this one with
[39:50] Mike Schmidtberger from Norm Law today.
[39:54] And it was a fascinating conversation.
[39:56] So norm law is what I would call a...
[40:00] second generation AI native firm, they have the who's who of former regulators on their advisory board, former chair of the SEC, I mean, just real heavy hitters, they've got extremely credible like Mike was managing partner at
[40:18] for a decade plus they are taking a different model and they are taking the best of what
[40:26] big law brings which is all of that human, the most talented legal professionals on the planet,
[40:34] you know, and advisory board with a very risk focused lens through which they look and then you've
[40:41] got the AI native platform that doesn't have all the baggage that a traditional law firm has like
[40:48] Compensation models that are completely out of date when you move away from the billable hour
[40:53] Client engagement models like we've been talking about that are so, you know, we're designed 40 years ago
[41:00] Capital structures such that they have an MSO that's they got 50 million from Blackstone
[41:06] They're already at a unicorn. They just raised at a round at over a billion dollars
[41:11] They've only been in existence a couple of years.
[41:14] And they don't have all of that cultural inertia that I was talking about earlier that has
[41:19] to be redirected.
[41:20] And they're taking swings.
[41:22] It's not the first generation of AI Native firms that's just doing contract and data privacy
[41:28] agreement review and NDAs.
[41:30] They're doing real, substantive legal work, not bet the company work, but several runs higher
[41:39] than what the first generation did on the complexity ladder.
[41:42] And I'm looking at, you know, and apparently investors are too are looking at the edge
[41:48] that they're going to have in making change.
[41:51] They've got a capital structure that they need funding.
[41:55] They get it.
[41:56] Lough firms don't have that, right?
[41:58] Like in the US anyway, here model rule 5-4 doesn't allow for any fee sharing.
[42:03] So you either got a move to Arizona and become an ABS or you got a leveraging MSO that takes
[42:08] It's time, it's somewhat messy, and for an am law firm to do it.
[42:12] And I know several are looking.
[42:13] It was just a, I think it was a financial times article that named some firms in the upper echelons of the am law that are looking at this model.
[42:22] But like norms already got it, right?
[42:24] They need capital.
[42:25] I'm calling Blackstone.
[42:27] There are already 50 million in our cap table.
[42:29] And I'm looking at how are these big law firms going to compete?
[42:32] And I know we're almost out of time.
[42:34] But I'm curious, your thoughts on big laws of ability,
[42:39] because they seem to be moving slower than their counterparts
[42:45] on the corporate legal side.
[42:47] I've talked about Stephen Crowley from Ford,
[42:51] posting on Bloomberg Law,
[42:52] and the title of the article is,
[42:54] Hey, law firms, you're not keeping up.
[42:56] So we're behind in the law firm world.
[42:58] We've got AI native structures starting to appear
[43:03] that take the best of what we offer as a big law firm,
[43:08] and they've got potentially unlimited capital
[43:11] with funders like Blackstone,
[43:14] and then you've got these law firms
[43:15] with all this inertia that has to be redirected.
[43:18] Are we gonna be able to make change fast enough
[43:22] before the chickens come home to roost?
[43:24] I still didn't get comes also back to the data, right?
[43:28] Like I actually think we will find that,
[43:30] We talk about the treasure trove of data that a law firm has,
[43:36] but it's missing the business data
[43:38] that accompanies it in a lot of cases.
[43:40] So I think that there is a real risk that,
[43:43] if they then suddenly run towards the capital,
[43:46] they'll all miss the boat, if they don't start moving very quickly.
[43:50] If I compare it to what some of my large investment bank cards
[43:55] have when their in-house team start to look at using AI
[43:59] on some of the data they have that then compare the agreement data with the
[44:03] new European data that they have with
[44:05] red data, you know, in terms of expressing regulation in some sort of codified
[44:11] form that the machine readable.
[44:13] The value is just so much more that right and it's really going to reduce the
[44:17] law firms in terms of the value proposition that they provide as part of it.
[44:20] And I've written an article that was published by the law Society because
[44:24] that if we're not careful,
[44:27] we're going to reduce ourselves to being diffused,
[44:29] the insurance policy, and you go to a lawyer
[44:31] when you want someone to have someone to sue if it goes wrong.
[44:34] That will be our function.
[44:36] There's so much, my journey's shown me
[44:38] that there's so much value lawyers can bring,
[44:41] I think the US actually does a lot better at that, right?
[44:43] And you look at where people who have worked in big law
[44:47] and some of the roles they take business side afterwards,
[44:49] I'm not sure we've got that same culture,
[44:51] the other side of the bond.
[44:53] But it's going to be a challenge.
[44:55] And I'm fearful.
[44:57] I feel I have a love for the profession.
[45:00] And I feel that it may just take one or two incidents,
[45:05] high profile incidents, and it might just force the issue.
[45:08] But it's not, I don't think it's just going to happen
[45:12] because everyone thinks it's the right thing to do.
[45:15] Yeah.
[45:15] I mean, the good news is we're not out of time yet.
[45:19] we will be if we don't start the work in earnest now.
[45:23] There's still a lot of experimentation happening.
[45:26] And hey, I get that.
[45:27] Like I hear people ask the questions about ROI.
[45:32] You know, I talk about the three waves of this transformation.
[45:35] First wave being co-pilot, era, which is with a lower KC.
[45:39] You know, the Harvey's Legora's the world.
[45:41] Second wave being, you know, where we re-engineer the process
[45:45] and unbundled the legal work.
[45:47] and enable it to scale with technology
[45:51] and then the third way being the auto pilot
[45:54] or the agentic era.
[45:56] And we are still figuring out wave one.
[46:00] And these AI native firms are starting in wave two.
[46:05] They're not using workflows from 1995
[46:08] that they bolt a copilot onto.
[46:11] They're starting in wave two,
[46:14] which is light years ahead of where we are.
[46:17] So I'm hopeful that like candid conversations like this inspire a sense of urgency.
[46:23] I don't think panic is the right path, but a sense of urgency moving in earnest and
[46:30] understand making the investments and stop the pearl clutching in the industry that
[46:36] hey, we're making record profits.
[46:39] What worked yesterday won't work tomorrow?
[46:42] Well, investing in people, right, and investing in our future generations, and realizing
[46:50] that this isn't about replacing the junior work because we'll create another problem as part
[46:58] of it, right? You know, this is about, you know, the reason we sponsor the PhD is because it's an
[47:06] investment in the future, right? And that's got to be the way you look at it. I guess I'm opening
[47:13] up a whole kind of worms there in terms of what do we do? Do the junior members of our profession
[47:20] equally have the maturity to realize that it's so crucial that they don't take the shortcut
[47:26] and use AI and kind of remove their ability to learn. I have a lot of fun explaining to people how
[47:35] neural networks actually operate and the fact that it's all about feeding it more data,
[47:41] trying things, getting things wrong, trying again, etc etc. And the moment the junior associate,
[47:47] the trainee gives that to the AI to do is actually them that suffer. But again, it comes back to the
[47:56] business model, right? The pressure is such that you know, you're forced in many ways to just look
[48:03] for the fastest way to get it out for the client demands.
[48:06] You know, one thing we haven't touched on is, you know,
[48:10] the client's always right.
[48:11] Right. So maybe maybe maybe, maybe,
[48:14] this is just what it is, you know, maybe clients have got to play a part to that.
[48:17] You know, when I know clients are equally bashing up law firms to say,
[48:20] look, if the AI can do it fast and, and, and therefore,
[48:24] you know, you really need to charge me that.
[48:26] We want you to use AI as part of it, et cetera.
[48:28] But maybe they need to play a part of that as well, right?
[48:32] and be a bit more mature and foresighted in terms of ultimately where we're trying to get to.
[48:38] Yeah, I think the challenge with that, I agree with you. I think the challenge with that is there's
[48:43] so much pressure coming from shareholders, going to boards, down to management, to deliver savings
[48:52] as a result of this, that I think it's going to impair the clients from thinking long term
[49:00] because if you're at a publicly traded company, you're beholden to shareholder demands and they don't really care about the profession.
[49:09] But what you're saying there, buys into the view that AI, what will it do to society?
[49:15] It will just reduce jobs, it will reduce cost. It's not really buying into that view that no, it's value creation.
[49:23] as with all other big advances, it actually changes the very nature of what we can achieve and work, right?
[49:32] You know, that's implicit in the statement that you've made there.
[49:36] But you're right, you know, it's those short-term pressures that we've put bit through shareholders or bit through, you know,
[49:45] a corporate investor demand.
[49:49] But it's from take a brief view, who tried the other way as you say, the AI natives, and maybe
[49:55] they'll just put enough pressure to mean that people realize, you know, they'll...
[50:00] than you've got bus drivers, they're not careful.
[50:02] Indeed.
[50:03] Indeed.
[50:04] I use Netflix and BlackBuster quite a bit.
[50:06] There's lots of lessons, I think we can learn
[50:08] from how that story played out.
[50:11] But this has been a fantastic conversation.
[50:14] I knew it would be, thank you so much for staying up late
[50:17] on your end.
[50:19] How do people find out more about D2 and yourself?
[50:24] D2LegalTek.com, just, you know,
[50:27] we do a lot of work in the derivatives
[50:29] is the space, there's lots of mischievous out there, and hopefully it can help people think through
[50:35] some of the challenges and opportunities that we have.
[50:37] But we'd love to have more conversations with the UTA and others on it.
[50:42] So please get in touch, anyone.
[50:45] That sounds great.
[50:46] All right, thanks again and have a good night, Akbar.
[50:49] Thank you.
[50:50] All right.
[50:51] Thanks for listening to Legal Innovations Spotlight.
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