Rethinking Law Firm Ownership in the AI Age

The prevailing business model of Indian law firms relies on labor arbitrage. Junior associates handle high-volume, low-value work that is billed to clients at rates higher than their cost. In effect, firms achieve profitability and scalability only by continually increasing headcount to generate more billable hours.

While historically effective, this revenue model is now coming under pressure from the rapid advancement of Artificial Intelligence (AI). Tasks typically handled by junior associates, like document review, legal research, contract analysis and regulatory compliance, are being automated with greater speed and accuracy at significantly lower cost. A 2023 Goldman Sachs report estimated that nearly 44 percent of legal work is susceptible to automation by AI. This shift is already well underway. A global survey conducted in the same year, covering 203 law firms across several jurisdictions, particularly in the United States and Europe, found that 51 percent of firms had already adopted AI-based legal tools, with another 12 percent actively evaluating their implementation.

In addition, AI is enabling legal services to be standardised and delivered at scale, paving the way for the productization of legal services. Western law firms are already investing in proprietary tech platforms and generating new revenue streams through subscription-based legal products. For instance, A&O Shearman (the recently merged Allen & Overy and Shearman & Sterling), has partnered with AI start-up Harvey to develop an antitrust tool. The tool analyses a company’s financial data and identifies merger-filing obligations across over 130 jurisdictions. This tool is part of a growing portfolio of AI-powered, subscription-based products that A&O Shearman offers, providing the firm with diversified revenue beyond traditional billable hours.

This trend breaks the traditional link between headcount and profitability, undermining the sustainability of the traditional Indian law firm model. To remain competitive in this rapidly evolving landscape, Indian law firms and their regulators must urgently rethink how firms are owned and financed in the AI age.

This article argues that the existing regulatory prohibition on non-lawyer ownership in Indian law firms is a critical barrier to innovation. This prohibition cuts off law firms from essential external capital and multidisciplinary expertise needed to fully leverage AI. To address this, Part I outlines the non-lawyer ownership restriction and how it limits law firm innovation. Part II  discussed the workarounds Indian firms have attempted within the existing rules and why those efforts fall short. Part III makes the case for permitting non-lawyer ownership in law firms. Finally, Part IV addresses the potential ethical concerns surrounding such a reform.

Regulatory Barriers

Rule 2, Chapter III, Part VI of the Bar Council of India (BCI) Rules of 1975 prohibit non-lawyers from owning equity in law firms or sharing in their profits. As a result, much of the tech-driven innovation in the legal sector is happening outside the traditional law firm model. In the last decade, roughly 650 legal tech start-ups have emerged, attracting over USD 55 million in investment. These start-ups position themselves as tech or consulting companies, placing them outside the BCI’s jurisdiction and thus beyond the reach of its ownership rules.

While these regulations do not expressly prohibit innovation, they create structural constraints that makes it difficult for traditional law firms to engage in innovation meaningfully. As a result, technological advancements in legal services have largely been driven by unregulated alternative legal service providers, rather than by law firms themselves. Consequently, while established firms may continue to retain high-value complex transactions, a growing share of routine legal work is likely to migrate to start-ups. Tasks like document review, contract drafting, legal research and compliance monitoring, constituting roughly 44 percent of the work currently done by law firms, as noted earlier, are exactly the kind of repetitive, lower-margin services likely to migrate under the pressure of automation and tech solutions.

In response, Indian law firms have tried to innovate by hiring tech professionals, setting up in-house innovation cells or partnering with legal tech start-ups. However, these stopgap measures, as discussed below, fall short of the capital and structural transformation required for a sustainable, long-term solution.

Imperfect Workarounds

Many leading Indian law firms, including Shardul Amarchand Mangaldas (SAM), Trilegal and Khaitan & Co, have hired seasoned tech professionals for key roles to drive innovation. However, because these firms remain lawyer-owned, they must rely on partner contributions or debt to fund any AI solutions. This approach has significant limitations.

First, traditional law firm partnerships have limited financial capacity. Since external investment is not permitted, firms rely exclusively on capital contributions from equity partners and retained earnings to fund operations and new projects. Equity partners, senior lawyers with ownership stake in the firm, are entitled to profits only during their tenure. This reduces their incentive to invest in expensive technology or R&D that may yield returns only after their retirement. This short-term focus, inherent in the partnership model, is misaligned with the long-term financial commitment required to build and sustain AI capabilities.

Second, since non-lawyer professionals cannot become owners or share in profits of a law firm, any tech expert hired by a law firm, even a Chief Technology Officer (CTO), can only ever be an employee without a stake in the business. This structural limitation makes it difficult for firms to attract and retain top-tier tech talent. Such professionals can find more attractive opportunities in the tech sector, where they can earn equity, stock options and meaningful roles in strategic decision-making. Law firms, under current rules, simply cannot offer comparable incentives or career paths to entice the best tech talent to stay long-term.

In addition to hiring non-lawyer talent, many law firms are partnering with legal tech start-ups to outsource parts of their workflow and improve efficiency. For instance, the law firm Trilegal has partnered with an AI platform called Lucio to automate document review and due diligence tasks and IndusLaw has a similar partnership with a start-up named Jurisphere. In these vendor-client arrangements, the start-up typically provides technology solutions such as AI-assisted contract analysis, discovery, or diligence support. In return, law firms offer legal expertise, pilot testing and occasionally even office space, in exchange for early access to the product. These collaborations can be mutually beneficial in the short term, as firms boost efficiency by outsourcing certain routine processes to the start-up’s product, while the tech start-up gain access to firm’s data and feedback to improve its product. However, these arrangements carry significant risks in the medium to long term.

First, a successful legal tech start-up that initially partners with law firms may eventually offer its services directly to corporate clients, effectively bypassing the firms for certain categories of work. This pattern of cutting out intermediaries has played out in other sectors, for instance, fintech firms that initially supported banks but eventually sold services directly to retail and SME customers. A similar shift is plausible in the legal sector. Through partnership, the start-up gains access to anonymised legal data and internal workflows, which it uses to refine its AI solutions. Once the platform reaches a certain level of sophistication, the start-up is well-positioned to approach the firm’s clients directly, particularly for high-volume, process-driven work such as contract review and basic compliance, delivering these services more efficiently and at significantly lower cost.

However, it is important to recognize that not all legal work can be automated or commoditized. Many aspects of legal practice, such as strategic legal advice, complex negotiations and bespoke advocacy, requires human judgment and reasoning that AI, at present, cannot replicate. Law firms will continue to play an essential role in delivering these high-value services. The concern, rather, is that for commodifiable and lower-margin work, legal tech start-ups may capture a growing share of the legal services market, leaving firms with a reduced portion of the overall value chain.

Second, these partnerships are governed only by commercial contracts which means that key terms such as pricing and revenue sharing can be renegotiated over time. This exposes firms to the risk of opportunistic ‘hold-up’ in renegotiations. Once the firm has grown dependent on a start-up’s AI product, the start-up may seek to renegotiate terms opportunistically. For instance, if a firm has deeply integrated a document automation platform into its workflow and cannot easily switch to another provider, the start-up may increase subscription fees or alter service conditions, knowing the firm has limited alternatives. This risk is heightened by the proprietary nature of most AI platforms. A firm that has invested time and resources in training its lawyers on a specific system may face significant switching costs. Without ownership stake, the firm has limited bargaining power to prevent or respond to such hold-up scenarios..

Case for Non-Lawyer Investment

Until recently, the prohibition on non-lawyer ownership of Indian law firms attracted little criticism. Legal practice was labour-intensive, difficult to scale and offered few opportunities for external investors. Now, however, the rise of AI has changed the equation. AI tools and platforms are scalable assets, making law firms potentially more attractive to external investment. Thus, in the AI age, there are strong reasons to reconsider the prohibition on non-lawyer investment in law firms.

First, although venture capital has fueled the growth of legal tech start-ups, these companies often lack established client reputations, access to high-quality legal data, and deep legal expertise. In contrast, established law firms possess decades of internal knowledge and client records, giving them a competitive advantage in training AI tools. For example, A&O Shearman’s antitrust tool was trained on the experience and know-how of the firm’s senior lawyers. The engineers programmed the AI model to solve problems the way senior lawyers would, while the lawyers reviewed the AI’s outputs for accuracy and reliability. This kind of synergy between technology and rich legal expertise is hard for a standalone start-up to replicate.

Second, as technology becomes increasingly central to legal service delivery, law firms need to attract technologists, data scientists and UX designers. However, under lawyer-only partnership model, non-lawyer talent have little incentive to stay since they can’t become partners or share in the firm’s success. In contrast, a corporate ownership structure allows firms to offer equity and decision-making roles to non-lawyers, making it easier to recruit, retain, and reward a multidisciplinary team.

Notably, following the introduction of United Kingdom’s (UK) Alternative Business Structure (ABS) model, which allows non-lawyers to own, manage or invest in law firms, many UK firms switched to that model, primarily to promote non-lawyers into senior roles, including as partners. Additionally, the Solicitors Regulation Authority (SRA), the regulatory body for solicitors in England and Wales, reported that moving to an ABS structure helped firms improve their operations by attracting, promoting and retaining non-lawyers.

Third, with the BCI now allowing foreign law firms to operate in non-litigious sectors, India has effectively opened its legal market to global players. Many of these incoming firms will hail from jurisdictions that permit non-lawyer ownership or investment, like UK, Australia, and Singapore. While the structure of law firms in these jurisdictions may differ, from publicly listed entities in Australia to ABS in UK, the critical unifying factor is their ability to access external capital. This access enables them to invest meaningfully in AI tools, attract multidisciplinary talent, and scale innovation. The global legal tech market was estimated at around USD 28 billion in 2022, reflecting the massive investments pouring into tech driven legal services worldwide. Without similar reforms, Indian firms risk losing significant market share to better-funded, innovation-driven foreign competitors.

Managing Ethical and Regulatory Concerns

Regulators understandably worry that allowing non-lawyer ownership could commercialise legal practice and dilute ethical standards. While these concerns are legitimate, experience from jurisdictions that have opened up law firm ownership suggests that such concerns can be effectively managed with proper safeguards. In UK, more than a decade after non-lawyers were allowed to invest in law firms under the ABS regime, studies have found no evidence of deterioration of lawyers’ ethics or professional independence or harm caused to clients. Similarly, U.S. states like Utah and Arizona, which have experimented with non-lawyer ownership in law firms, have not reported any evidence of increased ethical violations. Notably, no jurisdiction that has implemented the ABS model has subsequently chosen to reverse it.

India can draw on best practices from these jurisdictions to design a regulatory framework that protects core professional values even as ownership rules are liberalized. Measures such as appointing an ethics compliance officer, conducting ‘fit and proper’ tests for non-lawyer partners, capping non-lawyer ownership and enforcing strict conflict-of-interest and confidentiality rules on non-lawyers have proven effective in preserving the core values of the legal profession under new ownership structures.

While global best practices offer a useful blueprint, any reform in India must be tailored to the country’s specific legal landscape and institutional capacity. However, if left unaddressed, the status quo may actually pose a greater long-term risk to professional ethics. As firms struggle to meet changing client needs and lose work to unregulated providers, the lack of reform could push legal services into less accountable hands.

Conclusion

The prohibition on non-lawyer investment in law firms has fragmented Indian legal services market. Lawyers stay confined to traditional firms while technologists build legal tech tools in separate tech companies. This separation is a suboptimal arrangement for developing high-quality and robust AI-powered legal services.

In summary, the convergence of AI-driven disruption and intensifying global competition has brought India’s legal industry to a turning point. To thrive in this new era, regulators should draw on international best practices and reconsider the conservative approach to law firm ownership.

[*The author is a corporate and M&A lawyer at a leading law firm in Gurgaon, India.]