The AI arms race in law requires a capital strategy

When Kirkland & Ellis announced a multiyear partnership with Palantir earlier this month, it was the latest sign of the firm's reported $500 million investment in AI, a figure that has drawn significant attention across the legal industry. The scale of the investment reflects a willingness by Kirkland to commit substantial capital to AI as part of its long-term strategy.

Kirkland is not alone. A&O Shearman has expanded its relationship with Harvey to develop AI tools for work including antitrust, cybersecurity, fund formation and loan review. The firm has also suggested that some of these tools may eventually be offered beyond its own lawyers. Freshfields has similarly deepened its investment in AI through a strategic partnership with Anthropic, using the technology to support lawyers across a range of practice areas.

Taken together, these announcements point to a clear and accelerating pattern: Large law firms are spending big money on technology. What began as low-cost experimentation with off-the-shelf tools is now significant investment in proprietary systems.

The rationale is clear. Corporate clients are demanding greater efficiency in the face of higher billing rates and rising legal costs. At the same time, law firms recognize that AI will reshape how legal services are delivered, particularly in high-volume tasks such as contract review, due diligence and regulatory analysis, creating opportunities to improve productivity and unlock new service offerings.

As technology investment accelerates, firms face an increasingly important question: How will they pay for it?

Traditionally, law firms have relied on partner capital, retained earnings and bank financing to support growth and investment. But law firm partnerships are not designed to accumulate capital in the way public companies are. Most operate as cash-in, cash-out businesses, distributing profits annually rather than retaining them for future investment. That model creates a particular challenge when it comes to major technology spending. Every dollar retained to fund an AI initiative is a dollar that is not distributed to partners. In a market where top rainmakers are regularly courted by competitors, reducing partner distributions can have real consequences. Highly compensated partners may be willing to support strategic investment in principle, but if their compensation begins to lag behind what they could earn elsewhere, their eyes can quickly wander. As a result, law firms often find themselves caught between the need to invest for the future and the need to maintain partner economics in the present.

Alternative sources of capital can provide firms with additional flexibility when considering significant investments. At Burford, we work with law firms in a variety of ways, including portfolio financing, where capital is advanced against a firm's portfolio of litigation and arbitration matters, and law firm equity solutions, which can provide firms with access to long-term capital to support strategic objectives. Depending on the jurisdiction and regulatory framework, those solutions may include direct equity investments or Managed Services Organization ("MSO") structures. Firms have used that capital to support growth initiatives, partner distributions and investments in technology.

Access to long-term capital can be particularly relevant in this context. By reducing reliance on annual partner contributions or retained earnings, it can help firms pursue strategic investments without forcing a choice between innovation and partner compensation. As technology becomes a larger component of competitive advantage, access to permanent or patient capital may become an increasingly important differentiator among firms seeking to invest at scale.

AI may ultimately change aspects of legal practice, but one thing is already clear: Adopting new technology requires capital. As firms decide where and how much to invest, the discussion will be as much about funding as about technology itself.