Freshfields weighs spinning off its AI unit, but risks are growing

In short: Big law firms are considering spinning off their in-house AI tools to raise money, but the legal AI market is crowded and many products are not profitable.

What's going on

Freshfields, a long-established law firm, is exploring a carve-out of its AI unit, according to the Financial Times. A carve-out means separating a business line into its own company, a bit like turning an in-house team into a standalone shop that can take outside investment.

The appeal is straightforward. An AI unit can burn through cash because running AI systems costs money, especially when they handle lots of work. Spinning the unit off could bring in outside funding and could also create a product the firm can sell to other companies, not just to its own lawyers.

Other professional services groups have done similar moves. Deloitte Netherlands spun out a legal research unit in 2024, and UK law firm Travers Smith separated its AI unit into a business called Jylo. The FT notes that some legal tech firms are being valued very highly compared to their steady subscription income.

What to watch

The FT argues law firms should be cautious. Many legal AI tools are not very profitable, in part because of “tokens,” which are the small pieces of text an AI system reads and writes (like paying per word). As token costs rise, products priced as flat fees can become hard to sustain, and switching to pay-per-use pricing could push customers toward cheaper competitors.

Competition is another concern. The legal AI space now includes big AI labs, specialist startups, and rival law firms building their own tools. Watch whether Freshfields moves ahead with a carve-out, or instead keeps the technology in-house or combines it with third-party tools.

Source: Financial Times