Freshfields, a long-established law firm, is reportedly considering spinning off its artificial intelligence (AI) unit in a move that could potentially be valued in the multibillion-dollar range. This development comes amidst heightened interest in AI-related ventures and rising valuations within the legal technology sector, prompting outreach from investment bankers. However, some industry observers caution that such a carve-out might not be the most prudent course of action for law firms at this juncture.
The primary advantages cited for creating a separate AI entity include the opportunity to attract external capital and to provide financial returns directly to firm partners. Given AI’s reputation as a resource-intensive technology, external funding could prove valuable in sustaining and scaling operations. Additionally, spinning off the unit could allow the firm to expand its user base beyond its own 3,000 lawyers by offering services to third-party clients—a move that could help overcome the natural limitations of in-house tools.
Past examples exist within professional services and other sectors: Deloitte Netherlands separated its legal research unit in 2024, securing venture capital backing, and UK law firm Travers Smith launched its AI business, Jylo, the same year. Jylo reportedly expects to reach break-even this year and recently saw a 50 percent month-on-month revenue increase. Similar spins have occurred in industries such as retail and energy, providing a precedent for such strategies.
Despite these potential benefits, significant challenges temper enthusiasm about AI spin-offs in legal services. Critics argue that current high valuations do not align with the sector’s underlying profitability or the rising costs associated with AI "tokens," the computational units underlying AI tasks. Many AI product providers in the space are reimbursing subsidized costs through fee structures detached from actual usage, a model that may not be sustainable if clients shift toward consumption-based pricing, especially when lower-cost alternatives are available.
Moreover, the market for AI legal technologies is densely competitive. Leading AI research labs are entering the legal domain, competing alongside specialized firms often employing “wrapper” models that build on other providers’ AI systems. Freshfields’ rivals are also heavily investing in AI, contributing to a cumulative $7 billion investment in the sector this year alone.
From a macroeconomic perspective, the legal industry generates approximately $1.1 trillion annually, with only 4 to 5 percent dedicated to information technology expenditures—covering everything from back-office functions to cybersecurity. Even allocating a substantial portion of IT spending to AI tools would translate to a relatively modest market size, likely under $14 billion. For AI ventures to scale substantially, they would need to capture a larger share of core legal services, which remains a formidable challenge.
Given these factors, some experts advise that law firms might be better served by retaining AI capabilities within their own operations if the technology is truly transformative, rather than sharing it with competitors through a separate entity. Alternatively, firms could adopt a hybrid approach by combining internally developed innovations with third-party solutions, thus preserving flexibility and mitigating risks associated with the volatility of smaller AI providers.
As AI continues to captivate attention across industries, law firms face complex decisions about how best to integrate and capitalize on these emerging technologies. While the allure of high valuations may be tempting, careful consideration of market dynamics and strategic goals remains essential. Notably, major financial institutions have generally refrained from spinning off their AI groups, suggesting a more cautious path forward may be warranted in the legal sector as well.