The AI factory and the future of the legal function

Companies are becoming AI factories. As they do, legal leaders must move beyond traditional risk management to build the governance frameworks that allow innovation to scale safely, responsibly, and at speed.

For decades, legal departments have been measured by their ability to manage risk. The best legal teams protected the business, ensured compliance, and prevented costly mistakes. In an era defined by artificial intelligence, that definition of value is no longer enough.

Today, organizations are rapidly transforming into AI-powered operating models that generate insights, make decisions, and execute actions at a speed and scale no human workforce can match. As these systems become embedded across the enterprise, a new challenge emerges: how do businesses move faster without losing control?

Conventional thinking assumes governance is the answer to that question because it slows things down. Bjarne Tellmann, CEO FjordStream Advisors and author, whose newly released book, The Law in the Era of AI, explores the impact of artificial intelligence on legal practice and governance, sees it differently.

“The future legal department is not primarily a risk-management function,” he argues. “It is a business acceleration function.”

In Tellmann’s view, the organizations that will realize the greatest value from AI will not be those with the fewest constraints. They will be those with the best-designed ones. Governance, in other words, is not a barrier to innovation. It is the mechanism that makes innovation scalable.

This represents a profound shift in how legal leaders create value. As companies evolve into what Harvard Business School professors Karim Lakhani and Marco Iansiti have termed “AI factories,” continuously transforming data into decisions, actions, and outcomes, legal’s role must evolve alongside them. The most influential legal leaders of the next decade will not simply protect their organizations from risk. They will design the governance frameworks that allow their businesses to move with confidence, speed, and scale.

The AI factory changes the economics of business

An AI factory is best understood as a continuous operating system. Data flows into the organization, AI systems process and interpret that information, actions are taken, outcomes are generated, and new data is created. That data then feeds back into the system, improving future performance through a continuous learning loop.

According to Tellmann, three powerful forces are driving organizations toward this model: scale, scope, and learning. Scale allows businesses to grow at near-zero marginal cost. Scope enables the same digital infrastructure to support multiple products, services, and use cases. Learning creates a compounding advantage as every interaction improves future performance. Taken together, these dynamics create extraordinary competitive leverage.

Tellmann points to organizations such as Google, Uber and Walmart, which have used AI-driven operating models to create advantages that competitors struggle to replicate. The lesson is clear: AI factories are not limited to technology companies. They are rapidly becoming the dominant operating model across industries.

This shift helps explain why organizations continue to invest aggressively in AI despite ongoing debates about short-term productivity gains. Leaders understand that the companies that successfully harness scale, scope, and learning are likely to establish advantages that competitors will struggle to replicate.

For legal leaders, the question is no longer whether this transformation is happening. The question is how the legal function evolves alongside it.

Why legal must become an AI-enabled function

If businesses are becoming AI factories, legal departments must develop the capabilities necessary to support them. Tellmann argues that the modern legal function requires its own version of an AI-powered operating model. At its center sits a technology platform that serves as foundational infrastructure rather than an optional productivity tool. Without that foundation, legal teams will struggle to keep pace with the organizations they support.

Equally important is the evolution of legal operations. Over the past decade, legal operations has emerged as a vital discipline focused on efficiency, budgeting, and process improvement. In the AI era, however, its role expands considerably. Legal operations becomes the orchestration layer of the legal function, helping translate legal work into data, aligning resources with strategic priorities, and enabling continuous improvement across the department.

This evolution requires new capabilities. Future legal teams will combine legal expertise with technology, data, process design, and operational disciplines that have not traditionally existed within corporate legal departments.

Underlying all of this is a simple reality: data is becoming legal’s most important operational asset. To support AI-driven transformation, legal data must be structured, accurate, and consolidated.

The legal departments best positioned for the future will build on three interconnected layers: data, knowledge, and governance. Data provides the foundation. Knowledge includes playbooks, decision frameworks, institutional expertise, and embedded legal intelligence. Governance sits above both, establishing the rules, permissions, controls, and accountability structures that allow organizations to operate confidently at scale.

This is where legal’s future role begins to come into focus.

Governance is becoming legal’s highest-value contribution

The growing importance of governance is directly linked to the evolution of AI itself. Much of today’s conversation remains focused on generative AI systems that provide recommendations, generate content, or assist with analysis. Increasingly, however, organizations are deploying agentic AI systems capable of taking action autonomously.

These systems can negotiate agreements, execute workflows, communicate with customers, make operational decisions, and trigger business processes without direct human intervention. As autonomy increases, so does the importance of governance.

Tellmann emphasizes a critical distinction: “Organizations don’t need systems that optimize. They need systems that optimize within constraints.”

To illustrate the point, he recounts the experience of a pharmaceutical ingredients company that deployed an AI-powered supply chain system designed to maximize efficiency. When severe weather threatened shipments, the system automatically rerouted thousands of temperature-sensitive products to alternative ports. Operationally, the decision appeared sound. Legally and regulatorily, it was disastrous because the alternative ports lacked authorization to receive those shipments. By the time employees intervened, significant compliance issues had already been created. The problem was not the technology. The problem was governance.

Courts and regulators are increasingly reinforcing the same principle: organizations remain accountable for the actions of the AI systems they deploy.

This reality becomes more significant when combined with four characteristics of agentic systems that amplify risk: speed, scale, autonomy, and irreversibility. Decisions can be made in milliseconds. They can be replicated thousands of times simultaneously. They may occur without direct human oversight. And once executed, they may be difficult or impossible to reverse.

These are not primarily technology challenges. They are governance challenges. That is why Tellmann believes legal leaders must become deeply involved in determining what AI systems are permitted to do, where human oversight should exist, what guardrails need to be embedded, and how accountability is maintained. Those decisions cannot be delegated entirely to technology teams. They require legal judgment, regulatory understanding, and strategic foresight.

Historically, legal departments have created value by protecting the organization, enabling commercial activity, and capturing value through effective legal support. Those responsibilities remain essential.

The next frontier is helping organizations scale and govern AI-powered operations. The legal leaders who shape those systems rather than react to them after the fact will become strategic architects of business transformation. As Tellmann says, “The future GC is not just a legal advisor. They are an architect of responsible scale.”

He uses Germany’s Autobahn system as a powerful example of this principle in action. Its effectiveness does not come from the absence of rules. It comes from the presence of clear rules, shared expectations, and well-designed guardrails that allow vehicles to move safely at extraordinary speed.

The same principle applies to AI-powered enterprises. Organizations need structured velocity. They need frameworks that allow innovation to move quickly while remaining responsible, compliant, and sustainable. In that environment, governance is not the brake pedal. It is the steering wheel.

The most influential legal leaders of the coming decade will understand this distinction. They will recognize that governance is no longer simply about controlling risk. It is about enabling progress. By designing the frameworks that allow organizations to innovate with confidence, legal leaders can become architects of business transformation and indispensable partners in AI-powered growth.