Artificial Intelligence & Robotics

The fate of billable hours is in the hands of artificial intelligence

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“The less time something takes, the more money a firm can earn,” says Mathew Kerbis, the founding attorney at Subscription Attorney in Deerfield, Illinois. (Image from Shutterstock)

The billable hour has long been the subject of much debate. Whether you love it or hate it, the billable hour could face an existential crisis, thanks to the rapid introduction of generative artificial intelligence tools.

If AI is capable of doing tasks in seconds that once took hours or days, then law firms are faced with a dilemma: continue depending on that timer, which will be cut significantly; or find alternative billing methods that account for the tasks done, rather than the time that it takes to do them.

Artificial intelligence vs. the billable hour

Within five years, predicts Mathew Kerbis, the founding attorney at Subscription Attorney in Deerfield, Illinois, which offers legal advice and services to clients, the only way to profitably bill time via traditional billable hours in light of AI advancements will be to charge thousands if not tens of thousands per hour.

Such fees, which may have been reasonable in the past, now would probably be unethical with the addition of generative AI, and no client will want to pay, especially if they have answers in minutes, Kerbis says.

He adds that once firms stop billing by the hour, AI will increase their bottom line, as there’s an inverse relationship with time and money as soon as firms use alternative billing methods.

“The less time something takes, the more money a firm can earn,” Kerbis says. “With that additional time, more clients can be served generating more revenue; more automations and productizations can be built and improved and updated for changes in law; and more time can be spent on business development, marketing and training.”

In other words, improving the efficiencies while maintaining the firm’s effectiveness also means that while they can’t charge as much, they can increase clients served—and scale without hiring as often, which increases firm profitability and closes the access-to-justice gap, Kerbis notes.

A significant number of firms are already relying less on the billable hour. According to a 2023 Bloomberg Law survey, firms are using alternative fee arrangements for nearly a quarter of their work. Within the past year, the study finds, 53% of firms have used a flat fee rate, closely followed by a blended rate.

While firms should expect to feel pressure to adjust their business model to make up for fewer hours per task, the billable hour doesn’t have to totally disappear, says Reid Trautz, the senior director of the American Immigration Lawyers Association’s Practice & Professionalism Center in Washington, D.C.

Lawyers can still bill by the hour for communicating and counseling with clients, negotiating with opposing counsel, organizing litigation and more, Trautz says. But flat fees work best for functions that AI can now handle in a fraction of the time.

Alternative fees

There isn’t a one-size-fits-all option for firms that decide to forgo the billable hour. Possibilities include flat fees, hybrid fees, contingent fees and subscription-based models, says William Woodford, a partner with Avantech Law in Minneapolis. The common theme would be pricing transparency.

Many lawyers who have made the leap think that it’s a win-win for their firm and for their clients. The alternative fee system centers on the client, tying the monetary value for the lawyer to the result that the client is hoping to achieve, says Tom Martin, the CEO and founder of LawDroid—a legal AI assistant company in Vancouver, British Columbia—and a 2022 ABA Journal Legal Rebel.

It also gives lawyers an opportunity to use metrics and past financial data to understand the value that they’re creating and the economics involved in delivering it. Plus, Martin says, lawyers can potentially be more profitable using value-based billing, especially when the time involved in reaching a resolution is low—but the expertise needed is high.

The trick is to leverage data analytics to determine how much time each task takes, anticipating variations.

“By harnessing the wealth of data accumulated from past projects, firms can inform their pricing strategies, optimize resource allocation, and identify opportunities for efficiency gain,” Woodford says.

Eventually, standardizing processes across teams can help minimize discrepancies in profitability across matters to ensure the consistent delivery of services.

Will firms shift?

While firms have traditionally been slow to adapt to technology, they won’t have a choice this time if they don’t want to be crushed by the big players, Woodford says, noting that the future of legal services is inseparable from technological innovation—leading to winners and losers.

“Achieving firmwide adoption of new technologies will be crucial and will require a shift in organizational culture away from the opt-out mentality that has allowed partners to resist new technologies,” Woodford says.

If all the firms are speeding ahead with the technology and are able to get the work done faster and at a lower cost, then those tech-savvy firms could crush those still depending on human time and effort.

“The successful firms will be those that embrace change, foster innovation from top to bottom, and develop fee models that improve client value and lawyer well-being without sacrificing profitability,” Woodford says.

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