Pundits have been predicting the end of the billable hour forever, but AI is different
Legal market pundits have questioned for decades when the billable hour will finally die. A simple internet search – maybe using Chat GPT – will guide you to headlines that pronounce the billable hour dead or anticipate its imminent demise. Jordan Furlong’s position – noted in a recent interview in this publication – is that the billable hour “will survive until shortly after the sun dies.”
I agree with Jordan that the billable hour will persist in some form for a very long time. It has proven resilient despite the apparent appeal that alternative fee arrangements (AFAs) present for in-house counsel – namely cost predictability, the alignment of the client’s interests with those of its service provider, a simplification of the billing process, and encouragement of innovation in legal service delivery models including the greater use of legal technology to lower the cost of legal services.
For AFAs to truly take off, there must be a strong desire on the part of both clients and law firms to make structural changes to how legal work is priced. In-house corporate counsel love to express their desire for cost predictability but justifiably question whether the fixed fees their law firms develop for them will also result in cost savings from more efficient practice or be built based on the cost of historical matters that involved traditional (and non-tech enabled) legal workflows.
At the same time, law firms have not felt significant pressure to make structural changes to their pricing approaches. What would motivate law firms to make AFAs and value-based pricing a strategic priority when hourly rates have worked so well for decades?
The answer is, in part, generative AI. Those of us who have tested it at our law firms have seen the opportunities it presents to disrupt current workflows. We have also seen the remarkable enthusiasm of lawyers at all seniority levels to adopt the technology and explore novel use cases. Soon, there will be no reason to have an associate review, summarize and analyze a 100-page document when a sophisticated generative AI platform like CoCounsel or Harvey can perform that task with impressive results in seconds.
Clients will expect reductions in the cost of legal services for matters where AI can be leveraged, and it’s safe to assume that the percentage of matters where lawyers can find ways to leverage AI will continue to increase. Firms using generative AI to assist with routine tasks and who bill by the hour will quickly see declining revenue and profitability – the volume of associate billable hours for many legal tasks will decrease while legal technology costs continue to increase.
This is why we’ve reached an inflection point in how buyers and sellers view pricing arrangements. We will see AFAs finally pick up steam as the inputs and outputs of legal service delivery shift. Robot-created responses generated in seconds will replace much of the human-generated work product measured in hours. Clients will see legal services delivered more quickly and with greater efficiency, and with new insights for clients as AI tools scour massive and heretofore under-utilized data sets (think predictive analytics for litigation outcomes that are based on a mix of public court data and proprietary law firm data). To be clear, this does not mean that lawyers disappear from the process. This means a big step forward in efficiency and insights, with lawyers freed up to focus on higher-value tasks.
Law firms and clients can share the financial benefits of the efficiencies, resulting in the long sought-after but rarely realized “win-win” pricing arrangements. Clients will receive cost predictability through fixed fee AFAs but also benefit from cost savings by not paying for associate hours for many tasks. As a BDO report titled “A New Era for Law Firms” recently noted, the solution for law firms may be to “break the link between price and billable hours.” They can move away from a “cost-plus” pricing mentality and set fixed fee prices that are competitive and lower than under previous hourly billing models but that reflect the value being delivered to clients and provide reasonable profit margins for the firm while recovering a portion of the increased costs they are incurring to use generative AI platforms. The Thomson Reuters Institute’s 2024 Report on the State of the US Legal Market alluded to this scenario and envisioned, "Clients benefit from higher-quality advice, faster service, and more creative solutions, while firms see reduced operational costs and improved labor efficiency.”
Innovative law firms will move quickly to partner with clients on AFAs rather than get dragged kicking and screaming to do so. Such firms will also invest more in pricing experts who can effectively marry financial acumen with an understanding of how legal products and services will be delivered using tech-enabled service delivery models and an ability to articulate the value of such products and services.
Hourly billing will survive, but it may soon cease to be the dominant pricing arrangement between law firms and clients. This time, it’s different.