Legal tech challenges the ‘billable hour’

Author: Sharessa Naidoo.

Despite the beautifully articulate reasons we have for wanting to become future commercial lawyers, for many, the underlying reason remains the sizeable salary commercial lawyers take home at the end of the month. This isn’t necessarily a bad thing, especially for those that grew up with financial hardship. Law is a way to guarantee financial stability. But how will future lawyer’s justify taking money from clients based on the time  they’ve spent on a client matter when legal tech is destined to take over the most time-consuming and routine legal tasks, like document reviewing and contract drafting? In other words, does AI pose a challenge to the billable hour model that commercial law firms use today?

The billable hour remains a staple pricing model in UK firms since its wide-spread adoption in the 1970s. Under this model, firms calculate the cost of client work by recording the time spent by paralegals, junior lawyers, senior lawyers, and/or senior partners and then applying each person’s respective hourly rate. Because senior lawyers and partners have higher rates, the cost to the client increases if they spend more time on the matter, while larger firms often set higher hourly rates overall. Pricing is calculated in 6 minute increments, so that short tasks are billed for optimal profit-making[1].  

However alternative fee structures (AFS), existing before the billable hour model like fixed fees, are growing in prominence. This has been kickstarted by clients’ relentless need for greater cost control measures to have more certainty over what their final bill will be, instead of firms using the billable hour model to justify higher pricing according to unexpected, prolonged work. In short, clients are increasingly pushing for AFS to forgo ‘the blank check problem’. But firms abandoning the billable hours model could now more than ever be something they also want to do. Firms’ increased use of legal tech could create a misalignment between the reduced hours their lawyers will work and the value of work they produce for clients.

There is a clear issue here. AI is going to reduce the number of hours lawyers spend on a client matter.  Additionally, in-house departments adopting legal tech will increase their capacity to take on more work that they previously outsourced to firms, which will reduce work law firms have traditionally done for clients. For example A&O Shearman’s ‘ContractMatrix’, an AI-powered in-house contract drafting and clause quality assessment tool, cuts contract review time by 30% with lawyers saving 7 hours on average per contract review[2]. So if firms need to cut costs to respond to workload reductions, they may hire far less paralegals and junior lawyers. This could create a shortage of future senior lawyers if no new pathways to becoming senior lawyers are created.

However some see this as a good thing. Despite our future job prospects looking shakier, I’m inclined to agree! Law firms will have the capacity to handle more complex matters. Commercial law firms will become breeding grounds for domain experts. Law firms can go beyond routine legal risk mitigation tasks to help solve crucial business and social problems they never had the time for. In short, to truly capitalise on the adoption of legal tech, law firms must be proactive in identifying and telling businesses what their future needs will be. To do this, law firms may want to expand their knowledge on niche areas in the legal market[3] e.g. certain aspects of maritime law, climate law, space law, fashion law etc. The bottom line is that law firms must position themselves as the go-to advisor for niche practice areas.

This means we might see the billable hour model booted due to increased legal tech usage, since the financial value of the critical thinking needed in future commercial law firms cannot be determined by the number of hours lawyers in firms work. This value will likely be determined by the projected profitability of the ideas firms come up with. Future law firms may struggle to justify their fixed fee amounts, unless regulators and governments step in to set standards.

Some may argue this is all well and good, but with future generations highly dependent on gen AI tools like Chat GPT, are future lawyers losing the critical thinking abilities needed to make future law firms competitive?

Stay tuned for my next blog on the use of AI in training future lawyers.   

[1] Firms 'moving away from billable hours' by The Law Society Gazette

[2] A&O Shearman: Transforming Legal Services through AI Innovation

[3] Thomas Reuters 2024 Report on the State of the UK Legal Market, pg3