AI Is Making Lawyers More Efficient. What Does This Mean For Billable Hours?

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Law firms are embracing a raft of AI tools to get legal work done faster. But that newfound efficiency is now putting growing pressure on the industry’s billable-hour business model.

According to Sarah Kessler at The New York Times,

• Some clients are finding and challenging line items where they think AI should’ve saved time. In-house legal teams are asking firms to cut bills by 20% to 30% across the board, says Kyle Poe of legal software company Legora.
• Law firms are in a tricky position. Using AI to complete work faster can reduce billable hours, but rates haven’t risen quickly enough to make up the gap. Yet refusing to embrace AI could also leave firms vulnerable to emerging competition from AI-native law firms that offer upfront pricing.

What could this mean for law firms?

• Kessler believes billable hours are too deeply embedded in the legal industry to completely disappear. But there may be a gradual shift away from it, at least for some work. Repeatable, AI-heavy work may increasingly move toward fixed or project-based fees, while unpredictable, judgment-heavy work may remain hourly.

Our take? The death of the billable hour has been predicted for a long time, yet it has persisted– mostly; contingency fee matters have a long history in the context of certain litigation and other consumer legal services. And, over the past decade or two, the number of alternative fee arrangements (e.g., flat fee and not-to-exceed fees) in the commercial context has been quietly growing, driven by sheer client demand.

But as we note in our featured article, AI, sometimes in combination with the availability of litigation funding (and more often, not), is changing the landscape faster than market forces ever did before. And this goes well beyond the payment terms between clients and their law firms, impacting every aspect of the business of law.

Among the most impacted areas: attorney retention. Law firms, like so many other companies, leaned into remote working during COVID. But the remote working has been stickier in law than in many other industries. One result? All else being equal, less in-person face time translates into less sticky interpersonal relationships. This, in turn, makes it easier for people to decide to leave their firm. AI (and litigation funding) remove other hurdles and simply make it easier for attorneys to ‘hang their own shingle.’

We’ll leave the very-much-related topic of non-attorney ownership of law firms, another new development, for another day…

So, yes, as the American poet Robert Zimmerman wrote, “the times they are a-changin’.”