The billable hour has been the core business model of the legal profession for centuries. For generations, attorneys have meticulously tracked their time in increments, a practice as ingrained in legal culture as case law itself. But, AI appears to be on course to radically disrupt this and begin the course to commoditise certain legal services. Can the billable hour survive the transition to AI, and, more importantly, should it?
As machine learning algorithms and natural language processing tools increasingly automate tasks that once required hours of human labour, from contract review to legal research, the very foundation of how legal services are valued and delivered is being called into question. This technological revolution is not just changing how lawyers work—it's challenging the very economics of the profession, forcing a reevaluation of what truly constitutes value in legal services.
The Innovator's Dilemma
AI is in the process of reshaping the legal industry and the winners and losers will be determined by their willingness to embrace change. The best way of framing this is to consider the Innovator's Dilemma: companies well placed to dominate a new frontier often fail to do so because it threatens their core business model. Ultimately, when you start changing your pricing model, you’re also changing your business model, and that’s not a quick hack. For law, this is underpinned fundamentally by billing hours. Unfortunately, history has demonstrated very clearly that companies that don’t disrupt their own business model will find it disrupted for them. (Kodak, Nokia)
Why AI is Different
The legal industry has seen many technology shifts, including the digitisation of communications, signatures, payments and document management. Though impactful, existing tech has mostly involved efficiency around the edges of the work and the variable costs of human effort has remained the dominant cost factor. Eventually new technology is so widely adopted it becomes “table stakes” and any pricing advantages are lost. As a result, technology has done little to challenge the primary billable hour business model.
With AI, it’s a different story. We shouldn’t be viewing this as the next technological innovation, but a step change in the way technology will diffuse into our workflows. AI is different in that it can replace some of the core tasks of legal work and scale to huge throughput, allowing for some work to move to a fixed cost, value based pricing. It’s not all good news, however, because the variable costs of human labour are replaced with the upfront fixed costs of technology investment, which also needs to be paid for, somehow.
The existing billable hours model is familiar and it offers flexibility and (relatively) low upfront costs, but it also limits the speed of company growth and puts a cap on profitability per employee. Though AI adoption carries risks in terms of upfront investment there are opportunities for market expansion and profitability previously unavailable to law firms.
Don’t Sleepwalk into Giving Away Value
I recently spoke to an AI engineer who automated a complex research process that previously took two weeks into something that could be accomplished in only a few hours. They were surprised to be met with consternation that it would cost the company a fortune in lost revenue as they could only bill a few hours rather than two weeks of effort.
While we might raise our eyebrows at this sentiment it’s easy to miss opportunities for value based pricing. Customers are paying you for results, not to be busy. If they were happy to pay for research when it took two weeks they will be equally happy to pay for it now it takes two hours and likely appreciate the faster turnaround.
Establish a USP
Value based pricing only holds so long as your competitors aren’t all doing the same thing at which point it becomes a race to the bottom. It’s safe to assume that before long every major law firm will have rolled out access to a large language model across their workforce and so you can’t expect to establish a competitive advantage just by giving staff Copilot. By focussing on innovating in the areas in which you are strongest you can establish a unique selling point (USP) which can lead to higher profit margins. Even without a technical USP there are other ways to innovate.
Find a Bigger Pie
When a service reduces in price, demand for it will typically increase. It’s easy to imagine the legal sector as a fixed pie with a set of companies fighting it out for declining margins, but the pie can be grown.
There are many things that people would like legal support on, but the price of billable hours makes it impractical. For example assisting small claims, dispute resolution, drafting and reviewing low value contracts, or regulatory compliance checks. What these items lack in value they make up for in volume so these new markets becoming addressable offers a wealth of new value streams to tap into.
High Value Work
At the other end of the market, complex high value legal work is very unlikely to be automated in the foreseeable future and as such it will likely remain an area for high profits despite being a competitive market segment. By embracing AI for less complex tasks that support the high value advice (i.e. analysing a multitude of data points from 10,000 client contracts, instead forming a conclusion from a sample of 100), companies can focus their most valuable legal brains on building relationships with clients and unlocking opportunities to offer the kind of high value advice that customers will pay a premium for.
Keep Humans in the Loop
Clients don’t just come to legal firms to get work done, they want expertise, risk mitigation and human relationships. By ensuring that human oversight remains at the core of your offering you can combine fixed price and hours based offerings that provide assurance that purely self service tech led offerings can’t compete with.
So is the Billable Hour Dead?
Not any time soon, but it’s clear that the proportion of revenue in the legal sector generated by selling hours is only going to diminish and those companies that will thrive in this new AI powered world will be those that think in terms of value based pricing, innovate to develop USPs, find new markets to address and focus their billable resources on high value work that cannot be easily automated. This presents a threat to existing business models, but also huge opportunities to those that embrace change.
If you’d like to speak with us about how we could help your firm use generative AI in this way, then feel free to book a call with us here.