Will AI Herald the Death of the Billable Hour?

By McCarthyFinch.

For nearly 70 years, the billable hour has been the fiscal pillar of legal practice. It dictates how lawyers conduct their work, how they measure their progress, and when (or if) they clock off. A deep-rooted stalwart within the legal profession, it has long since provided the framework for how law firms structure their revenue models.

However, has the billable hour overstayed its welcome?

Nowadays, Lawyers have access to the data needed to set predictive, value-based fixed pricing. Further, with AI-enhanced law firms able to complete legal research in minutes instead of weeks, shouldn’t firms be naturally switching from time-based billing to result-based billing?

Such a paradigm shift would serve clients, lawyers, and law firms. However, as the industry faces disruption, the predominant form that billing will assume remains to be seen.

IT WILL KEEP THE CLIENT HAPPY

It’s no secret that the billable hour is a bane for many clients. It can result in unpredictable fees that are measured by six-minute increments, not outcomes.

“There can exist an inherent conflict of interest between the billable model and the needs of clients,” said Jean Yang, McCarthyFinch’s Legal Tech Counsel and Legal Services Manager.

“As much as it’s ingrained into the profession, the billable hour can be the direct enemy of efficiency. It disincentives the adoption of new ways of doings things that are more efficient, and often more accurate.”

“What lawyers should be doing is serving their clients’ needs, instead of serving tradition,” added McCarthyFinch CEO Nick Whitehouse.

“Value-based billing is generally what clients want. It’s the gateway to escaping the billable hour.”

By switching to value-based billing, law firms can offer clients a sense of transparency, security, and a degree of certainty in the result being delivered. It also gives lawyers more time to assess the business needs of the client, which in turn allows them to offer a wider array of client-centric legal services.

IT WILL MAKE THE LAWYERS HAPPY

Across the board, the disparity between the average worker and the CEO has never been greater. Last year, the income ratio of top company CEOs compared to the average worker sat at 271:1, compared to a 10:1 ratio in 1970.

Similarly, the profit reaped by the highest-paid partner compared to the most junior lawyer is an enormous problem: this year, a report released by Mahlab Recruitment revealed the average major firm partner in Sydney earns around the $1 million mark, while the average Sydney-based first year lawyer earns as little as $78,000.

Such figures suggest two concerns: that the current system hasn’t evolved to meet the needs of the average worker, and that the billable hour doesn’t serve the lawyers at the bottom of the ladder — ultimately, someone has to work more hours to create more profit.

“In the 1950s, families could survive on a single income,” said Nick.

“Now show me a western capital in which this could occur. Our relationship with work has been redefined overtime. You’re expected to take your work home with you. You’re expected to respond to texts and emails at any hour of the day. You’re always “on”. Many businesses are more profitable than they’ve ever been, but average wages haven’t increased commensurately. The model has changed without much discernible benefit to employees.”

At a pan-industrial scale, more needs to happen before genuine change can be achieved. However, within the legal sector, the removal of the billable hour will profoundly impact the lives of lawyers.

“By replacing the billable hour with value-based billing, a lawyer’s worth won’t be measured by how many hours they work over a week, but the results they deliver. This will create possibilities for more equitable distribution of work and remuneration, while also creating the possibility for work/life balance.”

IT WILL BE BETTER FOR BUSINESS

As we’ve discussed in the past, implementing new efficiencies can feel counterintuitive to some firms, as it results in a reduction of overall billable hours. However, value-based billing creates an opportunity for higher margins whilst keeping clients happy.

“It’s all about the value output,” said Nick.

“Clients have told us they are willing to pay a premium to get fixed fees. This can allow law firms to earn more revenue with greater margin for potentially fewer work hours.”

While some rules need to change to facilitate this broadly, Nick asserts that this model is not without precedent in the legal sphere.

“If you look at a consultancy firm or M&A firm where they charge a percentage of the transaction, they can earn far more fees for doing far less work by aligning fees with what the client values most.” he said.

While large law firms have the data and people to re-imagine how clients are billed, the period where this remains an opportunity is finite. Like Blockbuster, if you keep charging late fees when Netflix shows up, you’re going to be painfully disrupted.

“We’re already seeing boutique firms take business from traditional firms, as well as businesses outsource more work to LPOs. As legaltech matures, the impact of these trends will be more keenly felt across the board. You can either seize the opportunity and make use of the decades of billing data you have, or wait for disruption.

“Either way, I look forward to the day in which we can all earn more for working a five-hour week.”

McCarthyFinch is an artificial intelligence platform for automating and innovating the business of law. Founded in 2017, McCarthyFinch is a 50:50 joint venture between MinterEllisonRuddWatts and Goat Ventures.

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