Will legal AI end the billable hour?

AI is transforming legal practice. But as we adapt to a more streamlined way of working, there’s a question on legal professionals’ minds. Will it end the billable hour?

Clients know that the technology will shave significant hours off billable tasks. But this doesn’t have to pose a threat to share of wallet. According to the industry leaders we asked – it’s not as simple as AI ‘ending’ the billable hour.

The legal field, as we know, is a complex one. Instead, we need to think more broadly about how AI is revolutionising legal work. The key to success will be seizing the opportunities brought about by AI.

To strategically navigate this huge period of transition, it will (quite literally) pay to stay solutions focused. Whether or not the billable hour is here to stay, let us explore how you can leverage AI to safeguard your firm.

What is legal AI capable of?

To understand how AI will affect billing for legal services, we need to evaluate its capabilities. The biggest plus is the automation of routine, time-heavy work. This will vastly drive down the number of hours spent on legal research, writing legal memos, and drafting legal contracts.

What’s more, emerging legal AI tools are improving by the day. To ensure they meet the real-world needs of law, technology companies are building them to meet a range of security and ethics concerns.

One of the latest entries into the market to do so is Thomson Reuters’ CoCounsel. To curtail hallucinations and inaccuracies, the tool draws from Thomson Reuters’ extensive suite of legal publications and content. It is the first legal AI assistant of its kind, and can perform certain routine tasks in seconds. How do you bill for the opportunities it unlocks?

Automation will affect billable hours…

Let’s consider the kinds of tasks legal AI will take over and how much revenue they generate. Automation is gen AI’s greatest offering to the legal industry right now.

Research, summaries, memo and contract drafting are largely the purview of junior lawyers. In effect, they constitute significant, but low-profit billable hours. And with AI taking over these, it won’t pay to charge by the hour.

“AI will enable routine work to be done very quickly, with the result that firms will not achieve cost recovery if they charge for that work on an hourly rate basis,” says Warren Kalinko, Chief Executive Officer, Keypoint Law.

“For example, if it takes one minute to generate a document, charging on an hourly rate basis will not make sense,” he says.

…but a lawyer’s expertise will be more lucrative than ever

There is a lot that AI cannot replace, however. This fact will boost the importance of personalised service, field expertise and judgement that a human lawyer brings. Especially a senior legal practitioner.

To level out the decline in billable hours for low-level tasks, firms can switch from hours worked to an assessment of value for expertise.

By harnessing AI assistive tools like CoCounsel, senior lawyers will be free to have greater face-to-face time with clients. These benefits for the business include greater affinity with clients and gaining a better understanding of their needs. With deeper insights, you can unlock further solutions. This in turn means more work to bill for.

Chief Executive Officer for Keypoint Law, Warren Kalinko, maintains that this kind of ‘strategic or high-level advisory work’ is not under threat from AI. And therefore, neither is billing for lawyers’ time.

“AI will be brilliant for non-conventional firms, like Keypoint, which are ‘partner’ heavy – it will give senior lawyers access to a virtual army of AI lawyers. However, it will be very challenging for traditional firms,” he adds.

3 reasons the billable hour will survive

According to Joel Barolsky, Principal for Barolsky Advisors and Edge International, it is not the end of the billable hour (yet). He lists three factors maintaining its survival:

1.The billable hour best serves pricing for complex legal matters

“Despite all its imperfections, it is still the fairest way for buyers and sellers to transact when the scope of a particular matter is very unclear,” he says.

“For example, in a complex bespoke litigation matter, Generative AI will not create more certainty around how long the matter will take, the settlement terms, the resources required to resolve the matter, or the pathways to get to that outcome.”

2. Clients will have buying power

“Powerful buyers of legal services see it as the primary way for them to realise the financial benefits of productivity gains,” adds Joel.

“For example, if a legal document using Generative AI takes one hour to prepare instead of 20 hours, these clients will demand that they pay based on time spent, not on results or value. Law firms might try to negotiate a higher fixed fee plus a license fee, but in a buyers’ market, clients will most likely dictate market standards.”

3. Large-scale institutions will resist the change

“A third reason hourly rates will stick around for some time is that very large institutional buyers of legal services, such as banks, corporations, government and insurance companies, prefer to use hourly rates as a critical criterion when deciding which firms to put on their preferred supplier panels.”

“Hourly rates provide procurement professionals with a simple mechanism to compare the pricing of different law firms. Gen AI is not likely to change this approach,” Joel concludes.

How to bill clients in the age of legal AI?

As client-centric, strategic work takes centre stage, you’ll need to develop a strategy for pricing AI-augmented work. It is important to stay competitive, whether you’re considering moving away from billable hours or not.

But not all things have to change. In the age of AI, the most lucrative thing you can bill for is what you’ve been offering clients all along. It comes down to value and expertise. And used strategically, AI will help you deliver this.

3 ways AI can boost your value proposition

Here are four ways to safeguard revenue in the age of AI:

1. Everyone wants a piece of the AI pie

This includes your clients. Find out their expectations of AI both internally and as part of your collaboration. This will allow you to gain insight into how you can secure results on both sides. A win-win. In a recent interview with The Australian Financial Review, Minter Ellison CEO Virginia Briggs shared how to talk AI with clients.

Firms will need to communicate to clients that there will be “material cost savings, but with no loss of value and no increased risk.” Virginia suggests bringing prompt engineers to early discussions with clients.

Together, you can assess how technology can best be used to serve their needs. This will build trust and transparency with clients.

2. Clients will value trusted advice and guidance

It is important to consider business culture, too. As an information-based technology, AI cannot build client relationships and replace the expertise that human legal advisers give.

What it will do is enhance the work you can deliver to clients. In turn, shift your focus to the increased value you can offer and pivot your pricing to reflect your expertise.

3. Human interaction will take centre stage

Automation will liberate time in lawyers’ calendars to spend with clients. More face-to face moments means more insights into their unique challenges. In turn, this creates an opportunity for your firm to provide novel solutions and drive new revenue streams.

Chief Client Officer for Gilchrist Connell, Lauren Scott, says that AI gives firms opportunities to offer value-based pricing.

“In a world of tight margins, AI presents a tremendous opportunity to deliver more (output) for less (input). Client relationships have never been more important,” she reflects.

Additionally, strategic client work cannot always be quantified by an hourly rate.

“Gen AI demands a shift from transactional interactions to deep client relationships where risk is shared, and mutually beneficial solutions sought. The billable hour isn’t always appropriate in this scenario.”

Get your pricing ready for AI

It doesn’t look like the billable hour is going anywhere fast for legal professionals. But one thing is for sure: AI is here to stay. Many firms using AI are already reviewing their pricing and value propositions to drive revenue. The early adopters will have the greatest potential to capture new business.

As Chief Client Officer for Gilchrist Connell, Lauren Scott’s predicts: “In the future, Gen AI may offer a bridge between two groups with previously competing interests: the private practice firm looking to differentiate itself from its competitors by demonstrating its understanding of the client through compelling value-billing models (delivered efficiently by leveraging AI), and the procurement function seeking the cost efficiencies of AI (that may have historically defaulted to purchasing on the basis of an hourly pricing model).”

In conclusion, start by reviewing your pricing models. Then, look at the increased value you can offer clients with AI augmented work. Focusing on internal efficiency and external client service will help you adapt more easily.

A robust strategy will enable you to comfortably navigate evolving client expectations while securing revenue. This means that no matter the changes to billing for legal services, you’ll have security in a diversified approach.

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