Last year, I wrote an article about whether AI signals the end of the billable hour. In that article, I asked what Generative AI will do to the billable hour.
- Rates will go up.
- Rates will go down.
- Work will shift to alternative fee arrangements.
- Work will go in-house.
- All of the above.
My answer was “all of the above.” I am now qualifying my answer. AI will have less impact in the near term on the shift toward alternative fee arrangements, including fixed fees. The billable hour is more embedded, especially in Biglaw, than most realize.
Three things must change for the billable hour to give way to fixed-fee arrangements. Law firms must have a change in mindset, culture, and infrastructure. That is easier said than done. In the long term, competition and client demands will force the change. AI will have an indirect impact.
Mindset
Most firms bill by the hour and don’t benefit from efficiency when billable hours are reduced. Generative AI will drive efficiencies, but it will not change the mindset of marking up billable hours. It is still easier to raise rates when work becomes more efficient. If 10 hours become five hours of work, clients should expect an hourly fee at a higher rate.
Why is this?
Law firms must be 100% owned by lawyers, and the most expedient way to accomplish this is through partnerships. The partnership business model encourages the distribution of profits every year to its lawyer owners. Law firms rely on billable hours as a straightforward measure of work and attorney contribution. Profit comes from marking up hours, and that is very different than a business model where capital is retained and where the revenue model allows for a focus on efficiency.
Conrad Everhard, founding partner at Flatiron Partners law firm, which provides fixed-fee services for mergers and acquisitions, and other transactions, says, “Biglaw is like an ocean liner. Because of longstanding culture, staffing models, and compensation, they are locked into a cycle where efficiency doesn’t help the bottom line. It is a mindset that makes it very hard for Biglaw to pivot. But Biglaw is at an inflection point. Efficiency is being forced on it by technological innovation and AI.”
Culture
Mindset informs culture. Recently, another Biglaw firm just mandated associates to work four days a week in the office. In-office policy helps partners feel more comfortable about the work (billable hours) being done by associates, and it provides a more familiar way for associates to learn and be mentored (at least that’s from a partner’s perspective).
Gen Z is more digitally adept than prior generations. Their default learning and communication styles are through technology. How many firms are evolving their models to recognize that the next generation of attorneys and clients will prefer a better work-life balance and more virtual meetings? How many firms realize they will desire to interact via text or Zoom, and that they are more likely to spar with an AI mentor and reserve human interaction to those times when it’s truly needed?
The point is, there are new models and new approaches like online learning, virtual meetings, and hoteling. A firm’s economics and a firm’s cohesiveness need to be balanced, but right now, I’d argue that Biglaw is generally leaning toward familiar legacy practices as opposed to evolving those practices toward those that are likely to be valued in a future state. It’s not a criticism, but it is reality.
Infrastructure
Real estate is an example of infrastructure tied to a traditional mindset. How often do clients come to the office these days relative to the past? There are times when in-person meetings are required or when a “war room” environment needs to be set up. Real estate is just the tip of the iceberg. The entire back office of a firm is organized around the billable hour. It’s the basis for partner compensation, measuring the profitability of engagements, and for measuring the performance of associates.
Even if a large firm wanted to move away from the billable hour, it would have to rethink incentives, retrain staff, change process, and retool infrastructure. To do that requires setting aside nonbillable time for planning and retraining. It requires a rewrite of major systems, and that requires capital.
Can Biglaw move away from the billable hour?
The Catch-22 of retooling infrastructure is that the partnership model and incentives are tilted toward the disbursement of profits to partners. Nonbillable time and capital investment are the enemies of disbursing profits. Like their corporate counterparts, law firms require retooling to operate differently. But firms have a bigger challenge because the steps required are counter to the mindset.
When the familiar model of the billable hour starts to break down, we’ll see more change. For now, many clients still ask for work by the hour. Firms can make the move, but the move won’t be easy. The catalyst will be competition and changing expectations from clients. AI will be a behind-the-scenes driver. For now, AI is not yet incompatible with the primary, legacy model of the billable hour.
Everhard adds, “I think there will be an evolution of the pricing model over time. But like in other industries, the catalyst for change will come from outside. New market entrants, AI, and tech will force law firms to rethink the old playbook. That will drive the change. That is what we did at Flatiron. We got outside the traditional firm model and changed everything. We deploy labor differently. And we heavily leverage AI and technology, especially our own ‘deal operating system’ that enables us to handle complex transactions with a lot less labor and time, with better results.”
Firms will continue to be profitable using the billable hour in the near term. Competition from new firms that operate more cost-effectively will eventually come. They will embrace technology and have a mindset to deliver value with improved efficiency. This will raise awareness with clients and put pressure on firms to shift their model.
The big question is, how long will it take for Biglaw to feel the pressure?
Ken Crutchfield has over forty years of experience in legal, tax, and other industries. Throughout his career, he has focused on growth, innovation, and business transformation. His consulting practice advises investors, legal tech startups and others. As a strategic thinker who understands markets and creating products to meet customer needs, he has worked in start-ups and large enterprises. He has served in General Management capacities in six businesses. Ken has a pulse on the trends affecting the market. Whether it was the Internet in the 1980s or Generative AI, he understands technology and how it can impact business. Crutchfield started his career as an intern with LexisNexis and has worked at Thomson Reuters, Bloomberg, Dun & Bradstreet, and Wolters Kluwer. Ken has an MBA and holds a B.S. in Electrical Engineering from The Ohio State University.
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