Is the Billable Hour Dying?

Is the Billable Hour Dying?

Is the Billable Hour Dying?

Adrian Parlow

July 5, 2024

Since ChatGPT was released in late 2022, there has been an explosion of interest in legal tech. Every week I meet lawyers interested in building new tools with AI. The last two batches at Y Combinator have seen a major uptick in legal tech startups. And I’ve seen firsthand that VCs are now finely attuned to the space.

Much of this is predicated on the switch from the billable hour to flat-fee or other alternative fee arrangements. Historically – the argument goes – lawyers were reluctant to buy software that made their work more efficient, because efficiency results in fewer billable hours. As AI takes over the world, law firms will increasingly shift away from the billable hour model, which will incentivize them to adopt new, efficiency-promoting tools.

That’s the theory.

There is some evidence to support that this shift is already underway. Some big law firms are now experimenting with shifting repeatable work to flat fees (for instance, Wilson Sonsini's Neuron product), and it’s a focus of nervous conversations at every legal conference.

As a legal tech startup, we interact with many small firms pushing the boundaries of the legal model, and are seeing an increasing number of them adopt a mix of billable hour and value-based pricing.

However, in my view the purported “end of the billable hour” is being vastly overblown. While many firms now report using some type of fixed fees in their practice, when asked for details we usually discover that these comprise only a tiny fraction of the overall practice.

And there are good reasons why firms are hesitant to shift away from the billable hour model:

  1. Predictability. Many (if not most) kinds of legal work are inherently unpredictable. Even for something as simple and repeatable as a Series A financing, the time it takes to complete the project can vary wildly based on factors that are difficult to predict, like how hard opposing counsel chooses to negotiate. Using the billable hour, that risk is borne by the client; under a fixed fee arrangement, the risk is borne by the firm. If something takes much longer than expected, that’s money directly out of the partners’ pockets.

  2. Simplicity. Firms have been billing by the hour for hundreds of years. It’s a clear and simple business model that is familiar to both firms and clients. More importantly, trying to accurately estimate how much a fixed fee matter will cost is a challenging endeavor. With the exception of highly routine and repeatable work, most projects rely on external factors that make it very difficult to accurately price.

  3. Incentives. The prevailing narrative is that the billable hour misaligns lawyer and client incentives. However, the inverse is also true. Firms that bill on a fixed fee basis have the incentive to complete the work as quickly as possible. This creates fears that the work will become rigid and low quality.

Compounding these issues is the general opacity of legal services. Most clients don’t really understand “how the sausage is made” and rely on the firm to dictate the appropriate model. Highly sophisticated clients are usually purchasing higher-end legal services, which are less amenable to fixed fees anyway.

The future of legal billing

It’s clear that the billable hour is not dying anytime soon.

However, there’s no denying that more firms are considering fixed and alternative fee arrangements, driven by increasing client demand and leverage from AI. Over time, work that’s well-suited to fixed fees from the firm’s perspective – predictable, repeatable, and automatable – will shift over. Higher-end, less predictable, and more bespoke work will remain on the billable hour.

We think a lot about what administrative processes will look like for a future firm operating in this world. A few things are very clear:

  1. Accurately predicting how long a project will take is a major unlock for the shift to fixed fees.

  2. The choice of when to bill on fixed fee vs. hourly requires firm leadership to have a nuanced understanding of the work being performed. So does the decision of where to allocate resources within a fixed fee matter. Better data sets and tooling are needed to make these decisions effectively.

  3. Firms will increasingly be required to straddle these two divergent incentive structures and to craft new ways of operating that support both. This will have trickle-down effects on hiring, staffing, and training of attorneys.

We’re currently in a moment of transition for the financial model of firms. While there’s undoubtedly friction ahead, firms that are able to adapt will reap the benefits of the next wave of legal automation.

Since ChatGPT was released in late 2022, there has been an explosion of interest in legal tech. Every week I meet lawyers interested in building new tools with AI. The last two batches at Y Combinator have seen a major uptick in legal tech startups. And I’ve seen firsthand that VCs are now finely attuned to the space.

Much of this is predicated on the switch from the billable hour to flat-fee or other alternative fee arrangements. Historically – the argument goes – lawyers were reluctant to buy software that made their work more efficient, because efficiency results in fewer billable hours. As AI takes over the world, law firms will increasingly shift away from the billable hour model, which will incentivize them to adopt new, efficiency-promoting tools.

That’s the theory.

There is some evidence to support that this shift is already underway. Some big law firms are now experimenting with shifting repeatable work to flat fees (for instance, Wilson Sonsini's Neuron product), and it’s a focus of nervous conversations at every legal conference.

As a legal tech startup, we interact with many small firms pushing the boundaries of the legal model, and are seeing an increasing number of them adopt a mix of billable hour and value-based pricing.

However, in my view the purported “end of the billable hour” is being vastly overblown. While many firms now report using some type of fixed fees in their practice, when asked for details we usually discover that these comprise only a tiny fraction of the overall practice.

And there are good reasons why firms are hesitant to shift away from the billable hour model:

  1. Predictability. Many (if not most) kinds of legal work are inherently unpredictable. Even for something as simple and repeatable as a Series A financing, the time it takes to complete the project can vary wildly based on factors that are difficult to predict, like how hard opposing counsel chooses to negotiate. Using the billable hour, that risk is borne by the client; under a fixed fee arrangement, the risk is borne by the firm. If something takes much longer than expected, that’s money directly out of the partners’ pockets.

  2. Simplicity. Firms have been billing by the hour for hundreds of years. It’s a clear and simple business model that is familiar to both firms and clients. More importantly, trying to accurately estimate how much a fixed fee matter will cost is a challenging endeavor. With the exception of highly routine and repeatable work, most projects rely on external factors that make it very difficult to accurately price.

  3. Incentives. The prevailing narrative is that the billable hour misaligns lawyer and client incentives. However, the inverse is also true. Firms that bill on a fixed fee basis have the incentive to complete the work as quickly as possible. This creates fears that the work will become rigid and low quality.

Compounding these issues is the general opacity of legal services. Most clients don’t really understand “how the sausage is made” and rely on the firm to dictate the appropriate model. Highly sophisticated clients are usually purchasing higher-end legal services, which are less amenable to fixed fees anyway.

The future of legal billing

It’s clear that the billable hour is not dying anytime soon.

However, there’s no denying that more firms are considering fixed and alternative fee arrangements, driven by increasing client demand and leverage from AI. Over time, work that’s well-suited to fixed fees from the firm’s perspective – predictable, repeatable, and automatable – will shift over. Higher-end, less predictable, and more bespoke work will remain on the billable hour.

We think a lot about what administrative processes will look like for a future firm operating in this world. A few things are very clear:

  1. Accurately predicting how long a project will take is a major unlock for the shift to fixed fees.

  2. The choice of when to bill on fixed fee vs. hourly requires firm leadership to have a nuanced understanding of the work being performed. So does the decision of where to allocate resources within a fixed fee matter. Better data sets and tooling are needed to make these decisions effectively.

  3. Firms will increasingly be required to straddle these two divergent incentive structures and to craft new ways of operating that support both. This will have trickle-down effects on hiring, staffing, and training of attorneys.

We’re currently in a moment of transition for the financial model of firms. While there’s undoubtedly friction ahead, firms that are able to adapt will reap the benefits of the next wave of legal automation.

Since ChatGPT was released in late 2022, there has been an explosion of interest in legal tech. Every week I meet lawyers interested in building new tools with AI. The last two batches at Y Combinator have seen a major uptick in legal tech startups. And I’ve seen firsthand that VCs are now finely attuned to the space.

Much of this is predicated on the switch from the billable hour to flat-fee or other alternative fee arrangements. Historically – the argument goes – lawyers were reluctant to buy software that made their work more efficient, because efficiency results in fewer billable hours. As AI takes over the world, law firms will increasingly shift away from the billable hour model, which will incentivize them to adopt new, efficiency-promoting tools.

That’s the theory.

There is some evidence to support that this shift is already underway. Some big law firms are now experimenting with shifting repeatable work to flat fees (for instance, Wilson Sonsini's Neuron product), and it’s a focus of nervous conversations at every legal conference.

As a legal tech startup, we interact with many small firms pushing the boundaries of the legal model, and are seeing an increasing number of them adopt a mix of billable hour and value-based pricing.

However, in my view the purported “end of the billable hour” is being vastly overblown. While many firms now report using some type of fixed fees in their practice, when asked for details we usually discover that these comprise only a tiny fraction of the overall practice.

And there are good reasons why firms are hesitant to shift away from the billable hour model:

  1. Predictability. Many (if not most) kinds of legal work are inherently unpredictable. Even for something as simple and repeatable as a Series A financing, the time it takes to complete the project can vary wildly based on factors that are difficult to predict, like how hard opposing counsel chooses to negotiate. Using the billable hour, that risk is borne by the client; under a fixed fee arrangement, the risk is borne by the firm. If something takes much longer than expected, that’s money directly out of the partners’ pockets.

  2. Simplicity. Firms have been billing by the hour for hundreds of years. It’s a clear and simple business model that is familiar to both firms and clients. More importantly, trying to accurately estimate how much a fixed fee matter will cost is a challenging endeavor. With the exception of highly routine and repeatable work, most projects rely on external factors that make it very difficult to accurately price.

  3. Incentives. The prevailing narrative is that the billable hour misaligns lawyer and client incentives. However, the inverse is also true. Firms that bill on a fixed fee basis have the incentive to complete the work as quickly as possible. This creates fears that the work will become rigid and low quality.

Compounding these issues is the general opacity of legal services. Most clients don’t really understand “how the sausage is made” and rely on the firm to dictate the appropriate model. Highly sophisticated clients are usually purchasing higher-end legal services, which are less amenable to fixed fees anyway.

The future of legal billing

It’s clear that the billable hour is not dying anytime soon.

However, there’s no denying that more firms are considering fixed and alternative fee arrangements, driven by increasing client demand and leverage from AI. Over time, work that’s well-suited to fixed fees from the firm’s perspective – predictable, repeatable, and automatable – will shift over. Higher-end, less predictable, and more bespoke work will remain on the billable hour.

We think a lot about what administrative processes will look like for a future firm operating in this world. A few things are very clear:

  1. Accurately predicting how long a project will take is a major unlock for the shift to fixed fees.

  2. The choice of when to bill on fixed fee vs. hourly requires firm leadership to have a nuanced understanding of the work being performed. So does the decision of where to allocate resources within a fixed fee matter. Better data sets and tooling are needed to make these decisions effectively.

  3. Firms will increasingly be required to straddle these two divergent incentive structures and to craft new ways of operating that support both. This will have trickle-down effects on hiring, staffing, and training of attorneys.

We’re currently in a moment of transition for the financial model of firms. While there’s undoubtedly friction ahead, firms that are able to adapt will reap the benefits of the next wave of legal automation.

Since ChatGPT was released in late 2022, there has been an explosion of interest in legal tech. Every week I meet lawyers interested in building new tools with AI. The last two batches at Y Combinator have seen a major uptick in legal tech startups. And I’ve seen firsthand that VCs are now finely attuned to the space.

Much of this is predicated on the switch from the billable hour to flat-fee or other alternative fee arrangements. Historically – the argument goes – lawyers were reluctant to buy software that made their work more efficient, because efficiency results in fewer billable hours. As AI takes over the world, law firms will increasingly shift away from the billable hour model, which will incentivize them to adopt new, efficiency-promoting tools.

That’s the theory.

There is some evidence to support that this shift is already underway. Some big law firms are now experimenting with shifting repeatable work to flat fees (for instance, Wilson Sonsini's Neuron product), and it’s a focus of nervous conversations at every legal conference.

As a legal tech startup, we interact with many small firms pushing the boundaries of the legal model, and are seeing an increasing number of them adopt a mix of billable hour and value-based pricing.

However, in my view the purported “end of the billable hour” is being vastly overblown. While many firms now report using some type of fixed fees in their practice, when asked for details we usually discover that these comprise only a tiny fraction of the overall practice.

And there are good reasons why firms are hesitant to shift away from the billable hour model:

  1. Predictability. Many (if not most) kinds of legal work are inherently unpredictable. Even for something as simple and repeatable as a Series A financing, the time it takes to complete the project can vary wildly based on factors that are difficult to predict, like how hard opposing counsel chooses to negotiate. Using the billable hour, that risk is borne by the client; under a fixed fee arrangement, the risk is borne by the firm. If something takes much longer than expected, that’s money directly out of the partners’ pockets.

  2. Simplicity. Firms have been billing by the hour for hundreds of years. It’s a clear and simple business model that is familiar to both firms and clients. More importantly, trying to accurately estimate how much a fixed fee matter will cost is a challenging endeavor. With the exception of highly routine and repeatable work, most projects rely on external factors that make it very difficult to accurately price.

  3. Incentives. The prevailing narrative is that the billable hour misaligns lawyer and client incentives. However, the inverse is also true. Firms that bill on a fixed fee basis have the incentive to complete the work as quickly as possible. This creates fears that the work will become rigid and low quality.

Compounding these issues is the general opacity of legal services. Most clients don’t really understand “how the sausage is made” and rely on the firm to dictate the appropriate model. Highly sophisticated clients are usually purchasing higher-end legal services, which are less amenable to fixed fees anyway.

The future of legal billing

It’s clear that the billable hour is not dying anytime soon.

However, there’s no denying that more firms are considering fixed and alternative fee arrangements, driven by increasing client demand and leverage from AI. Over time, work that’s well-suited to fixed fees from the firm’s perspective – predictable, repeatable, and automatable – will shift over. Higher-end, less predictable, and more bespoke work will remain on the billable hour.

We think a lot about what administrative processes will look like for a future firm operating in this world. A few things are very clear:

  1. Accurately predicting how long a project will take is a major unlock for the shift to fixed fees.

  2. The choice of when to bill on fixed fee vs. hourly requires firm leadership to have a nuanced understanding of the work being performed. So does the decision of where to allocate resources within a fixed fee matter. Better data sets and tooling are needed to make these decisions effectively.

  3. Firms will increasingly be required to straddle these two divergent incentive structures and to craft new ways of operating that support both. This will have trickle-down effects on hiring, staffing, and training of attorneys.

We’re currently in a moment of transition for the financial model of firms. While there’s undoubtedly friction ahead, firms that are able to adapt will reap the benefits of the next wave of legal automation.

Bring your timekeeping and
billing into the AI era

Book a demo to learn more.

Bring your timekeeping and
billing into the AI era

Book a demo to learn more.

Bring your timekeeping and
billing into the AI era

Book a demo to learn more.

Bring your timekeeping and
billing into the AI era

Book a demo to learn more.