How will AI impact billable hours?

In February, Lexis Nexis published research which found the amount of lawyers using generative AI had doubled since July 2023, with 26 per cent of lawyers now using it on a monthly basis. The study also found that around 40 per cent of law firms had introduced AI-powered products across their business, performed training and built policies around its use.

As law firms increasingly invest in AI, it’s inevitable that in-house legal teams may start to question or challenge the billable hours charging models. This is unsurprising given AI’s promises of increased efficiencies and enhanced deliverability of legal support.

This was recently highlighted by BDO, in their report, A New Era for Law Firms, that AI could, “break the link between hours and billing”, with clients arguing, “that as fewer human hours have been spent on the work, the price they pay should also be lower.”

A survey of the UK’s top law firms by Law.Com International last year, also found that a majority “expect generative artificial intelligence to reduce their reliance on the billable hour”.

Should law firms be worried? Over the last decade, we’ve seen firms across the market increasingly using alternative fee arrangements such as flat fees, retainers and fixed fees (per matter) structures as clients have demanded more cost certainty due to ever tightening in-house budgets.

The expansion of more flexible legal solutions, for example, contract lawyers, managed legal services and legal project management, has also driven a desire to think differently about fees. But is AI likely to accelerate this trend, by devaluing or making the billable hour obsolete?

Could it reduce billable hours?

Currently, AI platforms and their integration in legal practice can be expensive. That’s why we’re seeing larger law firms dominating the headlines with their investments in AI platforms.

Therefore, it’s unlikely we’ll see widespread cost-cutting and boosted profitability for law firms, as well cost-savings for in-house legal teams in the immediate future.

Over time, there could be a warmer response to different pricing structures amongst law firms that have been historically wedded to billable hours. AI will generate more value, which will require a new value-based pricing system. It will also multiply the potential fees that lawyers (who only have so much time in a 24 hour day) can generate too.

The automation of certain tasks through AI – think research, contract analysis and document review – will take less time overall, but it doesn’t result in diminished value when you consider the positive outcomes of completing these tasks at a faster rate. For example, a speedier contract analysis process could accelerate the negotiation of a deal. More widely, there is also the benefit of reduced risk by eliminating scope for human error.

In-house legal clients are also likely to want more output from the same amount of time (charged before AI). Lawyers’ billable hours won’t reduce overall as they will still be required to fill their days with the same amount of work – it just may be of a different type.

To illustrate, a due diligence exercise that once took 2000 hours to do manually, could now take 100 hours through AI and lawyer supervision. And with this extra time, in-house legal teams could instruct lawyers to focus on more ambitious and transformational projects. Those projects that were perhaps deprioritised because they were unachievable for their private practice lawyers to focus on, within the day-to-day hours that in-house legal teams could afford.

As Pinsent Masons Head of Client Strategy Alistair Morrison recently explained, “Generative AI is augmenting the capabilities of the legal team…being a very powerful tool to get stuff done that wouldn’t otherwise be achievable…I can see applications for this for projects that you don’t have the time or resource to do, like putting improved risk management processes in place that give you institutional integrity and resilience.”

Overall, AI will increase capacity for private practice to support in-house legal teams with a higher volume of these projects. Therefore law firms could provide greater value, but still through a billable hours model where more is done in an hour, which could be transformational for the General Counsel and the wider business. There is also potential to multiply the potential fees that lawyers (who only have so much time in a 24 hour day) can generate too.

There’s also the argument that AI could develop private practice lawyers legal experience, knowledge and specialisation at a quicker rate by removing these time-consuming and ‘limited learning’ tasks. This could improve firm’s capacity to provide more senior expertise, have greater resilience and acquire complex knowledge across different departments as part of its offering, and therefore provide greater value to the clients in this way too.

There will be more desire for soft skill and tech-savvy lawyers

The Future of Professionals Report, published recently by Thomson Reuters, found legal professionals believe, “that the advent of AI would cause their skills to be more highly prized, rather than less.” This is contrary to the pop culture prediction that robot lawyers will be flooding our legal system.

This is because, as projects become more value-led as AI is integrated into legal practice, clients will expect more from lawyers in terms of service. More emphasis will be placed on lawyers to have excellent soft skills – i.e. high levels of emotional intelligence, strong leadership and teamwork skills, which AI struggles to replicate.

And this is why - people like to work with other people. A consumer study in the US last year found a majority of people preferred dealing with a human being, rather than a chatbot when it came to resolving complicated matters. The all-important human touch will become even more highly prized. We know that advice communicated by a lawyer, calmly and personably, is more likely to reassure a client worried about a tricky legal issue.

Human interactions are more likely to build trust with a client, even if AI is doing much of the legwork, and the lawyer is interpreting the findings to communicate to them. These human conversations have much more power.

This leads to another important point: AI can’t make the decisions for us. Using AI will still require a strongly skilled lawyer, knowledgeable about the nuances in the law to make judgements based on the information presented by AI.

That being said, in-house legal teams will also expect their lawyers to be more tech savvy. Legal mishaps over the last year have demonstrated the importance of accuracy checking - as we’ve learnt with the recent case of a US law firm and its lawyers being fined after submitting fake citations created by ChatGPT, they are still at risk of ‘hallucinating’, ie making up judgments and information that doesn’t exist.

Lawyers will be expected to know how AI systems work, and what human supervision is required to perform at an optimal level. Law firms will be upskilling their lawyers in AI literacy and will be looking for this competency in the next generation of lawyers. This will provide greater value for what in-house legal teams are charged for.

Concluding thoughts

More AI in law firms won’t necessarily lead to a reduction in billable hours overall. It will increase efficiency, and in doing so will also increase capacity for lawyers to do more for their clients, providing greater service and even greater value. It will also open up value based pricing models which are not linked to time spent on a task and which can both improve law firm profitability and deliver cost savings for clients.

Iain Brown is Head of MLS Legal Delivery at Pinsent Masons Vario