Law firms stick to billable hours model despite AI threat

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The billable hour remains the standard method of charging clients in the legal profession, despite predictions that the model could be under threat due to the rise of AI. As partners at leading UK-based law firms now charge £1,500 per hour, while their counterparts at US firms have hourly rates as high as $2,000, there’s little incentive to move away from the traditional model.

Law firms have used the billable hour as a staple model to log their work and bill clients since the 1980s. One of the reasons why the practice endures is that many of the top US law firms, such as Milbank LLP, have offered year-end bonuses to associates for hitting impressive billable hour targets. In addition, the top 10 UK law firms have increased their hourly rates by almost 40% over the past five years, and billable hours have grown over the past year.

A professor from Bayes Business School, Laura Empson, said the model represents “great symbolic value” as it signals to clients “that professionals are dedicated to serving them”.

Nevertheless, there have been concerns about the wellbeing of junior associates who compete to meet high billing targets and the potential of AI to disrupt the billable hour model.

AI has automated some routine legal tasks, such as research and document drafting, and experts have predicted that this automation could significantly impact junior roles, resulting in fewer billable working hours. For example, a Thomson Reuters survey from last year saw lawyers forecast that with the “predicted pace of AI adoption”,  they could free up 12 hours of work each week over the next five years. However, despite AI’s efficiency boost, the technology hasn't reduced the reliance on the billable hour significantly just yet.

The president of Legal Professionals at Thomson Reuters, Raghu Ramanathan, said: “We are seeing more experimentation of fixed-price models, and the increasing adoption of technology will lead to change of the billing model; we’re simply not there yet.”

Elsewhere, some experts believe that technology will enhance the billable hour, rather than replace it. The product manager at law firm software provider OneAdvanced, Fiona Muir, said that technology can automate the documentation of phone calls, making billing more detailed and less contentious.

A partner at Deloitte Legal, Jeremy Black, said: “While some might have expected, and some predicted [the billable hour’s] use as an external measure would have fallen faster, it remains the main billing method used by law firms.”

Black added that even if law firms adopt different fee models for their clients, the billable hour is likely to persist internally since it remains the simplest way to measure output.