It depends on who you ask. A central talking point at this year’s Legal Week in New York City centered around the emergence of AI technology and whether it will reshape legal billing. Traditionally, most law firms have been slow to adapt to new technology. However, many in the industry have opined that firms implementing AI can successfully harness its power to gain an edge over the competition. But how does this play out regarding how firms have billed their clients? Some argue that AI will completely reshape the foundational billing practices that most firms rely on –changing client expectations and forcing more transparency over billing practices. Others say AI is causing a shift away from “billable hours” and a trend toward “value-based pricing.” Where do firm executives and clients fall in the AI debate concerning law firm billing practices? –Let’s get into the details.
Background
Legal analysts and experts report that while AI has yet to disrupt traditional law firm billing practices –the conversation around legal billing is starting to shift. “Already, a handful of Big Law firms are testing AI platforms and hiring more data professionals. Legal departments are paying attention, too, experimenting with how AI can streamline work product or improve billing practices.”
For now, the traditional pricing model has survived throughout law firms. Still, AI has the potential to disrupt the billable hour business model and push firms into being more transparent with clients over pricing dynamics –leading to a redefining of what some call an “archaic pricing structure.”
During Legal Week 2024, held last week in New York, there was a panel discussion titled “Aligning Technology, Pricing, and Compensation to Create the Sustainable Engagement of the Future,” where panelists discussed “how much upheaval could be caused by emerging tech, or legal professionals themselves.” Some panelists believed that AI could lead to the death of the billable hour, whereas others thought that it would be at least 3-4 years before AI transforms the way law firms bill clients. Overall, there seems to be a growing shift from traditional billing models toward what experts call “value billing.”
The legal industry has been built on tradition and precedent, and many lawyers and law firms are cautious when it comes to technological change. For the past seven decades, most law firms used the billable hour pricing model to conduct business. In this model, typically, lawyers or firms set their hourly rate and charge for the time they spend working on a given matter.
Now, we are in a transitional era where most firms still use the traditional billable hour pricing model but are looking into alternatives given the transformative power of AI technology. With the emergence of large language models (LLMs) like ChatGPT, AI is transforming how lawyers practice law and redefining business practices and how firms operate –creating opportunities for firms to become more efficient. Law firms, legal departments, and billing professionals use “third-party products to gain more visibility into fees and take action.”
Shift from Traditional Billing to Value Billing
The shift to using AI could potentially disrupt the billable hour model that has been traditionally used because clients are becoming more interested in understanding what work is being billed and how AI technology changes the time and the value of the work performed. Because of AI, “lawyer time will likely be [reallocated] to higher-value work as firms deploy AI solutions, just as U.S. workers were able to take on higher-value tasks.” AI will also make the marketplace even more competitive, and firms will have to reshape their corporate legal structures and develop new ways to measure firm performance to keep clients happy and manage expectations.
From the client side, AI may foster more transparency in billing practices as firms have always relied on billing methods to “quantify their services, ensure revenue generation, and maintain transparency with their clients,” whereas traditional legal billing followed strict hourly billing practices, wherein clients were charged for the time spent on their case, with the “introduction of AI-enhanced legal tools — and, most recently, Generative AI tools — legal industry professionals may find themselves reevaluating their billing model” to meet client expectations. Shifting client expectations could lead to a preference for “value-based billing, which focuses on the outcome and value provided to the client rather than the hours invested.”
Benefits of AI in Legal Billing
Though the debate around AI and legal billing will continue as firms try to grapple with the rate at which technology is developing while trying to maintain traditional business practices, there are many benefits to incorporating AI into legal billing.
According to LexisNexis, “AI has the potential to make bills more predictable and accurate. AI’s ability to sort and interpret large data sets — like lawyer time needed to complete tasks — has the potential to help law firms predict costs with more accuracy, resulting in fewer surprises for clients by planning upfront. AI also has the potential to improve billing operations more generally. AI can, for example, automate time entries by analyzing a lawyer’s calendar, emails, and work product. AI can also canvas the detailed outside counsel guidelines, identify relevant client requirements and ensure that invoices meet those expectations. That technology should free lawyers to focus on reviewing outputs and data that can bring value into conversations with clients.”
While it may be a while before traditional billable hour models are radically changed, AI is already impacting billing practices –as firms shift toward efficiency and saving lawyers time in their daily practice. Ultimately, companies and firms will have to balance billable hours –potentially redefining the value of legal work with the help and expediency of AI.
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Sources:
https://www.reuters.com/legal/legalindustry/can-ai-end-client-frustrations-over-billing-2024-01-25
Music: Disruptor’s Dance by Anka Mason
Blog Narration: Anka Mason
