The billable hour is not dead, but AI is chipping away at its prevalence

In Brief

• About 70% of firms adopted AI tools since 2022
• Stephanie Corey calls for abandoning billable hour
• ABA Formal Opinion 512 addresses AI billing ethics
• Alternative fee arrangements gain traction amid AI use

The demise of the billable hour is at last at hand, thanks to the advent of generative AI legal tools.

Or is it?

Like Mark Twain’s famous description of his own death, the demise of the venerable but often vilified billable hour also seems to be greatly exaggerated. At least for now.

About 7 in 10 firms have adopted AI tools for legal work since OpenAI introduced Chat GPT in 2022 and Microsoft unveiled CoPilot in 2023, surveys show. Those tools, along with more legal-specific products like Leah, Harvey, Luminance, CoCounsel and Spellbook, now commonly aid lawyers in the basic research of cases, the drafting of some legal documents, and the compilation, cataloguing, and analysis of e-discovery materials.

But thus far, the profession has been slower to alter its billing systems to reflect the presumed time and cost savings that GenAI would appear to be making possible, attorneys and law firm management experts say.

Client pressure

Stephanie Corey, co-founder and CEO of UpLevel Ops, a San Francisco company that provides AI strategies, workforce assessments and other services to law firms, said she has been calling in vain for more than 20 years for abandoning the billable hour.

But in her view, the rise of AI use by firms is creating a more “nuanced” view of the continued use of the billable hour.

“AI is exposing where the billable hour no longer aligns with the value clients expect to receive,” she said. “The firms that are using AI effectively can complete certain work much faster than before. That creates tension if they’re still charging solely based on time.”

For example, AI can perform some basic research and drafting tasks much faster than the young attorneys who have traditionally piled up billable hours, Corey said.

As a result, clients are increasingly asking why they should pay for those hours when technology has fundamentally changed how the work gets done, said Hans Guntren, founder of the legal management services company Deliberately.ai in San Francisco.

“It is a little difficult to tease out right now,” he said. “But I have heard more talk about fixed-fee-for-service.”

He said it is taking firms time to figure out how much AI implementation is saving them in terms of the services they provide, and to pass savings along to clients without harming firm profitability.

“This is probably a slow transition because the industry is large and slow in general,” Guntren said.

Peter C. Lando, a co-founder of the intellectual property firm Lando & Anastasi, said he expects to see more firms adopt alternative fee arrangements over the next few years as AI continues to change work routines. Lando said his clients are not particularly enamored with AI, but they know that firms are using it more extensively and are expecting to see cost-savings as a result.

“Clients want a pricing structure that ties fees more closely to value, outcomes, predictability, and risk-sharing,” he said. “There will be increased pressure for alternative fee arrangements because clients are no longer willing to accept claims of efficiency without seeing them reflected in value and pricing. And the firms that can demonstrate outcome-based value … are likely to have the strongest competitive position.”

Law firms that have the best handle on what it actually costs to produce the various services needed to properly represent a client in a case will be the ones that thrive by presenting the best savings, Corey said.

Birth of the billable hour

Legal historians credit Reginald Heber Smith, counsel at the Boston Legal Aid Society, for creating a systemic timekeeping requirement. Starting in 1913, Smith required that the hour be cut into six-minute increments and that attorneys use time sheets to carefully document the hours they worked and the tasks they performed as a way of enhancing lawyers’ efficiency.

The six-minute segment remains the most common increment for billable hour timekeeping today.

The billable hour became the primary method of fee calculation at private U.S. law firms between 1950 and 1970, replacing fixed-fee or contingency fee systems. In the 1960s, the ABA advocated for the use of the billable hour, arguing that it would result in higher and fairer compensation for attorneys, and more accurate and transparent billing of services for clients.

But by the 1990s, criticism of the billable hour had begun to escalate and talk of its death — or, at least, deemphasis — had started to become common.

In 1996, U.S. Supreme Court Chief Justice William H. Rehnquist told a graduating class at Catholic University’s law school that the growing reliance on the billable hour “rewards inefficiency” by creating no obvious incentive for law firms to complete legal tasks as expeditiously as possible.

If a law firm sets its worth based on an hourly fee, “there isn’t any great difference between the law firm on the one hand, and the office supply vendor who simply counts the number of pencils furnished and sends a bill for that amount,” Rehnquist said.

Alternative options?

The American Bar Association’s Model Rule 1.5 sets down the core rule that any fees charged by lawyers must be reasonable, according to the difficulty and legal time and attention required for the proper handling of a case.

The ABA’s Formal Opinion 512, issued in July 2024 as digital tools began to be commonly used at law firms, spells out some specifics regarding AI and attorney compensation: Firms may not bill clients for AI tool subscription costs without client consent; firms cannot bill clients for time attorneys spend learning how to use AI tools, unless clients specifically requested those tools be employed; and firms must clearly indicate to clients if they are being billed for AI.

So, if the current AI-fueled push for change does result in payment options other than the billable hour, what might supplant it?

According to recent reports and legal industry surveys from Thomson Reuters, Clio, 8am, and others, alternative fee arrangements (AFA) that firms might lean more heavily on in systems less dependent on the billable hour include:

• Fixed/flat fees, where a pre-determined, flat fee for an entire case is agreed to by the client and law firm at the start of the legal matter.
• Subscription models, under which clients pay a regular monthly fee to gain access to AI-supported legal service providers. Subscription providers say this arrangement works best for firms providing volume or continuing services, such as real estate attorneys and lawyers handling estates and maintenance plans.
• Blended fee arrangements, where the client is charged one fee for the time all firm attorneys spend on their matters, rather than paying a lower fee for an associate attorney’s time and a higher fee for more senior attorneys.

Practice effects

Aside from accounting and payment changes, moving away from the billable hour might have other practical effects on law firm operations.

Jonah E. Perlin, a Georgetown University Law professor and ethics specialist, said a shift could see law firms giving more responsibility to newer lawyers who will no longer be toiling away at relatively menial tasks at the beginning of their careers.

But a first-year associate suddenly finding herself on an accelerated career path that an attorney with three years of experience used to occupy or a third-year veteran doing work that lawyers did not see until their eighth year on the job could be problematic, he said..

“Students are not ready for that,” Perlin recently said on his “How I Lawyer Podcast.” “Legal education is not ready to train them to do that.”

Some schools are trying to make the shift. The University of Chicago School of Law is among the schools that are introducing new AI rules for its students. Those rules are designed to make them more “AI resilient,” which the school defines as being less reliant on AI and other computer aids at the start of their studies as they learn to think like lawyers, but savvy in using the latest digital technology ethically as they near graduation.