The slow death of billable hours at law firms
With the rise of AI and the cost of lawyers going through the roof, law firms are rushing to change how they bill clients in the hopes of avoiding awkward questions.
Law firms have traditionally used the billable hours system to calculate their charges. This system does what it says on the tin: The firms bill the total hours their lawyers work on a client’s case.
However, now firms are increasingly replacing it with the flat-fee billing system.
According to research by legal software company Clio, 54 per cent of UK law firms expect fixed-fee billing to increase over the next 12 months.
As Sarah Murphy, general manager of EMEA at Clio, told City PM, “Clients are pushing for more predictable pricing structures, and many firms are recognising that hourly billing doesn’t always reflect the value of the work delivered.”
The rush to embed AI into law firms is a massive driver of this change.
As executive chairman of financial information provider Armalytix, Mike Ward explained that AI’s arrival in the legal sector “looks as seismic as the Big Bang was to London financial services in the 1980s.”
Clio’s research noted that 62 per cent of UK firms anticipate an increase in AI use over the next 12 months.
“That’s a sizeable proportion of work that will no longer require manual input in the same way it once did,” Murphy highlighted.
As firms embed more AI into their work, speeding up previously time-intensive tasks, the billable hour system may cause problems when trying to justify their bills to clients.
On top of this, it is no secret that law firms, especially those in London, are under constant pressure to increase their revenues and profits.
As a result, the price of lawyers can be eye-watering. Clients, especially general counsels at big businesses, are vocal about these rising costs.
Murphy noted that “general counsels are under pressure to control legal costs, and unpredictable hourly billing often doesn’t align with corporate budgeting needs”.
This comes from data revealed by Lubbock Fine, shows the average time it takes for the UK’s top 50 law firms to be paid by their clients has now reached over six months (188 days).
Mark Turner, head of professional services at Lubbock Fine, said that the weaker economy is encouraging clients, including lawyers, to hold on to invoices from their suppliers for longer.
“Many legal departments are questioning billable hours when they know that technology can significantly reduce the time required for certain tasks,” Murphy added.
Clio’s data noted that 81 per cent of administrative billable hours could potentially be automated.
It is no wonder the industry is moving towards alternative pricing structures that better suit this new era of legal work.
So, what are the benefits of a flat-fee billing system?
“There’s a perception that flat-fee structures can offer better value, and it’s certainly much better for budgeting and forecasting,” Ward explained.
It keeps clients happier and may help dodge any questions about whether it was a lawyer or AI on specific pieces of work.
Murphy pointed out: “Law firms that adapt their billing models to meet client expectations will be in the strongest position to maintain long-term relationships and secure future business.”
However, despite the external changes, most of the top city law firms have target hours for their lawyers internally, ranging from 1,800 to over 2,000 hours per year.
Nick Woolf, partner at Woolf&Co, highlighted that he is witnessing a move away from the billable hour, but it remains in place internally.
“Whilst it is still used extensively internally, within law firms, as a means of measuring performance, productivity and profitability, there is no doubt that fixed fees are becoming far more prevalent,” he added.
Law firms are working out how to keep clients sweeter, but their lawyers probably won’t be deleting those timesheets anytime soon.
Eyes on the Law is a weekly column by Maria Ward-Brennan focused on the legal sector.