“The billable hour has been a universal system applied by law firms. Using the traditional industry standard of six-minute intervals, lawyers would monitor their time spent working on client activities and then record it; first manually, and then later onto a technical application that would allow the firm to report and invoice accurately.

While retainers and fixed fees are beginning to take over as the industry standard, billable hours are still commonplace. And even if they aren’t used to charge clients, they can be used as an internal model to measure workloads, employee efficiency and how busy a firm is.

Now, the explosion of AI is set to change these approaches altogether. AI will automate many legal tasks traditionally performed manually, transforming how firms and staff spend their time. We see law firms gaining time and cost efficiencies at an operational level. But how exactly will it impact the billable hour and firms?

AI – the killer of the billable hour

AI will have an impact on the billable hour, with the dying model already beginning to fade into obscurity. But its rollout will impact different firms, different departments and differently sized companies at different times.

Thomson Reuters experts wrote a piece predicting how Generative AI will impact the legal sector. Looking ahead to the next three to five years, the article highlights how, as expected, AI will mean legal work gets done more efficiently. Yet this in turn will increase the pressure on law firms from external corporate legal departments “to deliver work faster”.

Of particular note, when it comes to the billable hour, it notes that this increase in efficiency will mean the model “will no longer be the most cost-effective way to capture value”. Instead, it will trigger legal entities “to reimagine their commercial models to better share in time and cost efficiencies, and capture the value that’s added through advanced technology”.

But what does a reimagined commercial model for the legal technology sector look like? And what firms will lead AI adoption?

The rise of ‘lawtech’ companies

The death of the billable hour, coupled with AI’s evolution, paves the way for law firms to deliver and sell their legal services using best-in-class technology platforms. What this means is that companies will instead charge the customer for the use of the technology in hand with their legal services, rather than just the services alone.

In this respect, while legal tech already helps firms and lawyers streamline their workflows internally, law firms will begin to emerge from this digital change as technology or ‘lawtech’ companies, using AI-powered platforms to provide and deliver services for clients.

Looking at how AI is set to change and shape the legal sector, the successful law firms leading the adoption of AI will not be experimenting or in playrooms with GenAI. Instead, they will know and have a good understanding of the business use cases that are most likely to have a positive impact on the firm financially. This understanding – of progressive and forward-thinking firms – will propel measurable and successful change, not only with time and cost efficiencies but also by driving revenue and gaining competitive advantage.

To build or to buy?

It’s one thing to say that one will implement AI and best-in-class technology – it’s quite another to actually do it. When approaching such a task, the main question to ask is whether to build or to buy. The real question here is whether a firm wants to gain a competitive advantage.

For those firms looking for speedy adoption or who have limited technical expertise, using commercial off-the-shelf (COTS) platforms is an attractive option.

However, as other companies will be using the same COTS platforms, these platforms cannot provide a competitive advantage. The only competitive advantage firms have here is how quickly they can adopt, right?

What’s more, using out-of-the-box AI tools will mean that competitors benefit from the machine learning improvements that a firm’s data brings to the COTS AI tool. So, whether you like it or not, everyone benefits from your data.

If firms can build best-in-class technology themselves to deliver their services – that works for their processes – then they stand a chance of gaining a competitive advantage. They can gain this advantage through using bespoke and technically excellent software applications.

What’s important is that firms buy commodities: ‘SaaS/COTS, licence’. But firms should build ‘custom, in-house, bespoke’ elements that give them a competitive advantage. However, what if firms don’t have the expertise to do this?

Software outsourcing companies offer cost-effective and efficient ways to build a bespoke platform. A firm can access a flexible pool of talent that can be handpicked to suit the business and software needs of its business/employees, and this talent tap can be turned on and off as required.

Building to the death of the billable hour

The legal sector is set to be one of the early widespread adopters of AI. Tasks such as managing and reviewing documents and updating contracts are perfectly suited to be carried out by AI and automation tools, with its rapid evolution sure to take over more activities in the coming years.

Crucially, this will signal the eventual death of the billable hour. As firms transition into selling their legal services through best-in-class technology platforms, the most successful AI adopters will be the firms that can not only outline specific business use cases and targets, but build their own AI applications.

The decades-strong approach of the billable hour is already seeing out its dying days. AI is sure to provide the final blow.

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