The impact of AI on legal fees: revolution or business as usual? Maybe both.
The Moneylender and his Wife", by the Flemish master Quentin Matsys in 1514.
It is hard these days to attend a conference about AI without hearing one or several panellists announcing that the traditional time-based pricing model of law firms is fast becoming obsolete and that a new pricing system is inevitable.
But is the legal industry really about to ditch the billable hour and embrace value-based pricing, subscription-based models, or another alternative, in response to the rise of AI?
The actual situation is more complex and ambiguous. As always with pricing, different interests (clients’ and law firms’) are at play. Depending on their respective strength and on the context, it may lead to very different outcomes.
Let’s start with the clients’ viewpoint.
Many clients expect the rise of AI to lower legal bills. Their reasoning is straightforward: AI reduces the time needed to perform certain tasks. Therefore, the cost of performing these tasks should go down. Logically, we see an increasing number of RFPs where legal departments request law firm to explain not whether, but how the use of AI will result in savings and lower fees.
Within that line of thinking, time-based billing works in favour of clients. They have no interest in moving to another system. The most assertive clients make the most of it by requesting time-based budgets and considering them as binding caps, not just indicative estimates or fixed fees.
How do law firms respond?
On the law firms' side, the starting premise is the same: AI is indeed reducing the time needed to complete certain tasks, and this trend will most likely accelerate. But from there, the lawyers’ reasoning branches into two different directions.
Some lawyers predict that if the unavoidable productivity gains translate into fewer hours and therefore lower fees, it is all gain for their clients and loss for them. Their turnover and profitability will take a dip. Therefore, they are eager to shift to another pricing model less dependent on time spent such as value-based pricing.
Other lawyers, however, foresee that time-based billing may be exactly what they need to make the most of the AI transformation and are happy to maintain it. Their position is based on three considerations:
AI may reduce the time needed to perform certain tasks, but it also increases the volume and speed of documents produced by clients and counterparties, resulting in more lawyers’ time needed to review and process. For example, it is notable with the use of AI, legal briefs tend to be longer, not shorter.
Thanks to AI, lawyers can reallocate their time away from low-value, high-volume work (e.g., document production) to higher value work (strategic advice), justifying higher hourly rates. The reduced number of hours may be (more than) compensated by higher rates, resulting in increased profitability.
The law firms that are substantially investing in AI may argue that their hourly rates deserve to be increased because they do not anymore only reflect the cost of human labour; they should also include a decent return on technology investments. When an industry that used to be labour-intensive becomes increasingly based on capital expenditures, basing the price just on human labour makes no sense.
