The billable hour had a good run — but its time may be up. Not only do alternative legal providers like Thomson Reuters vocally sound the death knell for the billable hour model, clients increasingly demand fixed fees and more predictable pricing, lower costs and greater value from their lawyers.
Think customers are bluffing? Consider Deutsche Bank's decision to stop paying for work done by trainees or newly qualified lawyers at its panel law firms.
In this new landscape, law firms must transform how they do business — and that includes exploring new pricing models, like value pricing. Artificial intelligence (AI) is an enabler, helping firms better price jobs at the outset, perform work more efficiently and find new ways to add value.
When law firms onboard a new job, how should they price it? How can they be sure they'll wind up with a healthy profit rather than simply breaking even?
Using AI to look at historical data within the firm provides answers. A firm can extract very specific pieces of information from deal capture reports and other data sources, such as the number and type of documents and attorneys involved in a matter, the client type, the opposing firm and so on. Meanwhile, an AI-powered classification tool can go through billing records, read free-form descriptions of each charge, and assign it to a fixed category like "emails" or "contract drafting."
Once data is extracted and classified, AI can start analyzing and pattern spotting. For example, a firm might notice that in cases where they're competing against firm X in matter type Y for client type Z, they tend to see a 20 percent higher cost versus other opposing firms. Or, they might see that they spend significantly more time on emails with clients of a certain size.
Firms can use this data to cost projects more accurately, and in turn manage resources more economically, by knowing which variables will likely impact a matter's profitability. Firms that do this will outcompete firms who don't, as pricing competition and commoditization of legal services heats up. Doing so helps win or retain business while keeping it profitable.
With the right tools in place, law firms can be more creative and strategic in how they price matters, creating a more beneficial state of affairs for clients and firms alike.
What happens once the deal is landed? For value pricing to work, law firms also need ways to perform work more efficiently. Once again, AI can lend a helping hand.
Here's an example. In the past, if a client came to a law firm with a mammoth task — such as reviewing 10,000 documents within four weeks — the law firm probably wouldn't be able to take on that task at a profitable fixed price. Or, they'd only be able to review a small portion of the documents initially, with potentially further review tranches to follow pending the progress and outcomes of the first tranche. Both are suboptimal for client and firm.
Thanks to AI, law firms can now efficiently review 100 percent of the documents. An AI classification tool can quickly go through a mass of documents and understand which documents are relevant versus which can be disregarded, what jurisdictions are involved, and what specialist resources might be needed.
Better yet — once law firms have "taught" a tool how to perform a specific reviewing task, they can reuse that model for the client in the future, letting them deliver work even more efficiently. This is comparable to the way firms standardize documentation and process for clients that regularly transact similar deals throughout the financial year, rather than drafting something from scratch each time.
At a law firm, simply "doing the work" is expected. Clients expect firms to bring additional value, and AI helps on this front, too.
Using AI and AI-assisted lawyers to tackle the grunt work of any matter means that clients only pay for high-value activities. Clients never have to receive an eye-popping bill for a senior lawyer who spent time pulling basic clauses from contracts because no other resources were available.
Law firms can also now service the client more comprehensively and provide more coverage — for example, to revisit the scenario in the previous section, by reviewing 100 percent of documents within a short timeframe instead of, say, only 15 percent. While using AI to review documents, law firms can perform additional value-adds, like using extract tools to pull out clauses and build a clause library for the client — something that the client probably couldn't do internally due to lack of resources.
In these ways and many others, customers get more value — not less — from firms that embrace AI as part of their operations.
With AI's ability to help firms better cost projects, perform work more efficiently at lower cost and deliver more overall value to their clients, value pricing becomes a viable option. And for law firms, the timing couldn't be better.
The chorus of voices demanding an alternative to the billable hour is only going to get louder. With the right tools in place, law firms can be more creative and strategic in how they price matters, creating a more beneficial state of affairs for clients and firms alike.