The billable hour has been king in law firm operations for decades. While tried and true in many firms’ eyes, the billable hour rewards inefficiency, reduces value to units and is the bane of every fee earner’s existence. It’s high time we dethrone this practice in favor of value-based billing.
The thought of this transition might send shudders down a firm manager’s spine, but this new approach is critical to maintaining margins while delivering high-quality client service. And now, with artificial intelligence (AI) technologies transforming the way law offices work, the timing is perfect for this transition.
Legal tech can automate routine tasks and streamline workflows, significantly reducing the time required for tasks. But some law firm managers are wondering, “If the technology can accomplish hours of work in just minutes, how are we going to make money?” That’s the wrong question to ask. Managers need to consider how technology benefits their clients rather than how it hurts their business model.
Refusing to adopt AI because it reduces profits based on billable hours does a disservice to your clients and your staff. If you can deliver faster and better results, why wouldn’t you? If you don’t, someone will. As legal practices change, you must adjust your business strategy. Fortunately, value-based billing allows you to embrace AI and improve efficiency without sacrificing revenue.
The hourly billing model has never been perfect. The structure rewards inefficiency, prioritizing quantity over quality. Clients are uncertain of the final cost and get frustrated with long timelines and cost overruns.
Hourly billing often fails to capture the full value of time spent. A 2022 industry report suggests fee earners work less than three billable hours daily. What happened to the other six-plus hours?
The fact is, the modern way of working makes time tracking difficult. Legal teams communicate primarily via email rather than scheduled client meetings, fee earners spend significant time generating documents, and remote capabilities allow legal professionals to work for short periods here and there. It’s challenging for them to measure the time they spend on small tasks like emails. As a result, they only record (and bill for) “chunky” items.
As legal professionals strive to meet their billable hours quota, they find themselves working significantly more than the 1,700 to 2,300 required hours. The pressure and long hours result in burnout, which 77% of attorneys report experiencing.
Technology paves the way for law firms to move away from this flawed model, serving clients and staff better. Firm managers should embrace the opportunity for change.
Legal tech can significantly reduce the time spent on tedious, repetitive tasks. AI completes document review and analysis in minutes, saving legal professionals hours. These skilled experts can then spend their time on high-value tasks, such as building client relationships, negotiating terms or developing a case strategy.
Legal tech is also more thorough than a human. AI capabilities enhance due diligence, discovery and research, delivering more exhaustive results in a fraction of the time. As generative AI matures, it will unlock even more value for legal teams.
“Technology paves the way for law firms to move away from this flawed model, serving clients and staff better. Firm managers should embrace the opportunity for change.”
The legal profession is risk-averse, and this new era of technology reasonably creates anxiety. But the reality is that most firms are ready to jump on the legal tech bandwagon because they recognize that AI is becoming the norm. In a Smokeball survey, 90% of respondents said they were eager to learn how to use AI in their law practice, with legal office managers showing the highest willingness.
Yes, legal tech can reduce billable hours, but it also shortens timelines, eases workloads and improves client service and outcomes. The legal field was created to help people, and these new tools allow teams to do so more effectively and efficiently.
With value-based billing, efficiency becomes paramount. When you bill by the case, you can’t afford to have your legal teams spending hours on administrative work. Firms must incorporate technology that expedites routine tasks like discovery and paperwork so lawyers can spend their time on strategy and relationships.
Moving to value-based billing doesn’t mean time tracking goes out the window — it actually becomes more important. You need to know how much time and resources cases really require so you can set prices appropriately. Continually reviewing legal teams’ activities — both billable and nonbillable — allows you to adjust pricing, resource allocation and workflows to ensure you are building a profitable firm. Investing in an automated time-tracking system will make that easier, enabling accurate evaluation while reducing the administrative burden.
You don’t need to start charging flat fees immediately for all case types. Start with standardized, transactional cases like estate planning or commercial contracts. As you gather more data on time management, you can expand your flat-fee offerings. Accurate time tracking also allows you to offer tiered pricing or a blended billing system where cases shift to time-billed at a predetermined threshold. And no one says everything needs to be value-based. You can offer different billing types for different case types. The right law firm software will help you manage whatever billing structure you choose.
With the proper data and streamlined workflows, value-based billing benefits both the firm and its clients. Technology adoption is quickly becoming a competitive imperative, and law firm managers must adjust their business strategy accordingly. In today’s legal landscape, value is the new king.
Value-based pricing expert Shaun Jardine appeared on Legal Management Talk to discuss the pitfalls of the billable hour in today’s legal industry and how a value-based system can address those. He also shares strategies for instituting such a change at your firm. Check it out today!
