The battle for the billable hour

At the heart of the billable hours debate is the desire for certainty, and whether it can be extended to the client.

Some practice areas and firms are much better positioned than others to benefit from fixed or contingency fee work. On the far end of unpredictable work, such as in litigation or complex mergers, the law firm is very unlikely to endure the risk of a different fee structure. And on the client-side, the calculus between the money that could be saved on legal fees, versus the potential increased exposure to liability in a billion dollar merger, is clear-cut; to the extent that some clients will insist that law firms maximise their hours and not employ time-saving measures including AI at all. In this respect, the billable hour is alive and well, with ie. Kirkland & Ellis recently spiking to $10bn in revenue.

Conversely, in commoditised legal work, where a firm can effectively leverage the expertise it has accumulated over time, leveraging sophisticated workflows and solid precedents, fixed fees can be very profitable. Here, the argument is that if clients know that lawyers are leveraging AI, which makes it faster for lawyers to adapt previous work, it increases pressure for savings to be passed on. But whilst AI can accelerate drafting, document review and research, it does not help a lawyer to predict the unpredictable: undisclosed issues from the client, an aggressive counterparty, or an unexpected ruling, and these are ultimately the factors that can greatly extend a case.

The client relationship is another factor that weighs heavily on both the duration of and mental effort expended on work. The billable relationship is somewhat adversarial: and a client is encouraged to do their homework before prodding their lawyer and being billed for emails and meetings. Conversely, fixed fee drafting can embolden clients to make frequent changes for work like document drafting, driving lawyers back to billing by the hour.

The great advantage of flat fee is that the client knows exactly what they're getting and for how much. More modern services have compartmentalised the risk involved by splitting a service into not one, but multiple small flat rate agreements throughout the duration of a case. This allows the practitioner not to sell a service via a flat rate agreement that extends beyond what they know, in terms of how long work will take.

For law firms that do employ flat fees, there is an imperative need to accurately track their spend on each case. By monitoring time, marketing and engagement spend, law firms can ground their flat fees in their actual data, and avoid setting a fee blindly. This data driven approach accounts for their expenses, the flat fee reduces the chance that a client will complain, and allows firms to compete for services that they may not typically provide.

To conclude, the commoditisation of legal work will continue, but there are still a huge amount of intangible factors that need to be incorporated in that process. And until they are, billable hours will remain the default model for most law firms, not the exception.