AI Efficiency May Shift Legal Billing Back to Billable Hours
Legal AI efficiency may reduce reliance on alternative fee arrangements, says Integreon.
Why it matters: Legal professionals must understand how AI-driven cost savings might influence fee negotiations and billing models, affecting their day-to-day financial decisions and client relationships.
- Rhett Lemmel of Integreon says AI-driven cost savings could make traditional billable hours more appealing to corporate clients (2024).
- About 70% of U.S. law firms have adopted generative AI tools since 2022, per Thomson Reuters Institute report (2023).
- Alternative fee arrangements (AFAs), which provide fixed or predictable pricing unlike hourly billing, account for 15%-25% of billings in sophisticated legal departments, per Thomson Reuters Institute (2023).
- Experts caution that increased AI usage doesn’t automatically translate to perceived client value, affecting how AFAs may be valued, according to Oracle's Hammad Hussain (2024).
Integreon's Rhett Lemmel highlights a potential shift in legal billing practices brought on by artificial intelligence (AI). As AI tools improve efficiency for law firms, Lemmel suggests corporate legal departments might favor the traditional billable hour model over alternative fee arrangements (AFAs). AFAs, which offer fixed or predictable fees instead of hourly billing, have been gaining ground but currently represent 15%-25% of billings in advanced legal departments, according to Thomson Reuters Institute’s 2023 report.
Since the 1950s, U.S. law firms have primarily used billable hours as their pricing standard. But the rise of efficient AI workflows—adopted by about 70% of firms since 2022—has undercut the value proposition of AFAs by significantly lowering costs. This efficiency may shift client preference back toward hourly billing because the traditional pricing model better captures reduced but still valuable labor input.
William Josten from Thomson Reuters Institute explains that the legal sector generally bases pricing on the "labor theory of value," which prices services according to time spent rather than outcomes. He states, "AI-driven legal services will cause a reimagination of how legal work is done, how it’s priced, and the relationship between law firms and their corporate clients" (2023).
However, Oracle’s Head of AI Strategy, Hammad Hussain, warns firms and clients not to conflate AI tool usage with actual value delivered. He emphasizes, "One of the fatal mistakes that clients can do... is they might perceive usage as value. And that's not the case" (2024). This underscores the need for clear communication on how AI efficiencies translate into client benefit, which will influence the acceptance of AFAs.
For legal operations teams and law firms, this developing dynamic requires careful evaluation. They must balance the cost savings AI enables with client expectations about fees and value, potentially revisiting fee models to reflect AI-enhanced service delivery without compromising trust or profitability.
By the numbers:
- 70% — U.S. law firms adopting generative AI tools since 2022 (Thomson Reuters Institute, 2023)
- 15%-25% — AFAs’ share of billings in sophisticated legal departments (Thomson Reuters Institute, 2023)
- Since 1950s — Billable hour as dominant law firm pricing model
Yes, but: While AI efficiency may favor returning to billable hours, some firms and clients still value AFAs for their predictability and risk-sharing benefits.
What's next: Further studies on AI’s impact on legal billing are expected in 2024, which may clarify evolving fee structure trends.