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For decades, the billable hour has been the cornerstone of law firm pricing models. However, AI is challenging this long-standing tradition. As AI streamlines routine tasks and accelerates legal work, the traditional billable hour model may no longer accurately reflect the value delivered to clients.

According to a newly published ½Û×ÓÊÓƵ survey of 800+ UK lawyers, 39% of private practice lawyers now expect to adjust their billing practices due to AI, up from only 18% in January 2024. This shift is driven by the recognition that AI can significantly reduce the time required to complete certain tasks, potentially rendering the billable hour model obsolete for those activities.

A General Counsel and Company Secretary at a biotech firm stated, "The billable hour rewards inefficiency. AI removes the excuse of hours spent, so private practice lawyers will have to change the way they measure their contribution."

Many firms are exploring alternative pricing models that better align with the value delivered to clients. One such model is value-based billing, which focuses on the outcomes and results achieved rather than the time spent. A law firm partner shared, "AI will push the legal industry towards value-based billing models as routine tasks become automated, reducing the time needed to complete them."

Read the full survey results here

By embracing value-based pricing, law firms can demonstrate the unique value proposition they offer beyond routine tasks, fostering stronger client relationships and enhancing profitability.

For in-house legal teams, the adoption of AI presents an opportunity to streamline operations, reduce costs, and enhance overall efficiency. The survey found that 71% of in-house teams expect their external counsel to use generative AI, reflecting the growing demand for AI-driven efficiency in legal service delivery.

As AI automates repetitive tasks and accelerates legal work, in-house legal teams can reallocate resources towards higher-value activities, such as strategic planning, risk management, and business advisory roles. This shift not only enhances the value proposition of in-house legal teams but also contributes to overall organisational efficiency and cost-effectiveness.

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Mark Smith, ½Û×ÓÊÓƵ' Director of Strategic Markets, highlights the potential impact of AI on pricing: "Properly trained and grounded generative AI can ultimately underpin certain legal tasks being undertaken faster and at higher quality than that done by a human alone. The impact of this on price will depend on many different factors – the importance and number of those tasks in the overall workflow, the pricing mechanism at play, the commercial relationship between the client and law firm, and the overall level of competition in that segment of the market."

In-house legal teams can leverage AI-driven efficiency to negotiate more favorable pricing arrangements with external counsel, aligning costs with the value delivered. This could involve fixed-fee arrangements, capped fees, or alternative fee arrangements that incentivise efficiency and cost-effectiveness.

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While AI promises significant efficiency gains, it is crucial for both law firms and in-house legal teams to strike a balance between profitability and delivering exceptional client value. As one associate shared, "AI will provide the legal sector with an unrivalled opportunity to demonstrate why their services are valuable. This will make the market more competitive, as firms will need to demonstrate what they offer that other firms don't, and what AI can't."

Law firms must carefully evaluate their pricing strategies, considering factors such as the complexity of the legal matter, the level of expertise required, and the unique value proposition they offer beyond AI-driven tasks. By aligning pricing with the value delivered, firms can maintain profitability while fostering stronger client relationships and enhancing their competitive edge.

Similarly, in-house legal teams must carefully assess the cost-benefit analysis of AI adoption, ensuring that the efficiency gains outweigh the investment required. By leveraging AI to streamline operations and negotiate favorable pricing arrangements with external counsel, in-house legal teams can maximise cost-effectiveness while delivering exceptional value to their organisations.

Read our GenAI survey of 800+ lawyers