The billable hour has always sparked debate in the legal field. It quieted down for a while, but with AI, it’s heating up again. Everyone’s got an opinion, including Business Insider, which just published an article, “AI Won’t Kill the Billable Hour, It’ll Reinvent It.”

While the article doesn’t fully explain how AI will “reinvent” the billable hour, the message is clear: the billable hour isn’t going anywhere. What’s changing is the nature of the work billed. AI will reduce the hours spent on lower-value, repetitive tasks—drafting, reviewing, and research. But it will increase the value of work that requires strategy, judgment, creativity, and personal interaction.

But isn’t this how legal work has evolved over the past 5 to 6 decades?

A History of Adaptation

The legal industry has weathered numerous technological revolutions: telex, fax, typewriters, libraries, copiers, dictaphones, word processors, email, mobile phones, paper bills, e-bills, and online research, to name a few. Each brought its own wave of innovation.

Yet, none have eradicated the billable hour. Why?

It’s the Business Model, Silly!

As I mentioned in my article “Navigating the Complexity of Selling Legal Tech,” law firms essentially sell time. For professional services organizations, time is the unit of revenue.

Regardless of fee arrangements—hourly, fixed fee, AFA, etc.—it all comes down to hours multiplied by price. More specialized work with a better reputation commands higher rates, while less valuable work is billed at lower rates.

Even when pricing teams determine fixed fees, they base calculations on estimated hours worked at certain rates (derived from historical data). Lawyers still need to track their billable hours; otherwise, how can firms gather meaningful data to measure profitability (billed minus worked)?

The billable hour works because it’s a fair business model—you pay for what you consume. It’s like usage-based pricing in SaaS, something customers prefer but less widely adopted than per-seat-based pricing. Interestingly, AI is pushing industry giants like Salesforce to reconsider pricing and move toward usage-based models as AI agents (which automate tasks) begin to replace user seat licenses, significantly impacting revenue.

Lessons from History

In the late 1990s, major corporate clients and insurance companies realized that paper bills were too cumbersome to analyze. They needed a better way to slice and dice rates and lawyers’ time. This led to the creation of eBilling and the Uniform Task-Based Management System (UTBMS), which standardized legal work. Every timecard had to be coded with Task and Activity codes, and every disbursement with an Expense code.

This transparency gave rise to Outside Counsel Guidelines (OCGs), where clients set the rules on what, how much, to whom, and when they would be paid.

For context, expenses like photocopies (E101) or facsimiles (E104) that were once billed at significant rates (e.g., 50 to 80 cents) dropped to nominal amounts (e.g., 10 cents). Now, those costs are down to zero. Activities like Research (A102) are now capped at a few hours before requiring approval, or Plan and Prepare (A101) may be billed at half the rate.

Over time, these codes, which started for litigation cases, have expanded to hundreds of codes covering every area of law—bankruptcy, M&A, workers comp, criminal, real estate, and more.

And while work that was once billable and profitable has been reduced to almost zero, law firms have managed to maintain value by increasing their rates and preserving their margins.

Law Firm Rates Increase Over Time

“Law firm rates continued to rise sharply in 2023, reflecting a trend that has been ongoing for more than a decade, although sharply accelerating since 2019.” - Thomson Reuters Institute, 2024 Report on the State of the US Legal Market.

What’s Different Now?

Speed and scale.

It took decades to create this digital transformation—paving the road, so to speak, to create top-grade quality highways. Now, we have AI-powered vehicles racing on those highways.

With this infrastructure in place, AI is about to take everything up a notch. What does this mean?

• Clients will have more control than ever.

• Legal work standards are already set, and clients will use them to manage quality, costs, and outcomes more tightly.

• Coding billable tasks, activities, and expenses—including duration and price—will become more streamlined.

• AI will optimize tasks like drafting (A103), reviewing (A104), and communication (A105 to A108), and clients will drive those values down.

• Billable rates for specialized work will keep climbing.

• Clients will demand AI tools to drive efficiencies.

• SMBs will get access to the same high-end legal tools large clients have.

• As AI improves, we’ll see increased consumerization of legal work for retail and small clients, with more self-serve tools and less direct attorney intervention.

• AI will accelerate the trend toward a more transparent buyer’s market.

The Human Capital Factor

When people say things like, “Those that fail to adopt [AI] tools will quickly fall behind,” it’s true, but not novel. Replace [AI] with [word processor] or [email] or [e-discovery], and the point remains valid. However, there’s an important caveat.

Generative AI models are probabilistic, built on neural networks that learn probability distributions over sequences of tokens (words, subwords, etc.). When generating text, they sample from these learned distributions, introducing an element of randomness and variability in their outputs. This is where human expertise remains crucial.

While GenAI is rapidly advancing, replacing human expertise—particularly the ability to understand complex, nuanced situations—remains deterministic in a way that AI can’t yet replicate.

Closing Thoughts

AI will become ubiquitous in the tasks performed by lawyers and their legal staff, and perfecting it will take time. In “The Coming Wave,” Mustafa Suleyman (Deepmind co-founder) predicts that AI will rapidly accelerate its ability to perform human tasks, potentially achieving human-level performance within three years and automating over half of all jobs within seven years.

Meanwhile, operational efficiencies will rise, and the scrutiny of time spent will grow. Lawyers will still track their billable hours, and work will become more standardized.

The key metric to watch isn’t necessarily the billable hour itself but the profit per equity partner (PPEP). For context, the top AM Law 20 firms in 2022 reported PPEP between $3.7M and $7.5M (per partner!).

Law firms have traditionally relied on associates' and paralegals' work to maintain their margins. However, AI will mostly impact routine tasks they handle, like document review, research, and drafting. At first, this will boost firms’ profits, but as clients catch up and OCGs evolve, the billable hours for these tasks will decrease—possibly to zero.

Time will tell, but the trend appears to be moving toward higher rates to compensate for revenue loss and a fundamental transformation of entry and mid-level legal jobs as we know them.

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