Last year, discussions about the potential of AI to end the traditional billable hour model in legal practices gained momentum. While the transformative power of generative AI is undeniable, its immediate impact on billing practices may be less revolutionary than anticipated, particularly in large law firms (Biglaw).

Rates could increase as tasks become more efficient thanks to AI, allowing firms to charge more for the time saved. Conversely, rates might decrease as AI-driven efficiencies make legal services more competitive. There's also the possibility of a shift towards alternative fee arrangements and moving more legal work in-house. However, the deep-rooted nature of the billable hour in Biglaw means these changes won't happen overnight.

Three key areas need to evolve for a significant shift from the billable hour to fixed-fee arrangements: mindset, culture, and infrastructure. Law firms are traditionally structured around partnerships, where profits are distributed annually, making them reliant on billable hours as a straightforward measure of work and attorney contributions. This business model does not incentivize efficiency; instead, it encourages the marking up of billable hours.

Conrad Everhard, a founding partner at Flatiron Partners, points out that Biglaw is akin to an ocean liner, slow to pivot due to its entrenched culture, staffing models, and compensation structures. "Efficiency doesn't help the bottom line in a setup where the culture is about marking up hours," Everhard explains.

Furthermore, the culture within these firms, informed by their mindset, continues to emphasize traditional practices. Recent mandates for associates to work multiple days in the office underscore a preference for familiar routines over embracing potential new efficiencies that AI and digital tools offer.

The infrastructure of law firms, including real estate and back-office operations, also revolves around the billable hour. Shifting away from this model requires not just logistical changes but a fundamental rethinking of how firms operate, which is a considerable challenge given that non-billable time and capital investments are often seen as antithetical to profit distribution among partners.

However, there is a sense of inevitability that competition and client demands will eventually push more firms away from the billable hour. AI, while not directly incompatible with this model, will be a significant behind-the-scenes driver of change. New firms using technology to operate more efficiently will likely pressure traditional firms to reconsider their models.

Everhard remains optimistic about the future, "Like other industries, the catalyst for change in legal pricing models will come from external pressures. At Flatiron, we've embraced AI and tech to revolutionize how we handle transactions, proving that significant changes are both possible and beneficial."

For now, Biglaw may continue to profit from the billable hour, but as client expectations evolve and competition increases, the pressure will mount to explore and adopt more efficient, client-focused business models. The journey away from the billable hour is beginning, albeit slowly, driven by external innovations and internal realizations that efficiency and client satisfaction need not be mutually exclusive.