Updated November 6, 2023
In the ever-evolving landscape of the legal profession, one aspect has remained constant: the importance of billing practices. Law firms, irrespective of their size or specialization, rely on billing methods to:
- Quantify their services
- Ensure revenue generation
- Maintain transparency with their clients
Traditionally, legal billing has followed strict hourly billing practices, wherein clients are charged for the time spent on their case. However, with the introduction of AI-enhanced legal tools — and, most recently, Generative AI tools — legal industry professionals may find themselves re-evaluating their billing models.
In this blog, we’ll explore why Generative AI may prompt a shift in some law firms’ billing models, especially with regards to anticipated increases in working speed and efficiency. First, however, we’ll review the different types of alternative fee arrangements available for attorneys who may be in the midst of this decision right now.
What are “alternative fee arrangements?” In the legal world, an alternative fee arrangement provides a different way for clients to pay their attorneys – one that does not involve the tracking and invoicing of billable hours. With increasing frequency, the industry is seeing a preference for value-based billing, which focuses on the outcome and value provided to the client rather than the hours invested.
This is where Generative AI shines; as AI-powered tools speed up the legal research and document drafting process, this type of billing model may allow attorneys to deliver above-average results, especially with regards to accuracy and speed. Below, we discuss four different types of flexible billing models which focus more on value, before digging into how Generative AI will potentially make these models even more prevalent.
A flat fee billing model involves charging clients a predetermined, fixed amount for specific legal services, regardless of the time or effort. This approach offers transparency and predictability to clients, as they know the cost upfront, regardless of how long the legal work takes. Flat fee billing works well for transactional services, promoting efficiency and aligning client and attorney interests in achieving successful outcomes.
Contingency billing allows law firms to take on cases with the understanding that they will be compensated only if they win or reach a favorable settlement. Often used in litigation, clients typically pay the attorneys 30-40% of their overall payout if the case is won.
Similar to contingency billing, success fees are compensations received pending apositive outcome or result. This fee structure often involves a percentage of the client’s financial gain or a predetermined bonus for achieving specific goals. In contrast to contingency billing, success fees are sometimes paid on top of other payments to the attorney. Although they may be reduced, clients could still pay the attorney even in the event that the case is lost.
A cap fee billing model sets a maximum limit on the total fees a client will be charged for specific legal services. It offers cost certainty and protection to clients by capping the expenses, even if the legal work requires more time or effort than initially estimated. This approach ensures that clients won’t be billed beyond the predetermined cap, providing transparency and minimizing financial uncertainty. The cap fee model is particularly beneficial for complex cases where the scope and duration of the legal work may vary.
Why might Generative AI impact billing practices? While these types of alternative fee structures aren’t new, Generative AI brings unprecedented shifts to efficiency, which may make them more popular. By offering conversational search and drafting capabilities, legal professionals can drastically reduce the time spent on tedious tasks. Although AI has the potential to transform the industry in a variety of ways, we’ll discuss two potential outcomes with regards to billing:
Greater Attention on High-Value Tasks
When less time is spent on tedious tasks, attorneys may have more time to focus on higher-value activities that require critical thinking and legal expertise. For example, instead of manually producing the first draft of a legal brief, AI can handle the process, freeing up time for attorneys to concentrate on perfecting the brief, engaging with clients, strategizing, and overall preparing a better case.
In this scenario, an attorney isn’t necessarily spending less time on client-related tasks; rather, they are able to bill for activities that provide greater value to the client. Maybe it still makes sense for a firm to use the billable hours method, with clients simply receiving more value from an attorney’s time.
Faster, More Valuable Legal Work
Of course, less time spent on research and drafting could also mean fewer billable hours per client. For some firms, this reduction in time may be what prompts them to shift billing models. In this case, value-based billing provides a way for attorneys to still get paid appropriately, while also offering more transparency to clients.
In either scenario, Generative AI is intended to enhance the work of an attorney and provide better outcomes for clients. While some traditional practices may shift, attorneys who embrace the change may find themselves better off in the long run.
While Generative AI offers promising benefits, its adoption and usage in relation to billing is not without challenges and ethical considerations. For example, as Generative AI continues to impact research speed, law firms will need to carefully consider how legal research is included (or not included) in billable hours.
Already, rules and practices for how to include research vary. In some states, firms can charge for the “full cost” of research — i.e., an adjusted amount you would pay to access the legal content outside of your legal research provider. Meanwhile, some firms don’t charge clients for legal research at all. As the way we conduct research changes, it will be important to keep a critical eye on billing practices.
Additionally, some may have concerns about “double billing.” In other words, if AI writes a draft for one client, while you meet with another client, can you bill for both?
Finally, the influx of AI tools may also raise concerns among legal professionals about job displacement. While AI is certainly getting more advanced, it’s essential to recognize that AI tools are meant to augment human capabilities, not replace them. Legal practitioners should embrace AI as a tool that enhances their work, allowing them to focus on more complex and strategic aspects of their profession.
- Conversational search that delivers results from a comprehensive, trusted database
- Easy-to-digest summaries of key legal facts and issues
- Quick drafting of tedious legal documents like briefs and memos
The legal industry is changing, but with the right tools, your firm will stay ahead of the curve. Contact us today to learn more about AI or become a Lexis+ AI Insider for exclusive access to education and previews.