Impact of Artificial Intelligence on law firm revenues: The end of hourly billing

KABUL: With the expansion of artificial intelligence (AI) in legal and accounting work, the traditional hourly billing method is becoming obsolete. This new technology has compelled firms to rethink their revenue models. The hourly billing method, developed by Reginald Heber Smith years ago, allowed firms to charge clients based on the time spent on each task. However, with nearly 44% of legal work in the U.S. now feasible through AI, this approach is losing its effectiveness. AI can draft contracts or prepare reports in mere minutes. Yet, the American Bar Association’s rules state that only work performed can be billed, regardless of AI’s speed. This limitation can lead to reduced revenues for firms. Additionally, the costs of implementing and utilizing AI software are substantial, and firms can only pass a small portion of these costs to clients. Consequently, some firms are considering reducing human staff in favor of AI, but potential errors and the inability of AI to fully replace human judgment pose challenges. A more effective approach would be for firms to abandon hourly billing in favor of fixed pricing for each project, similar to large firms like McKinsey and Allen & Overy. This model allows AI to enhance profitability, but establishing prices for unique legal cases remains challenging. Ultimately, clients are reluctant to pay the same rates for AI-generated work as they would for human labor, with many preferring to utilize the technology themselves. Thus, law firms must move away from outdated methods and explore new revenue-generating strategies.