One of the central themes of the recent Clio user conference held in Austin was the anticipated death of the billable hour. Jack Newton talked a lot about this in his keynote, as did other Clio executives in presentations and their talks with me.
The idea is based on one of the more startling findings announced by Clio at their 2024 annual Conference that just concluded. According to Clio’s Annual Legal Trends Report, AI can automate up to 75% of the work for which legal professionals currently bill. That’s a startling finding and should put fear into the hearts of managing partners. This billed time percentage is significantly higher than that reported by Goldman Sachs in March of 2023. At that time, Goldman Sachs believed 44% of legal tasks could soon be automated.
The Clio Study
Every year, Clio conducts an exhaustive survey of the legal market. The focuses on data and interviews of Clio’s customers and clients and comes out every year. It’s well-regarded due to its breadth and rigor.
According to Joshua Lenon, Clio’s Lawyer in Residence and chief author of the Study, Clio “looked at over 7 million anonymized and aggregated time entries and classified those against the same system Goldman Sachs used in their study.” In other words, Clio took the time entries and determined whether they fell into the categories that Goldman identified as potentially automated. Much of the time that could be automated was for such things as information gathering and data analysis.
Quantitatively, it’s hard to quarrel with a study that looked at so many actual time entries. Perhaps if there is any question, it would be whether qualitatively Goldman Sachs correctly identified the categories that could be automated.
But even if Goldman misidentified a few categories, it’s still a large number of billable hours that could be automated. It’s also possible that Goldman missed some categories of automated work. It’s also important to remember that the Goldman analysis was released in March 2023. There have been substantial advances in AI and GenAI capabilities since then. And there will be more to come.
A loss of 75% of the billable time of legal professionals would mean a huge reduction in revenue
The actual breakdown of the Clio finding is as follows:
- 57% of lawyer billable hours was for work that could be automated;
- 69% of paralegal billable hours was for work that could be automated;
- 81% of administrative billable hours was for work that could be automated.
Perhaps in a bit of an understatement. Lenon told me, “75%. It was so much higher than I was anticipating.”
If the Clio Study is correct that so much work currently being billed for can be automated, it has enormous impacts across the ecosystem. A loss of 75% of the billable time of legal professionals would mean a huge reduction in revenue. It has enormous cultural repercussions. It means the leverage model, upon which law firm profits have been based for decades may be done. The training regimen for young associates which depends in large part on that leverage model will also be upended, thinks Lenon.
What’s a Law Firm Do?
Lenon says, “There are only three ways to replace that revenue (assuming he says that replacement is even the right target):
- You gotta raise your hourly fees a lot-that’s not going to happen
- You gotta get more business and make it up in volume-that’s possible
- Or you shift some of that lost revenue to a flat fee.”
We’re going to see more matters with a hybrid of flat fees and hourly billing
Lenon strongly believes the most likely solution is for law firms to go to hybrid billing models. Under this fee structure, some work on a matter would be billed on a fixed fee basis, and some would be billed by the hour. Routine pleadings, for example, for which costs are predictable, could be billed on a task or flat basis. On the other hand, a full trial brings in a high degree of unpredictability in the type and amount of work. Thus, trials might still be billed by the hour under Lenon’s theory.
Lenon also believes that in addition to flat fees based on predictable and past data, the speed and timing of a desired delivery might also be factored into the flat fee amount. If you need it quickly, “It may be even more valuable to a client.”
“We are going to see more lawyers experimenting with flat fees. We’re going to see more matters with a hybrid of flat fees and hourly billing,” according to Lenon.
Another interesting finding from the Legal Trends Report is, according to Lenon, “50% of the firms that bill exclusively in flat fees were either widely or universally adopting AI in their practice,” which seems to support the idea that AI and flat fees are a marriage made in heaven.
How Will a Hybrid Fee Structure Replace Revenue Threatened by Automation?
Lenon says that billing by a flat fee and using automation to complete a task means more tasks can get done in a given period of time than are done now. And at a lower cost. For example, presently, it might take a lawyer an hour to prepare a pleading at, say, $200 an hour. But if an automated tool can prepare a pleading in seconds at a charge of $50 per pleading flat fee only four pleadings need be prepared by the AI tool to reach the same amount of revenue. If the lawyer can increase the amount of their business and needs eight pleadings instead of four, the law firm doubles its profit.
But Doesn’t This Mean Fewer Lawyers?
I asked Lenon if the automation of so much work lawyers presently do means we will not need as many lawyers as we now have.
We won’t need fewer lawyers because there is a lot of work out there that lawyers aren’t capturing
He cited Clio’s Legal Productivity Index for the idea that there is substantial work out there that’s presently untapped. The Productivity Index, which is part of the Legal Trends Report looks at the number of matters on which legal professionals work, the hours they bill, and the fees collected.
Lenon noted, “Since 2016, the number of matters that a timekeeper works on has grown 26%”. This is despite the fact that lawyers are “really horrible” at bringing business on,” says Lenon. Lawyers not answering the phone. Lawyers are not replying to emails. Lenon believes that lawyers need a better understanding of what clients want and need. “The single reason you hire a lawyer is you want a better chance for an outcome. What they tend to get instead is a pile of paper and a bill.”
Lenon concluded that, “If we can figure out how to make this vast improvement in speed and the commitment of AI into something profitable, we don’t need fewer lawyers.”
In short, we won’t need fewer lawyers because there is a lot of work out there that lawyers aren’t capturing, which they could do with things like better service and AI.
And this is not to mention that there will always be new areas of law that will require lawyers’ services in ways we don’t yet know.
The adage that it’s hard to tell a room of millionaires that their business model is wrong still applies
Is Clio Right?
I have a lot of respect for Lenon. He’s analytical and savvy. But I wonder whether he and Clio are a bit optimistic about changes in billing for legal services and the ability to capture more work. Just because something can be automated doesn’t mean it will be. Lawyers aren’t going to rush to a different business model unless they are forced to. For many lawyers, the billable hour model is still functioning pretty well: the adage that it’s hard to tell a room of millionaires that their business model is wrong still applies. The culture and infrastructure of most law firms are highly dependent on the billable hour: it’s how you advance, and it’s how your compensation is, in large part, determined.
For many lawyers, automation will occur on lawyers only when the market and clients demand it. For clients with in-house counsel, it’s important to remember that many came from a law firm background and changing to a model where output, as opposed to time, governs fees may be slow.
For firms that serve smaller businesses and individuals, Lenon and Clio are right. There is a huge untouched market. Forward thinking law firms can use automation and AI to tap into that market and be more profitable. But that’s not necessarily taking business away from other firms. Only when clients leave those firms for more progressive firms with flat fee models will those firms be forced to change their billing habits.
But if firms can automate their work to do more, they will still need to get more work to be automated than perhaps they have now. That work can come from the untapped market, but you will need a lot of work to make up for the revenue lost by a 75% reduction in billable hours. Moreover, if forward thinking firms take work from existing firms, then those existing firms won’t need as many lawyers as they have now.
Bottom Line
Clio is right that AI will force a shift to flat fees. But it still may be slow to come. And will we still need as many lawyers? Maybe, but suffice it to say, if we do, it will mean wholesale disruption in the marketplace with lawyers performing very different roles than they do today.
That’s why the Clio finding is so significant.
