Canadian Lawyer

May 2024

The most widely read magazine for Canadian lawyers

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Page 14 of 51

OPINION UPFRONT 13 AI's threat to the billable hour Generative artificial intelligence technologies could finally make alternative fee arrangements truly transform how law firms price their services as AI tools scour massive and heretofore under-utilized data sets (think predictive analytics for litigation outcomes that are based on a mix of public court data and proprietary law firm data). To be clear, this does not mean that lawyers disappear from the process; this means a big step forward in efficiency and insights, with lawyers freed up to focus on higher-value tasks. Law firms and clients can share the financial benefits of the efficiencies, resulting in the long-sought-after but rarely realized "win-win" pricing arrangements. Clients will receive cost predictability through fixed- fee AFAs but also benefit from cost savings by not paying for associate hours for many tasks. Law firms can move away from a "cost- plus" pricing mentality and set fixed-fee prices that are competitive and lower than under previous hourly billing models but reflect the value being delivered to clients and provide reasonable profit margins for the firm while recovering a portion of the increased costs they are incurring to use generative AI platforms. Innovative law firms will move quickly to partner with clients on AFAs rather than get dragged kicking and screaming to do so. Such firms will also invest more in pricing experts who can effectively marry financial acumen with an understanding of how legal products and services will be delivered using tech-enabled service delivery models and an ability to articulate the value of such products and services. Hourly billing will survive, but it may soon cease to be the dominant pricing arrangement between law firms and clients. This time, it's different. David Cohen is senior director, client service delivery at McCarthy Tétrault LLP. He oversees a team responsible for pricing, legal project management, legal process improvement, and service delivery innovation. LEGAL MARKET pundits have questioned for decades when the billable hour will finally die. A simple internet search – maybe using ChatGPT – will guide you to headlines that pronounce the billable hour dead or anticipate its imminent demise. I expect the billable hour to persist in some form for a very long time. It has proven resilient despite the apparent appeal that alternative fee arrangements (AFAs) present for in-house counsel – namely cost predictability, the alignment of the client's interests with those of its service provider, a simplification of the billing process, and encouragement of innovation in legal service delivery models including the greater use of legal technology to lower the cost of legal services. For AFAs to truly take off, both clients and law firms must want to make structural changes to how legal work is priced. In-house counsel often express their desire for cost predictability but justifiably question whether the fixed fees their law firms develop for them will also result in cost savings from more efficient practice or be built based on the cost of historical matters that involved traditional (and non-tech-enabled) legal workflows. At the same time, law firms have not felt significant pressure to make structural changes to their pricing approaches. What would motivate law firms to prioritize AFAs when hourly rates have worked so well for decades? The answer is, in part, generative AI. Those of us who have tested it at our law firms have seen the opportunities it presents to disrupt current workflows. We have also seen the remarkable enthusiasm of lawyers at all seniority levels to adopt the technology. Soon, there will be no reason to have an associate review, summarize, and analyze a 100-page document when a sophisticated generative AI platform can perform that task with impressive results in seconds. Clients will expect reductions in the cost of legal services for matters where AI can be leveraged, and it's safe to assume that the portion of matters where lawyers can find ways to leverage AI will continue to increase. Firms using generative AI to assist with routine tasks and who bill by the hour will quickly see declining revenue and profitability – the volume of associate billable hours for many legal tasks will decrease while legal technology costs continue to increase. This is why we've reached an inflection point in how buyers and sellers view pricing arrangements. We will see AFAs finally pick up steam as the inputs and outputs of legal service delivery shift. Robot-created responses generated in seconds will replace much of the human- generated work product measured in hours. Clients will see legal ser vices delivered more quickly and with greater efficiency, and with new insights for clients Firms using generative AI to assist with routine tasks and who bill by the hour will quickly see declining revenue and profitability

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