Beyond the billable hour: How AI is accelerating the shift to outcome-based pricing
In his book, Managing The Professional Service Firm, which was first published in 1993, David Maister suggests:
“Professional firms do not sell time (although they often bill that way). Rather, their stock-in-trade is skill.”
For firms operating in the legal profession, a legal skillset is hired by clients to either: conclude a relatively generic legal process quickly, and without much need for client intervention; or favourably resolve a highly complex matter in the shortest possible time.
In both cases, the job-to-be-done is to resolve a legal matter.
From the firm’s perspective, matter resolution requires a particular combination of skillsets (senior, mid and junior) multiplied by the time cost of those skillsets.
Big change
Clients don’t buy minutes; they buy resolution. Generative AI now makes that reality impossible to ignore. As routine legal work compresses from hours to minutes, time is a weaker proxy for value. Clients are responding to this change by asking for pricing models that reflect efficiency, not effort.
Recent coverage in the Financial Times notes buyers pressing for transparency on AI use and exploring flat-fee and subscription models as the cost of legal bills keep rising.
‘“There has not been a fundamental change in how law firms are delivering the work,” says Alex Kelly, co-founder of Brightflag, which uses AI to help in-house teams manage external legal services. This is despite more firms using generative AI for review, research and other areas, from private equity deals to patent data.
Yet over the next year or so, he (Kelly) predicts, more clients will seek agreements with law firms to mandate use of the technology in various billing areas, in the expectation that costs would be curtailed as a result.’
One of the reasons as to why the billable hour model has endured for so long is that clients have never (up until now) questioned the relevance of it.
However, there are now cases where corporate legal teams are being asked by their CFOs to demonstrate how their use of legal tech is helping to curtail costs; they in turn are looking at their service providers to do the same.
The Wall Street Journal reports that soaring legal fees charged by elite US firms is one of the major catalysts driving the demand for billing reform:
‘Shell sent a letter in June (2024) to outside law firms the energy giant was considering hiring. Its work wasn’t guaranteed, “as we constantly test the market for efficiency and cost effectiveness,” according to a copy of the letter from legal director Philippa Bounds reviewed by The Wall Street Journal. It asked the firms to explain how they are using generative AI tools, saying that the firms “that develop into that fertile ground” and are clear about how they are using it will have a competitive advantage.’
‘Shell tries to avoid the hourly rate model in general, arguing it provides little incentive for attorneys to work quickly. Shell’s head of legal operations, Gordon McCue, has pushed firms to use alternative fee arrangements so that Shell has a predictable and transparent rate in the final legal bill. ‘
Alternatives to the billable hour
According to the Clio 2024 Legal Trends Report up to 74% of hourly billables (information-gathering, analysis) are automatable, nudging firms toward exploring flat fees and subscriptions to align value with outputs, not inputs.
Increasingly law firms are responding with alternative fee arrangements (AFAs) that price the outcome. These include:
- Fixed / phase fees — Ideal for well-scoped work like policy packs, standard contracts and conveyancing workflows. Pair with clear assumptions, inclusions/exclusions and a change-order clause.
- Capped hourly with a collar — Keep the usual time-tracking, but share over/under risk versus a target. Great for matters with moderate uncertainty.
- Milestone / stage pricing — Break complex disputes, investigations or transactions into phases with go/no-go gates and prices per phase.
- Unit / menu pricing — Price by output: “per NDA”, “per diligence memo”, “per title search”. Works best where tasks repeat at volume.
- Subscriptions / retainers — Tiered monthly access with defined scope, response times and document quotas. Predictable for both firms and clients.
- Portfolio / volume deals — A single annual fee for a bundle of repeatable matters with volume bands and service credits.
- Success / holdback components — A base fee plus a success kicker or performance holdback tied to agreed outcomes (suitable within applicable ethical guidelines).
- Blended rate — One rate across the team; still time-based but simpler budgeting for the client.
AI makes outcome-based pricing possible. It helps firms to scope early by surfacing similar matters and precedents. It allows for the standardisation of repeat tasks for unit or subscription pricing and provides proof of quality with citations, comparisons and automated checks, which supports collars, SLAs and success fees.
With basic cycle-time data and work-type tags, you can turn real digital efficiency gains into predictable prices clients can plan for.
The new legal fee paradigm
As routine work is automated, the revenue mix will shift from fewer filler hours to more fixed/phase fees, subscriptions and success components.
Firms that productise repeatable outputs will protect financial margins, while giving clients the predictability they want.
The goal isn’t to charge less for everything, it’s to price the resolution fairly and transparently, with risk and reward shared appropriately.