AI is about to pull the rug out from time-based billing

Having spent more than my fair share of time thinking about pricing in family law, I was already considering how the recent advancements in AI were going to impact fees; but workshopping value pricing with Clarissa Rayward and some other family lawyers last week compelled me to really lock horns with it. We've run a lot of value-pricing experiments over more than a thousand matters at adieu.ai, so I've learned some surprising insights about fees in family law which I'll crystallise for you in this post. My wheelhouse is AI in family law, but everything here applies to legal services generally.

AI is about to force this issue in a way we've never seen before. Value/fixed pricing has already been in the zeitgeist over the last few years, but for most firms it remains either an aspirational idea they hope to explore one day, or a terrible idea they can't believe anyone would entertain. I expect this to change uncomfortably quickly, as AI-based work starts to make time-based billing simply unviable. This wont be true for everything firms do - but time-based billing will become the exception rather than rule.?

Before waves of panic start to overwhelm you: I think your firm will actually be better off as a result of this, and so will your clients. Let me explain why.

Time is not value

Although this might be a challenging idea if you've spent your career "producing" billable hours, your time isn't actually worth anything to anyone. The only thing that is valuable is what you are able to accomplish in that time. Back in the days when a lawyer would sit at their desk with a quill, time and value were close enough to each other as to appear one and the same if you squinted.

Technology is constantly pushing time and value apart however, because it amplifies the value you can produce with your time.?As it stands right now, time and value have already drifted quite a way from each other - but when you introduce AI into the equation, they become almost unrelated.

Outside of professional services, this isn't a radical idea at all. When an apple farmer starts using a tractor instead of farming by hand, their apples don't become less valuable. As someone buying an apple, you care about taste and nutrition - the amount of human exertion that went into producing it has absolutely no bearing on its value to you. You can clearly have the same value with a lower production cost.

You can also have a higher value for the same production cost. When you take a flight in the middle of the school holidays, you might pay two or three times as much for the same seat, on the same plane, being flown by the same pilot as you would a week later. The cost to the airline is no different, but the value to you certainly is.

Where this gets really interesting however, is the ability to have a higher value at a lower cost. A good example of this is the Tesla Gigafactory, where robots produce vehicles that are more valuable, with lower human input costs than vehicles made with traditional manufacturing methods. Is a Tesla Model Y less valuable than a Ford Escape because it required less human exertion to produce? Of course not. In fact, the question almost seems absurd.

Time is not value and it never was - it's just that up until now they were close enough that you could treat them like the same thing and get away with it. Pretending that time is value leads to worse outcomes for firms, and poorer outcomes for clients. Let's unpack this further.

Treating time as value creates many problems

Because time is not value, strange and perverse things happen when you pretend that it is.

1. Things that are done quickly are worth less than things that are done slowly

If time is value, then things that are done quickly are worth less. This defies the laws of economics to a degree that makes me dizzy. In the real world, if you want your package delivered tomorrow instead of next month, you pay more, not less. Why? Because having it delivered tomorrow is more valuable than having it delivered next month!

That makes sense for logistics, but what about family law? Allow me to illustrate with a real example from the adieu.ai beta programme. Our AI paralegals can prepare and type up a disclosure schedule for a client in 3.5 seconds (yes we measured it). If a human paralegal working at $200/hr spends 6 hours putting together a disclosure schedule, they create $1,200 of "value" for their client. If time is value, then having an AI paralegal create the exact same disclosure schedule only creates 19 cents of "value" for the client. So a disclosure schedule done quickly is worth 19 cents, and the same disclosure schedule done slowly is worth $1,200. I defy you to tell me that makes sense with a straight face.

2. There is an artificial cap on how much value a firm can create

If time is value, then the only way to create more value is to spend more time. But you're probably already working all the hours you can. Hiring more people could help, but staffing up doesn't scale because each new team member brings diminishing returns. This cap not only constrains what a firm can earn, it also constrains how much value your clients can get from you. It's a two-sided coin: you only have a very limited scope in which to increase what you earn, and an equally limited scope within which to provide more value or reduce your prices. Treating time as value creates a narrow band which is suboptimal for everyone.

3. Efficiency is bad, inefficiency is good

If time is value, then developing better ways to do things makes them worth less. In the real world, companies spend millions on innovation projects, because doing things better reduces costs and creates more value. In the time-is-value-bizarro-world, those who do things more efficiently are rewarded by getting paid less.

4. The metrics get warped

If time is value, then everyone creates an immense amount of value everyday by simply showing up - they just need someone to charge it to. What gets measured gets done, so finding creative places to stuff time becomes an important career skill and one of the chief dark arts of time-based billing. To correct for this shared fiction, firms then have to routinely write-down big chunks of this "value" because clients don't actually value it.

5. People measure their bathroom breaks

The wrongness of this is so self-evident that I have nothing further to add.

Many lawyers misunderstand value pricing

I'm happy to be corrected on this, but having spoken to a lot of lawyers about value pricing I'm fairly confident in saying that most misunderstand it.

What value/fixed pricing is not

Some of this comes down to terminology, where the term "fixed" leads us astray. A commonly held view is that offering fixed-fees is simply doing everything as you would otherwise, but only being able to charge some arbitrary, ill-informed fee that you told the client at the beginning of the matter. An even worse version of this is one in which you promise the same arbitrary, ill-informed fee to every client instead of giving each one their own special arbitrary, ill-informed fee. Unsurprisingly, this idea is not appealing.

There is also another variation of this (which I have my own scars from) in which you charge a risk premium. In this approach, you take whatever you think the work is likely to be on a time-cost basis, and then add a risk premium to account for the risk you take in offering a fixed fee. This is common in technology consulting and construction and can work in those contexts if you do it very carefully and control scope with an iron fist. I see this approach as a terrible idea for family law for many reasons, but I'll share three of them:

1. You don't have a rational buyer who wants to pay a premium to control risk
2. You can't measure, predict or control the scope to a degree anywhere near to what is required to make this work?
3. Amending scope is a full time job in tech and construction, and even if you could manage it, your client certainly can't

Value is what matters - the fixed part is a distraction

The "fixed" part is actually a red-herring here. This concept is really about creating and capturing value. There is no need to provide one, all-encompassing, never-changing fee for everything you'll do on a matter. What is important is breaking the work into meaningful units of value and putting a price on each one. This is only fixed in the sense that each unit of value has a set price. Looking at it this way, you could correctly say that time-based billing is also fixed - but you're using 6 minutes of someone's time as the fixed unit of value instead of something that's actually meaningful. So, this isn't about moving from flexible pricing to fixed pricing - it's simply about changing the unit of value from an arbitrary time increment to something resembling what the client actually hired you to do.?

What is value?

If we're going to talk about creating value, we'd better define what it is. There are many definitions of value, but I find the ones from Lean Manufacturing most useful for the purposes of creating more of it. According to the lean process' somewhat brutal definition, value is "any action or process that a customer is willing to pay for". Value is determined by the customer's perception of the worth of a service based on its ability to satisfy their requirements.

If we wanted to put this even more simply: value is what people want, as measured by what they're willing to pay for it.

When we define it this way it becomes abundantly clear that what does and does not constitute value is determined by our clients, not us. We don't get to choose what value is, just how we are going to provide it.

Value is malleable

This may not be intuitive if you're used to selling time - but value is actually malleable and can be increased independently of cost. Not just charging more for the same thing, but increasing the underlying value of the service itself. Value pricing not only enables you to reduce costs without reducing price, it also lets you increase value as an independent variable. This is a very, very exciting idea, and one that family lawyers have barely scratched the surface of.

Because value is determined by our clients, aligning our service more closely with their needs creates more of it. Not just in some philosophical way, but in terms of how much money they will actually pay us for it.?

So in a nutshell, the art of creating value is about deeply understanding what your clients want and finding creative ways of providing that to them. Not in a generic, procedural way - but at a human level. This is more about service design than it is about automation, and if you start to go down this path you'll get into the territory of psychology and brand pretty quickly; but I'll unpack this in later articles (I've even done an entire talk on it if you're really interested).?

Once you've maximised value and minimised cost, you can set price anywhere on that bar that you want. If you're all about access to justice, use automation to push that cost down as far as it goes and set a price that gives your clients lower fees while providing you with a sustainable business. If your clients value a high-touch experience, use that as a lever to crank the value right up to 11 and design a service centred around lots of high-quality face-to-face experience.

Unlike cost in which the primary lever is automation, value has many levers that we can pull to create more of it. Here is a starting list straight off the top of my head of the levers of value in family law:

1. Speed / time to resolution
2. Quality
3. Client experience
4. Convenience
5. Outcome
6. Communication
7. Degree of autonomy / support

With those levers alone you could make 100 distinct family law offerings with their own values, prices, cost structures and target client groups. Do you see how materially different this is to simply following a procedure and counting the hours it takes to get to the end? Different firms were founded for different reasons, with different values - and their services should reflect that in the nature of the value they create, their pricing, and their cost structure. In contrast, time-based billing leaves you with services which all look the same.

This is an exercise in creating and capturing value. Think about value holistically - if your clients aren't net ahead compared to time-based billing, you're doing it wrong. This should result in legal services that are better for firms and better for clients.?

Learning how to increase the value of a service is something that every family lawyer should up-skill in. As someone who designs services for a living, I'd be happy to help and will write a whole lot more about this going forward. Just follow me on LinkedIn if you're interested.

Why AI is going to make time-based billing unviable

Now that we've returned from our little odyssey into value pricing, let's get back to my original thesis: AI is going to make time-based billing unviable.

For all the reasons we've just talked about, time-based billing misaligns the firm's interests and the clients interests in a multitude of ways. This was already true 20 years ago, but AI is going to rapidly increase this gap from being small enough to ignore, to being so far apart that treating time as value will cease to be viable at all for most legal work. It will increase this gap in two ways:

1. Leverage: Humans will be able to create more value in less time
2. Autonomy: AI-based agents will do independent work that isn't just helping a human get more done, but is directly producing large amounts of value themselves

How confident am I about point 2? 100% confident, because it's not a prediction, it's a record of what has already happened. Our AI paralegals have already done this across more than a thousand family law matters in our private beta.

How long will it take before time-based billing is unviable? I have no idea. It could be two years, it could be twenty. As always, the technology comes first and the culture change comes second.?

Unlike most changes in the legal sector, I don't expect regulation to play much of a role in this, as value pricing in law has been gaining momentum for a long time and is not only permitted but often actively encouraged by regulators.

This sentiment is similar everywhere, but here is an example from the Queensland Legal Services Commission Regulatory Guide 9 from July 2021:?

fixed‐fee agreements have some marked advantages over time‐costed agreements, for both lawyers and their clients alike.

Thus while this guide addresses deficiencies we see from time to time with fixed‐fee costs agreements and bills issued pursuant to those agreements nothing in the guide should be construed to suggest that this kind of costs agreement is inherently problematic or should be discouraged: quite the contrary.

Rather than asking when this will happen for everyone, perhaps a more interesting question is when will this happen for you?

So, what should I do?

Although I've done my best to shock you into action so far, if you're not leveraging AI (or tech generally) in your firm, you can probably sit your hands and be OK for quite some time. The gap between time and value should remain small enough for you to continue on your merry way.

However, as soon as you start using AI to get more done, that gap between time and value is going to appear. If you start using autonomous AI, it's going to get very big very fast and leave you with no choice but to value price it. You don't need to value price everything, just the work done by AI. That provides an easy stepping stone, is trivial to implement, and is what a number of the firms in our beta currently do.

When you're ready to put on your grown up pants and start value pricing properly, I'd highly recommend Clarissa Rayward's value pricing workshops and document packs. If you're interested in starting to use autonomous AI in your firm, register for our adieu.ai private beta and if we think you're a good fit we'll invite you to join (subject to capacity). We're looking for early adopters with the right mindset - tech-savviness is not a requirement.

To wrap

There were many things I would have liked to have gone deeper on in this article that will need a bunch of subsequent posts to cover. Make sure you follow me (or connect) on LinkedIn and I'll be sure to get those things bottomed out. Check out the work we're doing at adieu.ai, and if you have any questions or comments I'd love to hear them below.