US Legal Industry: AI Fails to Kill Billable Hour, Flat Fees Decline

• The latest SMB Law Billing and Payments Report indicates that the billable hour remains dominant despite AI adoption.
• Flat fees now account for 15% of all bills, a decrease from 16% a year ago, according to data from over 60,000 firms.
• Nearly half of small and mid-size firms still bill entirely by the hour, while only one in ten uses purely flat fees.
• While lawyers report saving time with generative AI, billing data shows hours per case increasing across most practice areas.
• This paradox may be due to AI enabling deeper legal exploration and requiring extensive human verification of its outputs, akin to Jevons Paradox.

This creates a paradox where legal professionals believe they are saving time, while the objective billing records suggest otherwise.

The legal industry has long anticipated a significant shift away from the traditional billable hour, particularly with the advent of advanced technologies like artificial intelligence. However, recent data suggests that this transformation has not only failed to materialize but, in some respects, has seen a reversal. The latest SMB Law Billing and Payments Report, compiled from insights gathered from over 60,000 small and mid-size firms utilizing 8am (formerly AffiniPay) products MyCase and LawPay, indicates a surprising trend.

Contrary to expectations that AI would drive a move towards value-based billing, the prevalence of flat fees has actually decreased. Flat fees constituted 15 percent of all invoices issued, marking a slight decline from 16 percent recorded just a year prior. This modest retreat is particularly noteworthy given the concurrent surge in AI adoption across the sector. The report further reveals that nearly half of all firms continue to bill exclusively on an hourly basis, while only one in ten firms relies solely on flat fees. Firms employing 11 or more individuals demonstrated the most pronounced reduction in flat fee usage, dropping from approximately 16 percent to 14 percent.

For nearly a decade, the legal profession has discussed the impending obsolescence of the billable hour, largely driven by client demands for greater cost predictability. The assumption was that technologies enabling efficiency would naturally lead to a reduction in the time spent on cases, thereby diminishing the need for hourly billing. Yet, the data presented in the 8am report challenges this long-held belief, showing firms making different strategic choices.

A significant disconnect emerges when comparing lawyers' perceptions of AI's impact with actual billing data. The 8am 2026 Legal Industry Report, published in March, indicated a dramatic increase in individual generative AI use, more than doubling to 69 percent. A majority of these users reported saving several hours each week through the use of these tools. At that time, 22 percent of respondents even predicted a broader transition to flat fees. However, subsequent billing data from 8am in July revealed that the hours logged per case actually increased across nearly all practice areas. This creates a paradox where legal professionals believe they are saving time, while the objective billing records suggest otherwise.

This apparent contradiction can be attributed to several factors. While AI tools can rapidly generate initial drafts or research summaries, they do not eliminate the need for extensive human oversight. A lawyer must still dedicate considerable time to meticulously verify the AI's output, ensuring the accuracy of cited cases, confirming their relevance, and checking for any subsequent overruling decisions. Furthermore, a less obvious but equally impactful dynamic is at play, akin to Jevons Paradox. Just as 19th-century steam engine efficiencies led to increased coal consumption due to expanded applications, AI's ability to make legal research and analysis more accessible and efficient encourages lawyers to explore more complex arguments and broader lines of inquiry. This expanded scope of work, previously unfeasible for solo practitioners or lean teams, ultimately translates into more billable hours, rather than fewer.

The findings from the SMB Law Billing and Payments Report carry significant implications for the future of legal practice and client relationships. Despite widespread AI adoption and the perceived efficiencies it offers, the billable hour remains firmly entrenched, and in some cases, appears to be gaining ground. This challenges the prevailing narrative that technological advancements would inevitably lead to a fundamental restructuring of legal billing models.

Clients frequently express a desire for transparent and predictable legal costs, a need that flat fees are designed to address. The report's data, however, indicates that firms are largely opting to maintain or even increase their reliance on hourly billing, especially for matters deemed less predictable or bounded. This suggests that while AI may streamline specific tasks, it has not yet translated into a systemic reduction in the overall time commitment for legal matters, or perhaps it has enabled a deeper, more comprehensive approach to legal work that expands the scope. The enduring dominance of the billable hour, even in an era of advanced AI, underscores the complex interplay between technology, legal ethics, and economic realities within the profession.

Source: Original reporting via the SMB Law Billing and Payments Report