What Comes After the Billable Hour? Ken Callander Says Firms Should Charge for Value, Not Time
Advanced AI is changing the legal industry’s traditional relationship with time. When an AI system can generate a first draft of a motion or summarize thousands of pages of evidence in minutes, the billable hour becomes a less reliable indicator of value.
For Ken Callander, founder of Value Strategies, the question is not so much whether the billable hour will survive, but what comes after. What replaces time as the new proxy for value? If clients are no longer paying for the time it took their counsel to do the work, what should they be paying for?
Drawing on a unique background that includes running legal operations at Uber and CMO duties at Davis Wright Tremaine, Callander advises corporate legal departments on transitioning to value-based fee arrangements, which he argues can lead to better budget predictability for clients and higher profits for their firms.
Everlaw caught up with Callander to discuss how AI is accelerating this pricing transition, the structural “third rail” holding back traditional law firms, and steps needed to more closely align expertise, cost, and outcomes.
Your background includes leadership roles at both a law firm and in-house. How does that combination inform your work with clients today?
I joined Davis Wright Tremaine in 2008 to build out their business development team, and I ended up as their CMO. I was on the executive committee, and was basically helping run the firm. After that I joined Uber as head of legal operations and Chief of Staff to the General Counsel.
It was at Uber where I started exploring value-based fee arrangements for legal work — something that was harder to do at a law firm. On the buyer’s side, I had a better chance to make that happen. I worked with Uber’s general counsel to implement value-based pricing.
We started off with corporate and M&A. In the course of about a year and a half, we ended up moving most of Uber’s legal work off of hourly rates, including everything from litigation to employment, IP, privacy, corporate, and M&A.
After that I transitioned into consulting. For the last decade or so, I’ve been helping midsized to large clients restructure their fee arrangements, get them off of hourly rates, and give them the cost predictability they need, while reducing their outside counsel spend.
Changing the compensation model is like the third rail of law firm politics. You don’t touch it.
Very few service companies charge by the hour anymore but law firms continue to base their business model on the billable hour. What do people fail to appreciate about the reasons for its staying power in legal?
The large accounting firms and the management consulting firms went off hourly rates decades ago. Law firms are a holdout. In most cases, it’s because their compensation models are based on hours, and they have a tough time changing because they have little or no assets. If they do something that causes any of their major power partners to leave — like changing the compensation model — the firm can unravel.
Law firms have a set number of profit dollars that are broken out between all the partners at the end of the year. Because it’s a partnership, the taxes all get paid by the partners. They have to zero out the books at the end of the year, and all the partners get a percentage of that profit.
Because of a finite number of dollars to distribute by the end of the year, if you change the compensation model, some partners are going to get more and some are going to get less. The ones that get less are going to be unhappy, leave, and take their clients with them.
Interestingly, a number of the newer startup law firms have moved off of hourly rates and over to fixed fees for deliverables, like the Big Four accounting firms did years ago. They don’t pay people based on the hours they work; they bill by the project or deliverable.
But for traditional Am Law firms, changing the compensation model is like the third rail of law firm politics. You don’t touch it.
Alternative fee arrangements have also been around for a long time, but not all such arrangements count as true value-based pricing. How do you break down value-based pricing for clients?
The idea in value-based fee arrangements is to really pay for tasks, activities, deliverables, and results, not how many hours it took to do something.
We look at the value of the matter itself. I look at it across three dimensions: the economic value, the perceived value, and strategic value.
If you’re being sued in a contract dispute and the other side wants $10 million, your total risk in this matter is $10 million. That’s your baseline economic value.
If a client truly lost the case, they aren’t likely to pay $10 million. We ask the client what they think the actual economic impact would be for a loss. They often state that it is some amount less than the value requested in the complaint. This is called the perceived value.
To get to the strategic value, I ask a client, “If you lost this case, what might be the impact on the company brand or on potential future litigation?” For example, if you lose a wage-and-hour class action in California and you do business in other states, you’re most likely going to get hit with that same suit everywhere else. If a loss in court affects your brand or forces you to pull a product off the market, that financial impact must be added to the value equation.
Legal teams should start thinking about these dimensions of value and then determine what dollar amount is actually worth paying to deal with the matter.
My clients love fixed fees because the structure gives them predictability and typically reduces their outside counsel spend by 20% to 50%.
What might getting off hourly billing look like for transactional and litigation work?
For advice and counsel work, we build out a very detailed scope of work, go to several firms, and say, “Here’s all the corporate, governance, board, ERISA, exec comp, 34 Act, and Treasury work in detail. Give us a monthly fixed fee to handle all of this going forward for three years.”
Through a competitive process, you lock in a single firm. For all their corporate work, the client now has a fixed fee they can put on their budget, and they know exactly what it’s going to cost for the next three years.
In litigation or large transactions, you structure a fixed fee for each phase. For work that is task based, it would be a fixed fee per task. This is common now in patent prosecution, where you pay a fixed fee for preparing or filing a utility patent or responding to a USPTO Office Action. This is also the structure used for immigration (H-1B visas for example) or for contract work as a fixed fee per contract.
For most legal work, you price those fixed-fee structures based on the economic, perceived, and strategic value of each matter. My clients love fixed fees because the structure gives them predictability, and it typically reduces their outside counsel spend by 20% to 50%.
Corporate law departments are increasingly able to handle more work in-house thanks to AI tools. How is that playing out with teams you’re working with?
Some of my clients are turning to AI to take a first pass. Instead of going to a law firm and saying, “Give me an opinion letter on this topic,” or, “Give me an analysis of this issue,” they’re using AI models to ask those questions, getting an initial draft or opinion written up, and then sending that to their law firm and saying, “Okay, here’s what we’ve put together. Please read through this, edit it, and evaluate it.”
You’re still getting the validation from the firm, but they’re not doing the initial drafting. They’re now just reviewing a document. I think you’re going to see more and more clients doing that because it can significantly reduce costs.
AI is going to force firms to start charging for deliverables and thinking a lot more about fee arrangements tied to the true value of a matter.
What are the most common questions you hear about ways that AI can help in-house teams transition to more predictable pricing?
It’s moving so fast that if you ask me this question three weeks from now, I might give you a different answer. As these models get better and better, in-house teams are going to rely on them more and more. There’s going to be a point at which, in certain areas of law, people are going to get much more comfortable with the answers that AI gives them because most in-house teams are good with the 80% solution. They don’t expect perfection for routine questions or issues. When you try to get perfect, it takes you forever and can cost a fortune.
It’ll be interesting to see how much work moves to AI that previously went to outside counsel. We’ll see this especially with the lower-level tasks. Litigation and complex matters will still require formal filings, but a lot of basic contract work, immigration, employment, and real estate work — areas where ALSPs have been making inroads over the past few years — will increasingly be handled by AI.
How is AI accelerating the transition away from time-based billing?
AI is going to force changes in hourly billing as firms use it more. For example, if you’re researching and writing a motion to dismiss, you typically have three or four associates do the research, pull up case law, and do the initial drafting. It then goes to a partner for review, then to another partner, back and forth, and finally to the client. They might spend 100 hours of associate time on a big case to research and write the initial draft.
Now you have an AI system that has all the court filings right there, in that jurisdiction, with that judge, against this plaintiff attorney. It knows what types of motions were made in the past, which ones won, and which ones didn’t. All of that is instantly accessible, and AI can write an initial draft based upon winning arguments in previous cases. And it can do it in 5 minutes.
What are firms going to charge when they used to charge 100 hours for the associates to research and write now that you have an initial draft in 5 minutes? That’s a fundamental challenge for the billable-hour model.
Some clients would willingly pay more than they would under an hourly arrangement just to make sure the cost is predictable.
If law firms have fewer hours to bill because of AI, do you expect any time-based pricing to survive?
I do think some of it will survive. In very high-end work, like structured finance or highly complicated deals, AI is not going to be able to understand all the nuances and come up with an answer. That’s something that requires years of experience and intuition. You’re still going to be able to charge by the hour for your expertise on those matters.
But the majority of the work is going to be forced into some sort of pay for the value of the deliverable, the results, and the tasks, and not how many hours it takes, because you’re going to be able to do it so much faster.
It’s going to force firms to start charging for deliverables and thinking a lot more about value-based fee arrangements tied to the true value of a matter.
Corporate legal budgets are incredibly tight right now, yet outside counsel rates continue to soar. How is this tension forcing general counsels to rethink their hiring and staffing strategy?
Clients need predictability more than ever. General counsel and CLOs have a budget to maintain. If they can’t make the budget, the CEO will find someone else who can. For firms to say that they can’t give any predictability is just not a good answer for clients.
If you look at the latest Wells Fargo reports, law firm rates are going up 12% to 14% a year. What firms don’t realize is that when the rates get so high, it makes the business case to hire people in-house much easier for many types of legal work. If a matter is going to cost $2,000 or $3,000 per hour, a client can pay an in-house lawyer $100 to $200 an hour fully loaded to do the same work.
Granted, nobody in-house wants to add headcount because that’s hard, and that hesitation currently saves the firms, but soaring rates make it easier and easier for GCs to build that in-house business case.
If firms were charging for the value they’re delivering for their clients, they could charge a lot more for certain high-impact advice.
If skyrocketing hourly rates are pushing clients to bring work in-house, what should law firms be doing instead to stay competitive and actually capture the value they provide?
Firms can start thinking about pricing matters for the value of the deliverable to the client.
An argument I make for firms, and I made this when I was at a law firm: Imagine if you charge $1,000 an hour, and you have a 30-minute phone call with a client and your advice saves them $15 million.
How much do you get paid for that? $500?
If firms were charging for the value that they’re delivering for their clients, they could charge a lot more for certain high-impact advice. So firms should think about what the value of a matter is to the client and charge based on that, not by the number of hours it’s going to take to deliver it.
AI is going to force them to do it anyway, so they should start thinking about that transition now. That’s hard for firms to do because they’ve never had to think that way before, and what they think is the value versus what the client thinks the value is will always be different, but they need to start somewhere.
Giving spend predictability to the client is huge. I have some clients that would willingly pay more than they would under an hourly arrangement just to make sure the cost is predictable.
