Every Hourly Billing Flaw Explained in Detail (And Why It Can’t Survive AI)
The Thomson Reuters 2026 legal market report, broken down for anyone who sells time — lawyers, consultants, accountants, advisors
There’s a business model that’s been around since the 1950s. Law firms use it. So do consultants, accountants, and advisors. It generates hundreds of billions of dollars a year.
The model is simple: charge by the hour.
The more hours you work, the more you make.
AI just broke it. And Thomson Reuters published a 22-page report with hard data proving exactly how.
The report is about the legal industry, but the business model they’re documenting works for any professional service that sells time. If you bill by the hour, this is the data showing why that model just became obsolete.
TL;DR
The efficiency paradox: AI makes work faster, but in hourly billing, faster work means less revenue—the better you get, the less you make.
Dual cost trap: Firms are layering higher tech spending on top of talent cost increases, creating a cost structure that only works at full capacity.
When both sides (clients and the vendor) can buy the same $200 AI tool, the $1,000/hour justification collapses—Especially when corporations move routine work in-house.
The fork ahead: The report shows firms face a choice between two pricing models before the market forces one on them. One model turns AI efficiency into margin growth. The other becomes a death spiral.
The Business Model Where Efficiency is the Enemy
Here’s how hourly billing works, and why it’s fundamentally incompatible with AI.
In most businesses, efficiency is good. Do the work faster, and your margins improve. Automating a process, you make more money with less cost.
In hourly billing, efficiency is your enemy.
If you complete a project in 5 hours instead of 10, you just cut your revenue in half. Your client is happy — they paid less. But you also made less. The more efficient you get at your job, the less money you make.
This creates a perverse incentive: don’t get too efficient. Don’t automate too much. Don’t make the work too easy.
One of the oldest professional services in the world, lawyers, rely on this business model. This worked because there was a ceiling to efficiency. A lawyer could only get so fast. A consultant could only optimize so much. Human limits capped the downside.
Then AI arrived.
Now, here’s what the Thomson Reuters report shows is happening in legal — and I’m walking you through this because the pattern is identical for any hourly billing business.
The legal industry spent big on AI.
Tech spending is up 9.7% year over year. Knowledge management tools up 10.5%. Both growing at seven points above inflation — the fastest real growth in tech spending these firms have likely ever seen.
And at the same time, talent costs are also up near 10%.
They didn’t replace people with AI. They added AI on top of people. Which is different from what most people say about tech. This is only because there was still a strong demand for lawyers until Q4 2025.
So, even like what’s said in the report, that AI absorbs the 15% of the tedious tasks, such as the bad drafts, the research dead-ends, the associate still bills the same hours.
The upside here is that the firm isn’t eating the waste as pre-AI; now the waste is handled by AI.
Until now, on paper, everyone wins: the firm keeps its headcount, the associate stays busy on higher-value work, and AI absorbs all the tedious tasks.
Clever, right? It is — until demand drops.
The report’s own forecasts show a contraction from Q1 2026.
So now you’ve got firms that loaded up on both AI AND people — a dual cost structure that only makes sense at full capacity — heading into a downturn.
If demand drops, what do they cut first?
The AI, or the people?
Because that answer tells you everything about whether this industry actually believes in the technology it just spent billions on.
But the cost structure is only half the problem. The other half is what happens when the clients can see the efficiency that is supposed to be hidden away.
When Efficiency Cuts Both Ways
90% of all legal billing still runs through standard hourly rate arrangements. The same structure from 1913, invented by Boston lawyer Reginald Heber Smith.
And rates keep climbing. Average rate at top firms: $1,000 per hour in 2025.
Before the pandemic ended, firms could argue their rates were tracking inflation. Now? Rates are growing well above it.
The justification:
AI makes our work better, so each hour is worth more.
Here’s the problem. The client is looking at the same AI as the firms. And the clients are reaching the opposite conclusion.
The firm sees AI and thinks:
We deliver more value per hour now. A brief that took 10 hours still costs the same, but it’s better quality. Our rates are justified, maybe we should charge more.
Which they actually do charge more (written in the report). The client, however, sees AI and thinks:
You did the work in half the time. Why am I paying the same? Why am I paying MORE?
And this isn’t just happening in the legal industry.
KPMG hired an external audit firm — then asked for a lower fee because they knew the firm was using AI to do the work faster. Meanwhile, KPMG charges its clients a premium, arguing that because it uses AI, it delivers more value per hour.
KPMG isn't even hiding behind different logic. They're using the exact same AI justification in both directions. That's almost worse than hypocrisy; it's shameless.
The Thomson Reuters report confirms this standoff once more. Clients want billing that reflects AI efficiency. Firms want to pocket the gains. Both sides are waiting for the other to blink.
But here’s what the firms haven’t figured out yet: the clients aren’t going to blink. They’re going to leave.
When Both Sides Can Use the Same $200 Tool
The Claude legal AI plugin costs $200 a month. It drafts contracts. Triages NDAs. Tracks vendors. Builds legal briefing templates.
Here’s what clients actually paid for: judgment, independence, and risk transfer. The expertise to navigate gray areas, the credibility to stand before a regulator, and the liability insurance if things went wrong.
However, under the current billing model, most clients paid for routine work that required neither judgment nor independence.
Of course, the $200 AI tool can’t replace judgment. It can’t stand before the SEC or indemnify a board. But it can do the routine work.
Which means the client no longer needs to buy the $40,000 package to access the $4,000 worth of judgment. They bring the routine in-house and only hire the firm for what the firm is actually good at.
And the data shows this is already happening.
52% of corporate leaders expect to move more work in-house over the next five years.
So you are watching this death spiral:
AI makes routine work cheap + Clients bring routine work in-house.
Only complex work stays with firms.
Complex work alone can’t fully support the headcount that routine work used to pay for.
And this isn’t just law. For management consultants, it’s market research and slide decks. For interim C-levels, it’s audits and vendor evaluations. Different tasks, but the pattern is the same.
The standoff between firms seeking higher rates and clients wanting lower bills, which we discussed earlier, is already over. The clients adopt AI as quickly, or even faster than, the firms do, because to them it’s not about making a margin but about immediate cost savings they can see and grasp.
So now the question every hourly-billing business has to answer: if your clients can do the routine work themselves, and the routine work is what pays for your entire operation, what’s left?
Fortunately, there is an answer.
And it’s not new. It’s been hiding in plain sight for decades.
What Replaces Hourly Billing
M&A advisors charge based on transaction value. Tech consultants quote value-based pricing. Investment bankers take a percentage of the deal.
These models work and are compatible with AI; if anything, they benefit from it. The faster you deliver, the better your margins.
So why isn’t everyone switching?
Because hourly billing has been profitable for decades. And it’s stress-free. If the client doesn’t follow your advice and fails, that’s not your problem. You got paid for the hours regardless of the outcome. There’s no accountability for outcomes, just for time spent.
Switching to value-based pricing means the firm is now responsible for results. That’s scary if you’ve spent 40 years billing by the hour.
The TR report also shows firms are waiting. Hoping they can keep the old model just a little bit longer. Still stubbornly waiting for their clients to blink first.
Finally
Thomson Reuters titled this report “Peak Prosperity and the Fault Lines Below.” Twenty-two pages of data from 184 law firms. And every page says the same thing.
Every professional service built on hourly billing is facing the same fork. You either charge for the value you create, or you watch your clients replace you.
That’s what the data already shows.
If this changes how you think about pricing in your business, share it with someone who still bills by the hour — they need to see this data before their clients do.
Drop a comment and tell me which AI report you would like me to read next.