- We establish a baseline sample matter and compare changes to that sample matter when Generative AI is applied
- We explore how leverage is affected by Generative AI and how those changes may affect profitability in unexpected ways
Determining Generative AI’s effect on law firm profitability requires a bit more than a “back of the napkin” calculation with rough percentages based on keywords in time entries, as we did when roughly calculating the effect on revenue.
As Toby pointed out at the end of the last post, Generative AI is unlikely to hit all timekeepers equally.
We begin with this assertion.
Generative AI will disproportionately impact non-partner hours.
We are comfortable making this assertion for two reasons:
- Generative AI, in its current state, is most likely to replace or shorten the time to complete lower complexity and lesser specialized tasks that should be performed at the associate or paralegal level.
- Any time legal work hours are reduced, Partners tend to protect their own hours.
With that in mind, Toby began a profitability analysis, beginning with a baseline sample matter that does not factor in any use of Generative AI. We will use this baseline to compare against our AI adjusted matters.
Baseline M&A Sample Matter Data
Our baseline sample matter is loosely modeled on an M&A transaction and includes 5 timekeepers:
- an Equity Partner
- a 17th year service partner
- 10th, 7th and 3rd year associates
Estimated Annual Profit Per Equity Partner (PPEP) – $1,851 X 1400 hrs = $2,591,400
Leverage – 60% Non-Partner Hours
There are, of course, a number of assumptions in this baseline data that could greatly change from firm to firm, including the billable rates, the realization rate, and the expense for each timekeeper. However, we will keep this baseline data consistent across all of our examples in order to make a fair comparison. With different rates, realization, and expenses you will get different results. We strongly encourage every firm to perform a similar calculation for themselves.
Baseline Matter Analysis
The total hours billed are 450. The total revenue is $311k and the total profit in dollars is $163k.
Our model then translates the profit on this one matter into an estimated PPEP number for the firm. This is so we can determine profit margin impact separate from profit dollars.
In this baseline model, the PPEP number is ~$2.6m; meaning that if all work at this firm were staffed and billed like this one matter, the firm average PPEP would be about $2.6m.
There’s an old adage in economic circles: “Workers Work. Owners Benefit.”
Continue Reading AI-Pocalypse: The Shocking Impact on Law Firm Profitability