Prompt:

Summarize the key points in this article acting as a senior managing partner of a large law firm talking to his partners about these conclusions. [sending text of the third post]

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GPT 4:

Ladies and Gentlemen,

I write to you today to discuss the potential effects of Generative AI on our firm’s profitability. The primary findings of our study are that Generative AI will disproportionately impact non-partner hours, and that its effect on profitability is more complex than simple reduction of billable hours.

Our baseline model is an M&A transaction with five different timekeepers. Based on this model, our estimated annual Profit Per Equity Partner (PPEP) is around $2.6 million. However, this could change based on the billable rates, realization rate, and expenses for each timekeeper, among other factors.

Contrary to intuition, the majority of our profitability actually comes from non-partner timekeepers. This is due to the principle of leverage—the percentage of non-partner hours to partner hours. Our baseline leverage is 60%.

When Generative AI is applied, we see different scenarios. In a conservative scenario where we have a 5% reduction in partner billable hours and a 20% reduction in non-partner billable hours, we see that our total revenue is reduced by about 13%, and our PPEP drops to about $2.4 million. Our leverage also decreases to 56%.

If we start with better leverage (63%), then our PPEP can increase to about $2.7 million. However, applying the same conservative effects of Generative AI results in a decrease in PPEP to around $2.5 million. Therefore, firms with better leverage may experience greater reductions in profitability when using Generative AI.

A less favorable scenario sees a 20% reduction in partner hours and a 40% reduction in non-partner hours, resulting in a total revenue reduction of 30% and a decrease in PPEP to $2.3 million.

Now, how do we react to this AI-driven shift in our field? For the next year, we need to invest in education around Generative AI, accessing AI tools as inexpensively and safely as possible for educational and internal use only. We should not blindly invest in expensive Generative AI solutions without understanding their impact on our bottom line.

The most profitable practices could be negatively affected by Generative AI due to the disproportionate displacement of associate time. Hence, improving leverage is not only crucial but now more urgent than before. We need to build and improve our leverage model in the face of this technology.

The partner compensation models also need to be reassessed. Current models often reward partner production over other metrics. In an era where work can be done faster, more of that work should be done by associates. Partner focus should shift towards business growth. Models that continue to incentivize moving work to higher-cost resources will diminish firm profitability while raising costs for clients.

Now is also the time to consider alternative pricing methods such as flat fees and value-based pricing. Generative AI may allow for some legal tasks to be done at a fraction of the cost, leading to increased client satisfaction, improved client retention, and increasing chances of winning higher value hourly work that AI is not yet capable of.

We must remain cautious about Generative AI. It’s important to understand its potential impacts before fully integrating it into our practices. Know what you’re buying and where you’re deploying it, and understand how it will affect your bottom line.

Thank you for your attention. I believe that together, we can successfully navigate these turbulent waters and continue to provide excellent service to our clients while maintaining the profitability of our firm.