Will AI change Maister’s four profit levers?
The vast majority of law firms still base their performance management systems on the Maister profit levers. These four levers are margin, blended billing rate, utilisation, and leverage.
Two of the metrics – rate or charge per hour, and utilisation or billable hours per day – assume a business model centred around recording and billing for time. Leverage largely reflects the size and shape of the ‘people pyramid’ working below the firm’s equity partners.
Are these profit levers redundant when we have a new technology that promises to reduce service delivery time 10-fold, slim leverage, and has computers delivering a significant portion of the service?
The best way to tackle this question is to examine each of the four Maister levers separately.
Margin
For the foreseeable future and regardless of technological developments, law firms will still need to optimise and control their operating expenses. The expense mix in firms will likely change to include a higher proportion of technology-related costs, such as license fees, software development, application support, and training, however, the underlying metric of ‘margin’ will remain relevant and useful.
Blended Billing Rates
Fast forward five years, and there is a good chance that the revenue associated with traditional time-based billing will be significantly less than it is today. Billing solely for people’s time is a commercially naïve way to capture value for a service that relies heavily on legal knowledge embedded in smart technology and large databases.
The most likely scenario is not the end of time-based billing but rather a much more diverse range of pricing models and fee structures. In this future, a performance scorecard that centres on things like rack rates, charged rates, realised rates, etc. will become increasingly meaningless for the portion of revenue that is not time-based. A ‘rate-focused’ dashboard will orient decision-making towards inputs and the cost of production rather than client gains and leverage of intellectual capital.
Utilisation
To date, measuring fee-earners’ billable hours per day has proved to be a useful proxy measure of staff productivity.
In a future world where humans and technology co-produce services and pricing is fixed or based on outcomes, daily timesheets will become less relevant for costing and billing.
Timesheets may help in keeping track of what people are doing, but there are far more sophisticated ways to monitor productivity. Many professional service industries, such as medicine, manage staff performance without requiring them to account for every minute of their time.
There may be a need to do time ‘sampling’ – record time for a specific short period or on particular matters – but less of a need for every practitioner to record all their time every day.
Leverage
The leverage story is complicated.
At an operational level, completing work at the right level with the right resources, whether people or technology, will continue to be a key success factor in most legal practices.
At an ownership level, the ratio of equity partners to non-equity partners, will still be relevant for traditional partnerships, but less meaningful for some ownership models. For example, in firms with an eat-what-you-kill remuneration system, partner earnings are much less about relative equity holdings and leverage, and much more about the individual’s direct and indirect financial contribution.
In jurisdictions that allow it, incorporated law firms Gen AI may accelerate investments by private equity firms in law firms and serve as a catalyst for new ownership models. The injection of fresh capital and expertise will allow some firms to operate with a different risk profile and be at the forefront of technology adoption. In these firms, metrics around internal rate of return, distributed to paid in capital, free cash flows and exit multiples are more likely to be used.
In conclusion
This analysis suggests the dashboard used by law firm leaders to fly their firm needs to be augmented. The Maister gauges and dials should be kept, but a whole new set of positioning, productivity and margin optimisation measures will be required. Perhaps, David will step out of retirement and offer some novel suggestions 😊.