Begum: What is driving value in firms?
The traditional metrics and models used to calculate partners’ pay are coming under mounting pressure from the rise of artificial intelligence (AI) and private equity (PE), according to the Professional Practices Alliance.
These twin pressures are having a significant impact on how firms are re-working their financial models – from how to measure performance to what partners should earn.
The PPA is a collaboration between the London-based law firm CM Murray, partner remuneration specialist David Shufflebotham from PEP.Up Consulting, and law firm management consultant Robert Millard from the Cambridge Strategy Group.
A webinar last week heard how, to date, the only lawyers seen to have suffered from the rise of AI have been those at the junior end, with technology taking over the routine tasks they handled.
But AI is making it increasingly difficult for partners to demonstrate and justify their salary expectations, or for firms to work out who or what is generating profits.
Zulon Begum, a partner at CM Murray, said: “We’re seeing a shift driven by the twin forces of AI and external capital in the market, in slightly different ways.
“With AI and technology, we are seeing a shift in what actually drives value in firms. Traditionally compensation systems have been aligned to input. As firms increasingly adopt technology and AI, the value increasingly sits in other areas.
“Many compensation systems have not yet caught up with that shift in how pricing is changing in firms because of the use of AI, and how value is being delivered.”
Ms Begum said firms faced “a real risk of misalignment” by investing in AI to drive efficiencies and boost profits, whilst maintaining an old compensation system based on billable hours, that is rapidly being eroded by AI.
Mr Millard agreed: “We know that we have to adopt these new tools, but we’re still measuring largely on output and billable hours. Not only is compensation but the whole firm is hardwired around that.
“And that status quo is protected by the most senior, most valuable, partners. If we switch away from those metrics, what is the unit of account that we should use? Where does profit actually come from?”
AI is also disrupting the traditional ways of setting and measuring key performance indicators, because of the shift in who or what is actually driving value in firms.
And when meetings take place, AI has been used to try to influence outcomes, for and against partners.
Mr Shufflebotham said: “We’ve had partners coming along to meetings with their own version, generated via AI, of the numbers from the practice management system.
“We used to stick to one version of the truth, in a world which was reliant on the chief financial officer. You can now get into a situation where you are being exposed to multiple ideas of what the figures could be telling us.”
AI is also changing the quality of notetaking at meetings, which partners may need to rely on if they want to challenge their salary, or their terms for exiting the firm.
Corrine Staves, a partner at CM Murray, said: “A lot of committees or internal meetings within firms will use AI as a tool for keeping notes.
“In my view, the HR professional or a partnership secretary will, from experience, know the way that things ought to be recorded, in a way that reflects the real heart of the decisions made around remuneration. They might not get that level of sophistication and nuance from an AI transcription.”
The speakers advsied partners to set very detailed criteria for their performance and pay, and to keep their own documentary evidence of this.
Ms Begum said PE, meanwhile, was linking partner pay to financial targets, more than traditional balanced scorecards, which – as with AI – was changing how firms evaluated performance and pay.
She said: “When you take the two forces together, AI and PE are both moving funds away from traditional partnership models.
“We’re probably going to see a greater erosion of locksteps, much focus on individual contribution, not necessarily based on billable hours anymore, but actual revenue contribution and profitability – moving away from a trust based system in a traditional partnership towards something that’s much more structured and performance managed.
“That’s quite a significant cultural change for many firms.”