Lawyers likely can think of few sectors that are less like the distinguished practice of law than the restaurant business. From the sweaty, soapy dishwashing and the retail/sales/customer service mindset to the notion of serving other people’s food, most lawyers don’t think to emulate the restaurant business. And yet, running your law firm like a restaurant—or, at the very least, thinking about your law firm as a financial vehicle akin to a restaurant—can provide key insight and make good money, too. Let’s look at a few pieces of advice from the restaurant business and examine how they might apply in the legal profession. All of these tips come from an article on the restaurant profitability on Restaurants.com.
What to expect when you start a restaurant
Restaurants in their first year of business should shoot to break even financially, at best. Restaurant profitability is a longer-term proposition. This is great advice for first-year lawyers, too. Establishing a legal practice is hard work, and lawyers don’t make money right away. Like a restaurant, new lawyers should expect to cover their expenses the first year before making any profit.
One note about the definition of “break even.” Covering your costs includes the cost for labor, including paying yourself if you’re a solo practitioner. At times, a solo practitioner may forgo paying themselves, effectively robbing Peter to pay Paul. Consistently failing to pay oneself, or worse, not even accounting for one’s salary in a business projection, is bad business. The lawyer occupies an important and central part in a law practice, particularly a solo one, and should be compensated, just like accounting for any other part of the practice, such as administrative work, technology, physical space, etc.
Give it away, now
Restaurants’ margins on beverages are significant. A cup of soda costs a restaurant 20¢, a cup of tea is five to seven cents per serving. Consequently, the markup on a drink can be between 200-300%. That’s why restaurants have little problem offering bottomless drinks. Once the customer has paid for the drink, they have to consume a whole lot to get their money’s worth. This creates a real sense of value to the consumer while allowing the restaurant to maintain a healthy profit margin.
Law firms would be wise to identify the equivalent of the beverage. What does the firm have that can be virtually given away without costing it a lot of money? For some, perhaps it’s simply an auto-respond email that acknowledges the receipt of a document or email and briefly describes next steps. For others, perhaps it’s a list of do’s and don’ts or best practices for a given situation that the firm long ago created and is used over and over. The marginal cost of providing the information to the client is minimal, but the perceived value to the client could be significant.
Flat is the new black
Beverages are a great example of the fact that restaurants do not earn the same amount of profit on every item they sell. Overall restaurant profit depends not upon making the same amount on every item, every consumer, or even every table, but instead on the right mix of items and their “mark-up.”
Attorneys can’t think of fees in terms of “mark-ups.” Their fees must be reasonable to pass ethics muster. That said, most lawyers are pretty uncreative when it comes to how they charge that reasonable fee. While nearly all jurisdictions allow lawyers to deliver flat-fee unbundled services, with many jurisdictions actually having issued ethics opinions that establish clearer parameters around how to do it, most lawyers still opt for the old revenue standby: the billable hour. While lawyers generally make the same amount of profit on each unit of billable time sold, they also never have the opportunity to make more profit than that.
Taking a page from the restaurant business, lawyers may be able to grow their business and their profit by using flat-fee services. Let’s take a family law practice; this example is admittedly oversimplified but it also comes from a real-life example of a thriving family law practice that uses only flat fees. A law firm that takes a large volume of uncontested or or lightly contested divorce cases for a reasonable fee that offers them a healthier profit margin can still stay afloat when they are required to engage in expensive litigation in which the firm breaks even or loses money.
Are you McDonald’s or Spago?
It turns out that fancier restaurants have a lower profit-to-operation cost ratio than fast food joints. For the non-math nerds out there, this means that fancy restaurants generally make less profit than lower-brow ones. This is because, among other reasons, fancier restaurants have expenses that cheaper ones do not, such as laundering and replacing table cloths and napkins, as well as cleaning dishes and silverware. This is quite remarkable, because the mark-up on alcoholic beverages, a staple at fancy places, is even higher than that on soda and tea discussed above.
One need look no further than the fast-food phenomenon Shake Shack for economic evidence of the profit-to-operation disparity between high-end and low-end restaurants. Shake Shack was intended to be a one-off shack in Madison Square Park, started almost as a philanthropic endeavor by New York restaurant magnate Danny Meyer. Meyer was a successful high-end restaurateur with a portfolio of a dozen or so restaurants, who was participating in the redevelopment of Madison Square Park. However, the little shack succeeded far beyond expectations and has grown into a publicly traded business with more than 60 locations; the largest business in Meyer’s Union Square Hospitality Group’s restaurant empire.
Lawyers may find thinking about their practices like McDonald’s distasteful (no pun intended). That’s fine. High-end restaurants make money too. The key for a law firm is understanding which kind of firm they are—high-end or low-end—and then designing marketing and business operations to attract the right kind of clients and to service them according to that model. A high-volume family law practice with high profitability numbers (like the one described above) shouldn’t be providing clients with the legal equivalent of cloth napkins and tablecloths—in law firm land, maybe that’s lots of attorney face time and unlimited phone calls. Similarly, a white-glove firm with lower volume but better-heeled clients can afford to give clients better “service,” and may be more interesting to an attorney who gets the opportunity to engage directly with clients and handle intricate legal issues more often, but should not necessarily expect the higher profitability numbers that come with a high-volume practice.
Yes, foodservice may be an unglamorous industry, especially to those who went to law school with dreams of the ivory tower, or the wood-paneled skyscraper. However, well-run restaurants have much in common financially with well-run law firms—from start-up, to freebies, to branding and operations. So, the takeaway for lawyers seeking to grow their practices? Think a bit more like a restaurateur.
About the Author
Dan Lear is a technology lawyer and blogger, and is a member of the Law Practice Today Editorial Board. Follow Dan on Twitter @rightbrainlaw.