You Can’t Win on Food Alone: The Restaurant Theory of Law Firm Profitability

Have you ever been taking a medication for which alcoholic beverages are contraindicated and you go out to a restaurant on Friday night?  So you and your lovely spouse go out for a nice dinner, but you both have allergies and have been taking antihistamines so you just order tap water with dinner. 

Observations:

1. It’s a mark of professionalism on the part of your server if they successfully avoid even giving a hint of disappointment in your beverage selection.   Tip that person well.

2. If you are me, you find out you aren’t half as smart and funny as you think you are, and

3. When the bill comes, you are extremely pleasantly surprised!  It’s like half price!

Let’s put a pin in #1 and #2 – especially #2 because I don’t want to really internalize the implications. 

Let’s talk about that bill.  Half price, that’s a big deal.  We should unpack that.

In the fine dining category, liquor has the highest markup.  Indeed for most restaurants, it’s the bar that drives all the profitability.  Food is great, it gets people in the door, but your food menu probably barely breaks even on a fully loaded cost basis.  It’s the bar that pays the bills and funds the restaurant owner's extravagant lifestyle of champagne, caviar and high level pickleball. 

I’d even go so far as to say that absent revenue from alcoholic beverage sales, most restaurants wouldn’t be able to stay in business.  You can have the world's most in demand executive chef working with the finest ingredients in a killer location, but unless you can sling cocktails at gigantic markups, you aren’t going to make a penny.

But Jay, you say, why are you talking about restaurants, aren’t you some kind of techno-lawyer?  Yes, yes I am and here’s why this is important.

You can be the best of the best in your field as a lawyer.  You can be the first call every CEO makes when it’s time to bet the company.  You can be a senior equity partner billing 2600 hours a year at $3000/hour but unless you can leverage your contribution with that of 3-5 associates you are never going to be profitable enough to attract high quality talent and grow your business.

This brings us to the Restaurant Theory of Law Firm Profitability: 

· Excellent food, expertly prepared = deep subject matter expertise and experience

· High demand: Diners or clients will pay almost anything

· High cost of goods sold: Celebrity chefs and top performers demand high compensation.

· Not scalable: One chef can only cook so much. One partner can only bill so many hours in a year

· Leverage: High markup on lower value, higher margin commodities. Associates and booze.

Here’s the thing, this has worked fine for a hundred years. As a matter of fact, if you are a rainmaker partner, your economic situation has been getting better and better for a hundred years. But things are about to change.

We all agree that AI, in its current form, is not a threat to the work that rainmaker partners do. The things it can do now are the lower value, more repetitive and frankly less interesting tasks that lawyers sometimes have to do. And the people who are doing those things now are the associates.

All of the work that associates do is not currently doable using AI, but I don’t think it is irresponsible to posit that in the near future, AI will double associate productivity.  So a task that takes two hours to do now will take one hour in the near future. Seeing as hourly is still the predominate billing model in the legal industry, that means revenue attributable to the high margin, high volume side of the house will be cut in half. This is analogous to a hot new restaurant losing half of its liquor sales, which if you ask any restauranteur, means it’s time to fold up the tables and find a new concept, because this one is no longer profitable.

This is a huge issue facing the industry. I’ve been at the forefront of legal technology for the last 30 years and I care a lot about how this turns out, and you should too. Stay tuned over the next few months and I’ll be digging deeper into this topic and many more.