pdf version - David Maister

The Anatomy of a 

Consulting Firm 

By David H. Maister 

This is chapter two of The Advice 

Business: Essential Tools and Models 

for Managing Consulting (Pearson 

Prentice Hall, 2004) edited by Charles J. 

Fombrun and Mark D. Nevis. 

It has been adapted (with permission) 

from material contained in David H. 

Maister’s Managing the Professional 

Service Firm (Free Press, 1997) and 

True Professionalism (The Free Press, 

1993). 

The structure and management of 

consulting firms is driven primarily by 

two key factors: the degree of 

customization in the firm’s work 

activities and the extent of face-to-face 

interaction with the client. Both of these 

characteristics (customization and client 

contact) imply that the value of the firm 

is often embedded less in the properties 

of the firm and more in the specific 

talents of highly skilled individuals. The 

consulting firm must therefore compete 

actively in two markets simultaneously: 

the “output” market for its services, and 

the “input” market for its productive 

resources, the professional workforce. It 

is the need to balance the often 

conflicting demands and constraints 

imposed by these two markets that 

creates the special challenge of 

structuring and managing the consulting 

firm. 

Leverage Structure 

The consulting firm may be viewed as 

the modern embodiment of the medieval 

craftsman’s shop, with its apprentices, 

journeymen and master craftsmen. The 

early years of an individual’s association 

with a consulting firm are, indeed, 

usually viewed as an apprenticeship, and 

the relation between juniors and seniors 

is the same: the senior craftsmen repay 

the hard work and assistance of the 

juniors by teaching them their craft. 

Every consulting project (and hence 

every consulting firm) has its own 

appropriate mix of three kinds of people. 

By tradition, these are called “finders, 

minders and grinders.” This refers to the 

three main activities that make up 

consulting work. Finders (usually the 

most senior level) are responsible for 

bringing in the business, scoping and 

designing the projects, and engaging in 

the high-level client relations necessary 

during the work. The main responsibility 

of minders is to manage the projects and 

the team of people working on it. 

Grinders (the lowest level) perform the 

analytical tasks. Naturally, this is an 

idealized structure and, depending on the 

firm, all may participate in analysis 

and/or junior people may be delegated 

tasks associated in the ideal model with 

higher levels. 

The required shape of the organization 

(the relative mix of juniors, middle-level 

staff and seniors) is usually described as 

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The Anatomy of a Consulting Firm 

its leverage structure, and is primarily 

determined by the (aggregate) skill 

requirements of its work: the mix of 

senior-level, middle-level and juniorlevel 

tasks involved in the projects that 

the firm undertakes. 

Getting the leverage structure right is 

key to the consulting firm’s success. If a 

firm brings in a mix of client work that 

requires more juniors, and fewer seniors, 

than the firm has in place, higher-priced 

people will end up performing lowervalue 

tasks (probably at lower fees), and 

there will be an underutilization of 

senior personnel. The firm will make 

less money than it should be making. 

The opposite problem is no less real. If a 

firm brings in work that has skill 

requirements of a higher percentage of 

seniors and a lesser percentage of 

juniors, the consequences will be (at 

least) equally adverse: a shortfall of 

qualified staff to perform the tasks and a 

consequent quality risk. Matching the 

skills required by the work to the skills 

available in the firm (i.e., managing the 

leverage structure) is central to keeping 

the firm in balance. 

Leverage and the People Marketplace 

The connection between a firm’s 

leverage structure and the people 

marketplace can be captured in a single 

sentence: people do not join consulting 

for jobs but for careers. They have 

strong expectations of progressing 

through the organization, from grinder to 

minder to finder, at some pace agreed to 

(explicitly or implicitly) in advance. 

While the pace of progress may not be a 

rigid one (“up or out in x years”), both 

the individual and the organization 

usually share strong expectations about 

what constitutes a reasonable period of 

time for each stage of the career path. 

Individuals who are not promoted within 

this period will seek greener pastures 

elsewhere, either by their own choice or 

career ambitions or at the strong 

suggestion of the firm. 

Few firms offer career positions at the 

middle-level or junior ranks. Partnership 

or ownership is usually restricted to 

those who attain the highest levels. In 

recent years, however, which have seen 

a people shortage or “war for talent,” 

some firms have experimented with 

offering profit sharing, stock options or 

other financial incentives to allow those 

who are not at the highest levels to share 

in the firm’s overall success. This has 

not removed the expectation that most 

staff will continue to strive for 

promotion to the highest levels. 

This promotion system serves an 

essential screening function for the firm. 

Not all young professionals hired will 

develop the project management and 

client relations skills required at the 

higher levels. While good initial 

recruiting procedures may serve to 

reduce the degree of screening required, 

they can rarely eliminate the need for the 

promotion process to serve this 

important function. The existence of a 

“risk of not making it” also serves the 

firm in that it puts a degree of pressure 

on junior personnel to work hard and 

succeed. 

The promotion incentive is directly 

influenced by two key dimensions: the 

normal amount of time spent at each 

level before being considered for 

promotion and the “odds of making it” 

(the proportion of juniors promoted.) For 

any given rate of growth, a highly 

leveraged firm (one with a high ratio of 

juniors to seniors) will offer a lower 

probability of making it to the top, since 

there are many juniors seeking to rise 

and relatively few senior slots opening 



up. A less leveraged firm at the same 

rate of growth will need to bring along a 

higher percentage of its juniors, thus 

providing a greater promotion incentive. 

Leverage and Profitability 

A consulting firm’s leverage is also 

central to its economics. The rewards of 

partnership or ownership (the high levels 

of compensation attained by vice 

presidents or senior partners) come only 

in part from the high hourly (or daily) 

rates that the top professionals can 

charge for their own time. A significant 

portion of profits derives from the 

surplus generated from hiring staff at a 

given salary and billing them out at 

multiples of that salary. By leveraging 

its high-cost seniors with low-cost 

juniors, the professional firm can lower 

its effective hourly rate and thus reduce 

its cost to clients while simultaneously 

generating additional profit for the 

partners. 

The market for the firm’s services will 

determine the fees it can command for a 

given project; its costs will be 

determined by the firm’s ability to 

deliver the service with a cost-effective 

mix of junior, manager and senior time. 

If the firm can find a way to deliver its 

services at the same quality with a 

higher proportion of juniors to seniors, it 

will be able to achieve lower servicedelivery 

costs. (Note that this is true 

whether the firm bills by the hour or on a 

fixed-fee basis.) The project team 

structure of the firm is therefore an 

important component of firm 

profitability. 

The Client Marketplace 

Degrees of client contact and 

customization vary from to firm, or even 

practice area to practice area. Some 

differences between types of practice are 

shown in Figure 1. This defines four 

kinds of professional practice, which for 

the purposes of example we’ll call 

Pharmacist, Nurse, Brain Surgeon and 

Psychotherapist. 

The Pharmacist 

A Pharmacy practice is one where the 

client is trying to buy a relatively 

familiar service and does not require 

very much counseling, consultation or 

contact. The client wants the service 

performed to strict technical standards at 

a minimal cost. Notice that this type of 

practice is defined as a standardized 

process conducted with little, if any, 

client contact. This does not mean that 

the result cannot be highly customized, 

merely that the process to be followed in 

producing the result is well specified. 

While this type of work is common in 

systems installation and other IT firms, it 

can also be found in high-end strategy 

firms, where component analyses of cost 

structures, market shares, competitive 

positioning and many other studies, as 

valuable as they can be, have been 

highly proceduralized and can be 

conducted with thoroughness and 

accuracy by junior staff. The method of 

conducting these analyses does not vary 

from job to job. 

Quality standards, in the sense of 

“conformance to specifications,” must 

be high for this work, since the client 

will be “swallowing the pills.” However, 

the client does not require that the pill be 

specifically designed for him or her. The 

client wants to buy well-established 

methodologies and procedures, not 

innovation and creativity. 

The client is in effect saying, “I have a 

headache, and I know that you, along 

with many others, are licensed to 

dispense aspirin. Don’t waste your time 

and mine trying to convince me that it’s 



brain surgery that I need. I’ve done this 

before, and I can tell for myself the 

difference between the need for aspirin 

and for brain surgery. I want aspirin! 

What’s your best price?” 

The Nurse 

The Nursing practice also delivers 

relatively familiar (or “mature”) services 

that do not require high levels of 

innovation. However, it differs from the 

Pharmacist practice in that the emphasis 

is not only on the ability to dispense the 

pill (which still may be required), but 

also on the ability to counsel and guide 

the client through the process. This time, 

the client wants to be nurtured and 

nursed: “Help me understand what’s 

going on; explain to me what you’re 

doing and why; involve me in the 

decision making; help me understand my 

options. Be with me and interact with me 

throughout the process until this is all 

over. I need a front-room advisor, not a 

back-room technician.” (The nursing 

practice can be distinguished from the 

pharmacy practice by the proportion of 

total project time that is spent in contact 

with the client.) Practices that work in 

this area are those where the consultant’s 

approach to is to help the client (and the 

client’s organization) arrive at its own 

decisions and conclusions, rather than 

performing independent studies and 

presenting the consultant’s 

recommendations. This requires 

interpersonal and consultation skills in 

addition to analytical skills. 

The Brain Surgeon 

The Brain Surgeon combines high levels 

of customization, creativity and 

innovation with a low degree of client 

interaction. The client is searching for a 

practitioner who is at the leading edge of 

his or her discipline, and who can bring 

innovative thinking to bear on a unique 

assignment. Here, the client says, “I 

have a bet-your-company problem. Save 

me! I don’t want to know the details, just 

find the right answer! If I wake up in the 

morning, I’ll pay your outrageous bill! 

I’m not shopping on price, I’m trying to 

find the most creative or technically 

superior provider I can.” Consulting 

firms positioned here tend to be regarded 

as leading thinkers, and tackle unique, 

one-of-a-kind problems in the areas of 

strategy, technology or organization. 

The Psychotherapist (or Family 

Doctor) 

Finally, the Psychotherapist (or Family 

Doctor) practice is one where the client 

says, “Again I have a bet-your-company 

problem. This time, I don’t want you to 

give me the anesthetic and leave me out 

of the process. I want to be intimately 

involved in the problem-solving process. 

What I’m really trying to buy is 

someone who can sit down with me, 

help me understand why my company is 

falling apart, how I should differentiate 

between a symptom and a cause, what I 

must deal with and what I can afford to 

postpone. Sit down with me and my 

executive team and help us understand 

our problem and our options.” 

As with the Brain Surgeon, the emphasis 

for the Psychotherapist is as much about 

creative diagnosis as it is about 

execution. When buying the services of 

a Nurse or Pharmacist, clients know 

what they want done: they are hiring 

someone to execute it. But with Brain 

Surgeons and Psychotherapists, the 

clients are seeking help determining 

what needs to be done as well as how to 

do it. 

Psychotherapy practitioners can be 

found in most high-end consulting firms, 

since many client projects contain an 

initial diagnostic component. Except for 



solo practitioners and other small firms, 

few consulting firms spend all their 

billable hours in this activity. 

Differences Between Practices 

There is a market for all four of these 

kinds of providers, and they all represent 

“honorable” ways of being of value to 

clients. However, the four services 

described represent four profoundly 

different businesses. Virtually 

everything, from marketing to hiring, 

managerial styles to economics, key 

skills to career paths and performance 

appraisal criteria, varies significantly 

depending upon which service the firm 

is trying to provide. 

Consider, for example, how each of 

these providers makes money. The 

Pharmacist is in a fee-sensitive business 

where the key to economic success lies 

in finding ways to dispense the “aspirin” 

at a very low cost (without 

compromising quality). This means 

getting the work done with a minimum 

of high-priced senior professional time 

and extensive use of either low-cost 

(junior) time or time-saving tools such as 

methodologies, systems, templates and 

procedures. The Pharmacist is in a lowfee, 

high-leverage business. 

The Nurse also needs to have wellestablished 

procedures, methodologies 

and tools, but if the Nurse has superior 

counseling skills, then he or she can 

command higher fees than the 

Pharmacist. Since the client is buying a 

relationship with a “primary care 

provider,” he or she will be less inclined 

to shop on price and more likely to pay a 

premium for an advisor they can work 

well with and trust. 

However, since much of the work is 

likely to involve client contact, there is 

probably a little less chance to leverage 

(by using low-priced junior 

professionals) for the “front-room” 

portion of the work. The Nurse thus 

makes money by charging higher fees 

than the Pharmacist, but probably 

employs lower leverage. 

The Brain Surgeon is paid for 

innovation, creativity and frontier 

technical skills. Accordingly, the Brain 

Surgeon has even less ability to get 

projects done by leveraging junior 

resources or established methodologies. 

Instead, the Brain Surgeon firm makes 

money if (and only if) it is truly 

recognized by the market as being a 

leading-edge practitioner that justifies 

premium fees. Brain Surgeons make 

money through high fees and low to 

modest leverage. 

The Psychotherapist (or Family Doctor) 

has the most unleveraged business of all. 

Since most of the work is face-to-face 

counseling at the highest level of the 

client organization, little use can be 

made of junior staff (except for 

background analytical work in support 

of the Psychotherapist’s efforts). 

The Psychotherapist makes money in 

one of two ways: Either high fees are 

charged or a diagnosis results in work 

that can be referred to other parts of the 

“hospital.” In other words, the 

Psychotherapist may not be very 

profitable on a stand-alone basis, but 

makes money by being a “relationship 

manager” and generating work for 

others. 

The Need to Focus 

The categorization scheme used here 

does not define whole disciplines, but 

rather different market segments. For 

example, some clients for a service like 

market research may (historically) seek 

out a Pharmacist (the work, in their 



view, being mostly programmatic and 

performed with little need for ongoing 

client contact). However, other market 

research clients may want pioneering 

work and require (and request) extensive 

diagnosis, and also want a great deal of 

ongoing client interaction. They may 

seek a provider with demonstrated 

Nursing or Psychotherapy skills and 

methodologies. Which box a firm is in is 

determined less by the profession it 

practices than by the market segments it 

is trying to serve. 

And therein lies the problem! Suppose 

that you are a highly skilled tax 

practitioner who handles complex, 

frontier tax problems through creative, 

innovative thinking (i.e., you are a Brain 

Surgeon). A client comes along who 

wants to get their basic tax forms 

completed to ensure compliance with all 

tax laws. Since this is your client, it’s a 

tax problem and you’re a tax provider, it 

is tempting to conclude that you’re the 

perfect person to help the client. 

Wrong! As a Brain Surgeon, you are 

probably high-priced, and your key 

talent is creativity and complex problem 

solving. Completing tax forms and 

ensuring compliance is a Pharmacy job; 

it is not work for a Brain Surgeon. A 

Brain Surgeon may have the tendency to 

treat all problems as if they required 

Brain Surgery: The client says, “I’d like 

to buy some aspirin,” and the Brain 

Surgeon replies, “Sure! But first, get on 

the operating table so we can investigate 

and find out whether it’s aspirin you 

really need!” 

(Of course, the opposite problem is 

equally unacceptable. If a client says “I 

have a unique bet-your-company 

problem,” it is not very sensible to 

respond by saying, “Let us show you our 

established methodology based on years 

of solving identical problems!”) 

Even if you as a Brain Surgeon 

recognize the need to treat a problem as 

an “aspirin” job, it would still be a 

misallocation of resources for you to do 

it, since low-cost, methodology-driven 

activities are not the Brain Surgeon’s 

key talents. In fact, everyone will lose if 

you, a Brain Surgeon, do it yourself: The 

client will not get low cost, you will be 

underutilizing your talents (and will 

probably find the work dull) and your 

junior staff will be denied the 

opportunity to perform work that, while 

old hat for you, might be interesting and 

skill building for them. 

What this analysis points out is that 

while it may be acceptable for a firm to 

be a “full-service hospital” with 

capabilities to meet a broad range of 

client needs, it is not acceptable for 

individual professionals to try to do so. It 

is highly unlikely that any one individual 

will excel simultaneously at all the 

virtues of efficiency, creativity, 

counseling and diagnosis. 

While Brain Surgery is the traditional 

self-image of many professions, the 

harsh reality is that Brain Surgeon needs 

probably represent a very small 

percentage of the total fees paid in any 

profession. It is also true in “real” health 

care, where surgeons may be the most 

glamorous providers but represent only a 

tiny fraction of the health care needs of 

society. 

Ownership and Governance 

Among the many things that are affected 

by the market positioning (i.e., mix of 

services) of the firm are ownership and 

governance. The traditional model in 

consulting has been a privately held 

partnership, with all significant decisions 



being made after extensive consultation 

with the senior group. This model 

matches well with a Brain Surgery or 

Psychotherapy practice, which requires 

significant power and autonomy to be 

left in the hands of the senior 

practitioners. A related, but different, 

part of the partnership tradition is that 

senior people are rewarded by the 

income they derive during their time at 

the firm, and not from the increase in the 

value of the firm itself. (Many firms 

transfer their ownership between 

generations through an “in and out at 

book-value” system.) Ownership is 

restricted to those currently practicing 

within the firm. 

However, recent years have seen the 

emergence of publicly held consulting 

firms. Theoretically, there is nothing in 

the corporate form or in public 

ownership that would prevent the 

preservation of a “partnership ethos,” 

with decision making through extensive 

consultation and the retention of 

significant autonomy for senior 

practitioners. However, when a firm has 

gone public, the value of the shares (and 

hence the company) takes on a greater 

significance, and this inevitably affects 

the process of decision making. A 

greater emphasis is given to building the 

systems of the firm to embed value in 

the firm, not just in the individuals who 

belong to it, and this often leads to 

greater codification. It is easier to “own” 

a chain of pharmacies than a 

rambunctious group of brain surgeons 

and psychotherapists. 

Structural Trends 

Two trends suggest where the bulk of 

the market lies. First, clients are buying 

fewer services as if their problem is 

totally unique. They more frequently 

want to tap into a firm’s accumulated 

experience and methodologies in order 

to benefit from the efficiencies that come 

from dealing with providers who have 

done it before. They are buying less 

brain surgery and more aspirin. (The 

widespread use of technology also has 

the effect of allowing complex analyses 

formerly performed by Brain Surgeons 

to be conducted by junior staff, thus 

reinforcing this trend.) 

Second, clients are increasingly reluctant 

to say to their professionals, “You take 

care of things and report back when it is 

done.” More and more, clients want to 

be involved in the process, or at a 

minimum be kept informed of their 

options, kept up-to-date on progress and 

assisted in understanding what is going 

on and why. 

From these two trends, we can 

hypothesize that the bulk of the market 

is moving towards Nursing (established, 

proven procedures with high client 

contact) and away from Brain Surgery. 

As reflected by the amount of price 

competition in most professions, the 

Pharmacy also represents a high 

percentage of fees. While critical, the 

role of Psychotherapist is not a highvolume 

area. It is filled with those few 

individuals who have sufficiently earned 

their clients’ trust and confidence so 

that, whenever the client has a problem, 

the Psychotherapist is called in to 

diagnose what is needed. 

Most professional firms put new entrylevel 

people to work in the Pharmacy 

first, so they can learn the key technical 

skills of their profession. As time 

progresses, people have historically 

moved in one of two directions, either 

following the technical career path to 

Brain Surgeon or the client contact 

career path to Nurse. 



Psychotherapists have tended to evolve 

from the more creative Nurses, although 

not all Nurses can make the transition to 

being accepted as the client’s prime 

diagnostician. While it is possible for 

Brain Surgeons to become 

Psychotherapists, it is rarer. Unless a 

professional learns the basic client 

contact skills early in his or her career, 

they are difficult to develop later. 

This traditional approach to career 

development (often called “paying your 

dues”) is increasingly under attack. 

Consider the Pharmacy service. Under 

the traditional career model, the aspirin 

is being dispensed by professionals 

temporarily working in the Pharmacy, 

serving their time until they are 

promoted to a higher-level service. This 

method of having the aspirin dispensed 

by “Brain Surgeons in training” is not 

entirely aligned with the clients’ 

interests. 

Unlike the Brain Surgeon firm, which 

can only afford to hire the best and 

brightest from the top schools, a focused 

Pharmacy practice would, appropriately, 

view these as the wrong people to bring 

in. Not only do they command higher 

salaries, but their superior intellect may 

be inappropriate for the service the 

Pharmacy is trying to provide. If a firm’s 

business is making hamburgers, it will 

not want to hire people who are 

dreaming of the day they can leave and 

become Cordon Blue chefs. It will want 

and need people who are excited about 

hamburgers. 

A focused Pharmacy practice should be 

able to hire people without a formal 

education in its specific area, since smart 

people can learn to apply well-defined 

methodologies and tools. Training and 

development should be structured and 

formal to ensure that new people can 

quickly learn to apply the firm’s 

established methodologies. (This is 

exactly what is happening in some 

management consulting firms, which 

now hire people with degrees in such 

diverse fields such as anthropology and 

liberal arts.) 

Employees in the Pharmacy are not 

promised a fast-track promotion and 

career path. In fact, there should be no 

traditional “up-or-out” policy. (This is 

one reason why the big accounting 

firms, increasingly realizing that much 

of their business is Pharmacy, have 

recently moved away from such 

policies). 

The Nursing practice requires capable 

people who are not only able to apply 

methodologies but who are able to work 

well with clients. One common approach 

is to hire individuals who have prior 

industry experience working in client 

environments in order to maximize the 

chance that these individuals can 

empathize with the client situation. 

Guru Associates: A Numerical 

Example 

Let’s consider a numerical example 

(Figure 2) to see how the forces at work 

in a consulting firm interrelate. Guru 

Associates, which engages in a variety 

of projects, nevertheless has a “typical” 

project that requires 50 percent of a 

senior’s time, 100 percent of a middlelevel 

person’s time, and the full-time 

efforts of three juniors. In order for the 

firm to meet its economic goals, it 

requires that seniors and managers be 

engaged in billable work for 75 percent 

of their time, and juniors 90 percent. 

Guru Associates currently has four 

seniors. If it is to meet its target of 75 

percent billed senior time, its available 

senior time will be four multiplied by 75 



percent, or the equivalent of three 

seniors working full-time. This implies 

six projects if the typical project requires 

50 percent of a senior’s time. 

With six projects, the firm needs the 

equivalent of six full-time middle-level 

staff according to the project team 

structure. (Each project requires 100 

percent of a middle-level person’s time.) 

At 75 percent target utilization (billed 

hours divided by available hours), this 

means that the firm must have eight 

middle-level staff (6 × 0.75). Similarly, 

at three juniors per project, the firm 

needs 18 full-time juniors (at 90 percent 

billability, that means 20 juniors). 

Simple calculations such as these show 

that, with eight seniors, the firm would 

need 16 managers and 40 juniors. The 

proportions remain constant: one senior 

to every two managers and every five 

juniors. Unless there is a change in either 

the project team structure (e.g., the types 

of projects the firm undertakes) or the 

target utilization (matters that will be 

discussed below), the firm must keep 

these ratios constant as it grows. 

This seemingly simple-minded 

calculation relating the staffing mix 

requirements of the work to the staffing 

levels existing in the firm is in fact of 

extreme importance. 

If we know the salaries of the staff 

members and their billing rates, we can 

construct the pro forma income 

statement of this firm at full utilization. 

(Figure 3) 

The role of leverage is amply illustrated 

by Guru Associates. The four seniors 

(partners) personally bill a total of 

$1,200,000, or $300,000 each. At perprofessional 

overhead costs of $40,000 

(including the costs of all secretaries, 

administrative staff, space, supplies, 

etc.), this would result in a per-partner 

profit of $260,000 if these seniors were 

totally unleveraged. 

With a healthy seven staff members per 

senior, partner profits now total 

$420,000 each. About 60 percent of each 

partner’s profit comes not from what he 

or she bills but from the profit generated 

by the nonpartner group. Thus the 

benefits of leverage! 

It should be immediately stressed that 

high leverage is not always good. As we 

have already observed, having high 

leverage is completely inappropriate if 

the firm has a high level of Brain 

Surgery or Psychotherapy work. What 

we can say is that leverage should be as 

high as the requirements of the work 

allow. 

We now turn to Guru Associates’ 

position in the market for staff. Guru 

Associates has the following promotion 

policies: It considers that it requires four 

years for a junior to acquire the expertise 

and experience to perform the middlelevel 

function, and it expects to promote 

80 percent of its candidates to this 

position. A lower percentage would be 

insufficient to attract new juniors, and a 

higher percentage would imply that 

insufficient screening was taking place 

(i.e., that there was no room for hiring 

mistakes). From middle level to senior is 

also expected to take four years, but 

because fewer candidates develop the 

critical client relations skills that Guru 

Associates requires, on average only 50 

percent of the candidates make it. 

We shall now trace the evolution of 

Guru Associates over time. Among the 

eight middle-level staff, we may assume 

that, since it takes four years to make 

senior, in any given year there are onequarter 

(i.e., two) of these managers in 

their final year as middle-level staff. If 



Guru Associates is to abide by its 

promotion policies, then it can expect to 

promote 50 percent, (i.e., one candidate) 

in that year. Whether by firm policy or 

by the personal decision of the 

individual, the nonpromoted candidate 

will leave the firm. (Note that this result 

tends to happen in most consulting firms 

regardless of whether the firm has an upor-out 

policy. Middle-level staff may, if 

allowed, hang on for another year or 

two, but most eventually leave if not 

promoted. As we shall see, there is a 

strong incentive for the firm to 

encourage them to leave, since they are 

occupying a slot eagerly being sought by 

the juniors coming up behind them.) 

Counting both those promoted and those 

leaving, we have reduced the number of 

middle-level staff by two and increased 

the number of seniors by one. Since we 

now have five seniors, we require ten 

middle-level staff (unless the mix of 

project types changes), and have six 

remaining. We must seek out four new 

middle-level staff from among our 

juniors. Of the 20 in the firm, we assume 

one-quarter (five) will be in their final 

year as juniors. Since our expectation (or 

policy) is to promote 80 percent at this 

level, we will indeed promote four out of 

the five to fill our four available slots. 

(The fact that these figures match is not, 

of course, fortuitous. The percentage that 

can be promoted at a lower level is 

determined by the shape of the 

professional pyramid.) Like the “passed 

over” middle-level staff person, the fifth 

junior may reasonably be assumed to 

leave the firm. 

We now have 15 juniors left. However, 

with five seniors and ten managers, the 

firm requires 25 juniors: it must hire ten. 

These changes are summarized in Figure 

1-7, which follows the same logic for 

years one through nine. 

In year five, the first batch of middlelevel 

staff that were promoted from 

junior in year one will be ready to be 

considered for promotion to senior. It 

will be recalled that there are four of 

them. If promotion opportunities are to 

be maintained, then 50 percent will be 

promoted (i.e., two) and two will leave. 

This creates a total of ten seniors. With a 

total of ten seniors in year five, 20 

middle-level staff are required. Of the 16 

in the firm the previous year, four have 

been promoted or have left, meaning that 

a total of eight juniors must be 

promoted. Fortunately (but not 

fortuitously) there are 10 juniors who 

were hired in year 1, and are to be 

considered for promotion. The expected 

80 percent target may be maintained! 

What must be stressed at this point is 

that we have arrived at these staffing 

levels solely by considering the 

interaction of the firm’s leverage 

structure with the promotion incentives 

(career opportunities) that the firm 

promises. What we have discovered by 

performing these calculations is that the 

interaction of these two forces 

determines a target (or required) growth 

rate for the firm. As Figure 1-7 shows, 

Guru Associates must double in size 

every four years solely to preserve its 

promotion incentives. If it grows at a 

lower rate than this, then either it will 

remove much of the incentive in the firm 

or will end up with an “unbalanced 

factory” (too many seniors and not 

enough juniors) with a consequent 

deleterious effect upon the firm’s 

economics. 

If the firm attempts to grow faster than 

this target rate, it will be placed in the 

position of either having to promote a 

higher proportion of juniors or to 

promote them in a shorter period of time. 

Without corresponding adjustments, this 



could have a significant impact on the 

quality of services that the firm provides. 

We have seen that the leverage structure 

and the promotion policies together 

determine a target (required) growth 

rate. It should be acknowledged, 

however, that there is another way of 

looking at the relationship between these 

variables. An equivalent way of stating 

the relationship would be to observe 

that, if given a growth rate and a 

leverage structure, the promotion 

incentives that result can be specified. 

We may see this by examining Figure 8 

once more. Suppose that we had 

constructed this by specifying the 

growth rate and the project team 

structure. We would then have 

discovered that we could afford to 

promote only four out of five juniors and 

one out of two managers. We would also 

have discovered that we would have a 

built-in, or target, turnover rate 

averaging over 4 percent (two 

resignations per year for the first four 

years, while the average number of 

nonsenior staff was 45.5). 

In this example, Guru Associates can 

achieve what would be considered an 

extremely low target turnover rate if it 

achieves its optimal growth. However, 

the norm in many consulting firms is a 

much higher rate than this, often 

reaching as high as 20 to 25 percent or 

even 30 percent. The key point to note 

here is that, given a growth rate and an 

organizational structure, the target 

turnover rate of the firm can be 

specified. (This does not, of course, tell 

us what the actual turnover experience of 

the firm will be. We are considering here 

the turnover that the firm requires to 

keep itself in balance. While it may be 

able, through its promotion system, to 

ensure that the actual rate does not get 

too low, it may have to use other devices 

to ensure that the actual turnover rate 

does not get too high through too many 

people quitting.) 

In most professions, one or more firms 

can be identified that have clearly 

chosen a high target rate of turnover. 

Under this scenario partners (or 

shareholders) can routinely earn a 

surplus value from the juniors without 

having to “repay” them in the form of 

promotion. This high turnover rate also 

allows a significant degree of screening 

so that only the best stay in the 

organization. Not surprisingly, firms 

following this strategy tend to be among 

the most prestigious in their industry. 

This last comment gives us the clue as to 

why such firms are able to maintain this 

strategy over time. Individuals continue 

to join these organizations, knowing that 

the odds of “making it” are very low. In 

the eyes of many potential recruits, the 

experience, training and association with 

the prestigious firms in the industry 

make the poor promotion opportunities 

at such firms worthwhile. 

Young professionals view a short period 

of time at such firms as a form of “postpost-graduate” 

degree, and often leave 

for prime positions they could not have 

achieved (as quickly) by another route. 

Indeed, most of the prestige firms 

following this strategy not only 

encourage this but provide active 

“outplacement” assistance. Apart from 

the beneficial effects that such activities 

provide in recruiting the next generation 

of juniors, such alumni/ae are often the 

source of future business for the firm 

when they recommend to their corporate 

employers hiring their old firm (which 

they know and understand) over other 

competitors. 

The ability to place ex-staff in 

prestigious positions is thus one of the 



prerequisites of a successful churning 

strategy. (An exception might be 

provided by those professions where 

legal requirements such as professional 

certification necessitate that juniors 

spend time in a firm. However, even 

here the prestige firms provide active 

outplacement assistance.) 

Growth and Profitability 

Before we leave the topic of growth, we 

should take a quick peek back at Guru 

Associates. How did its growth 

contribute to its profitability? Let us 

perform our analysis on the basis of 

constant (year zero) dollars, to remove 

the effect of inflation. By implication, 

this means that the salaries and billing 

rates at each staff level remain the same. 

What does the firm’s P&L now look 

like? Figure 1-8 repeats the analysis of 

Figure 1-6 using year-five staffing levels 

instead of year zero. 

The result? Per-partner profits have not 

increased! In fact, they have remained 

precisely the same! 

What this simple example shows is that 

there is no necessary relationship 

between growth and profits. As we have 

seen, growth in a professional firm is 

driven primarily by the need to attract 

and retain staff, and is critical for that 

reason, but it is not a guarantee of higher 

per-partner profits. 

Why is this so? We shall explore the 

reasoning in greater detail in subsequent 

chapters, but the basic fact is this. If a 

firm grows subject to two conditions, as 

Guru Associates has, whereby (a) the 

mix of client projects (and hence fee 

levels) remains the same; and (b) the 

project staffing (or leverage) is such that 

the same proportion of senior or partner 

time is required to handle each project, 

then the number of seniors or partners 

that the firm requires will correspond 

exactly to the growth rate. In 

consequence of this, the profit pool may 

increase because of the higher volume, 

but it must be shared among a 

correspondingly increased number of 

partners. 

If per-partner profits are to increase, then 

one of the two conditions must be 

broken. Either the firm must bring in a 

different mix of business commanding 

higher billing rates (i.e., find highervalue 

work for its people to do) or it 

must find ways to serve the same kinds 

of work with an ever-increasing 

proportion of junior time and a declining 

proportion of senior time. 

It is an interesting observation to note 

that few prominent consulting firms act 

as if growth were profit-neutral. Indeed, 

rapid growth is often listed as a primary 

goal of the firm, and advances in top-line 

growth are used as a primary internal 

and external measure of success. If 

justified in the name of providing career 

opportunities for staff, this indeed makes 

sense. However, if desired on 

profitability grounds, it looks like many 

consulting firms are fooling themselves! 

Summary: The Key Role of Leverage 

Perhaps the most significant 

management variable to be disclosed by 

the previous analysis is the choice of the 

mix of projects undertaken and the 

implications this has for the (average) 

project team (i.e., leverage) structure. As 

we have seen, this latter variable is a 

significant force in influencing the 

economics of the firm, its organizational 

structure and its positioning in the client 

and people markets. The leverage 

structure, in the sense used in this book 

(the average or typical proportion of 

time required from professionals at 

different levels) has not been a variable 



that is routinely monitored by firm 

management. However, as we have 

shown, its role in balancing the firm is 

critical. 

It is possible, and not uncommon, for the 

firm’s project team structure to change 

over time. If it is possible to deliver the 

firm’s services with a greater proportion 

of juniors, this will (in general) reduce 

the costs of the project. Competition in 

the market for the firm’s services will, 

over time, require the firm to seek out 

lower costs for projects of a particular 

type, and there will often be 

opportunities for an increasing 

proportion of juniors to be used on 

projects that, in the past, required a high 

proportion of senior time. What in past 

years had the characteristics of a Brain 

Surgeon project may, in future years, be 

accomplishable as a procedural or 

Pharmacy project. 

When considering new projects to 

undertake, it is usually more profitable 

for the firm to engage in one similar to 

that recently performed for a previous 

client. The knowledge, expertise and 

basic approaches to the problem that 

were developed (often through 

significant personal and financial 

investment) can be capitalized upon by 

bringing them to bear on a similar or 

related problem. Frequently the second 

project can be billed out to the client at a 

similar (or only slightly lower) cost, 

since the client perceives (and receives) 

something equally custom-tailored: the 

solution to his problem. However, the 

savings in costs incurred by the firm in 

delivering this customization are not all 

shared with the client (if, indeed, any 

are). The firm thus makes its most 

money by “leading the market”: being 

able to sell as a fully customized service 

(at a fully customized price) what 

increasingly becomes a service with 

reproducible, standardized elements. 

While it is in the best interests of the 

firm that similar or repetitive 

engagements be undertaken, this is often 

not in accord with the desires of the 

individuals involved. Most individuals 

that join consulting firms do so out of 

the desire for professional challenge and 

variety and the avoidance of routine and 

repetition. While they may be content to 

undertake a similar project for the 

second or third time, they will not be for 

the fourth or sixth or eighth. 

The solution, of course, is to convert the 

past experience and expertise of the 

individual into the expertise of the firm 

by accepting the similar project but 

utilizing a greater proportion of juniors 

on second- or third-time projects. Apart 

from requiring a lesser commitment of 

time from the experienced seniors, this 

device serves the admirable purpose of 

training the juniors. 

For all these reasons, we might suspect 

that, over time, the proportion of juniors 

to seniors required by the firm in a 

particular practice area will tend to 

increase. If this is allowed to proceed 

without corresponding adjustments in 

the range of practice areas, the basic 

project team structure of the firm will 

alter, with significant impacts on the 

economics and organization of the firm. 

The dangers of failing to monitor the 

leverage structure are thus clearly 

revealed. 



See Graphs on pages that follow. 

David Maister is the author of Managing 

the Professional Service Firm (1993), 

True Professionalism (1997), The 

Trusted Advisor (2000) (coauthor), 

Practice What You Preach (2001) and 

First Among Equals (2002) (coauthor.) 

Prior to launching his (solo but global) 

consulting practice in 1985, he served as 

a professor at the Harvard Business 

School. 

TEL: 1-617-262-5968 

E-MAIL: david@davidmaister.com 

WEBSITE: www.davidmaister.com 

You can automatically receive David’s 

future articles via e-mail (at no cost) by 

registering on his web site 

(www.davidmaister.com). 



Figure 1: Different Types of Practices 

STANDARDIZED 

PROCESS 

EMPHASIS ON 

EXECUTION 

CUSTOMIZED 

PROCESS 

EMPHASIS ON 

DIAGNOSIS 

HIGH DEGREE OF CLIENT 

CONTACT 

NURSE 

PSYCHOTHERAPIST 

VALUE IS RENDERED IN THE 

FRONT ROOM, I.E., DURING 

INTERACTIONS WITH THE 

CLIENT 

LOW DEGREE OF CLIENT 

CONTACT 

PHARMACIST 

BRAIN SURGEON 

VALUE IS RENDERED IN THE 

PROFESSIONAL’S BACK 

ROOM. CLIENT FOCUS IS ON 

RESULT ONLY 



Figure 2: Guru associates 

Level 

Requirements for 

Average Project 

(By Number of 

Partners) 

Target 

Utilization 

Required 

Staffing For 6 

Projects @Target 

Utilization 

Required 

Staffing For 12 

Projects @Target 

Utilization 

Senior 50% of 1 person 75% 4 8 

Middle 1 person 75% 8 16 

Junior 3 people 90% 20 40 



Figure 3: The Economics of Guru Associates 

Level No. Utiliza 

-tion 

Available 

Hours to 

Bill* 

Billing 

Rate 

Billings 

Senior 4 75% 6,000 $200 $1,200,000 

Individual 

Salary 

Total 

Salaries 

Middle 8 75% 12,000 $100 $1,200,000 $75,000 $ 600,000 

Junior 20 90% 36,000 $ 50 $1,800,000 $32,000 $ 640,000 

Total $4,200,000 $1,240,000 

Contribution to Overhead and Profits = 

Billings - Salary Costs = $4,200,000 

($1,240,000) 

$2,960,000 

Assume overhead costs of $40,000 per professional: 

Overhead $1,280,000 

Partner Profits $1,680,000 

Per Partner $ 420,000 



Figure 3: The Consequences of Guru Associates' Promotion Policies 

Level 

Year 

0 1 2 3 4 5 6 7 8 9 

Senior 4 5 6 7 8 10 12 14 16 20 

Middle 8 10 12 14 16 20 24 28 32 40 

Junior 20 25 30 35 40 50 60 70 80 100 

TOTAL 32 40 48 56 64 80 96 112 12 

8 

160 

New Hires 10 10 10 10 20 20 20 20 40 

Resignations 2 2 2 2 4 4 4 4 8 

Annual 

Percent 

Growth in 

Staff 

25 20 17 14 25 20 17 14 25 



Figure 4: The Economics of Guru Associates - 5 years later 

Level No. Utilization 

Available 

Hours to 

Bill* 

Billing 

Rate 

Billings 

Senior 10 75% 15,000 $200 $3,000,000 

Individual 

Salary 

Total 

Salaries 

Middle 20 75% 30,000 $100 $3,000,000 $75,000 $1,500,000 

Junior 50 90% 90,000 $ 50 $4,500,000 $32,000 $1,600,000 

Total $10,500,000 $3,100,000 

Contribution to Overhead and Profits = 

Billings - Salary Costs = $10,500,000 

($ 3,100,000) 

$7,400,000 

Assume overhead costs of $40,000 per professional: 

Overhead $2,560,000 

Partner Profits $4,200,000 

Per Partner $ 420,000 

* Based on a 2000-hour year

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