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The Anatomy of a Consulting Firm
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
Copyright 2005 David H. Maister Page 3 of 3 www.davidmaister.com