The Anatomy of a Consulting Firm 11 - Summary: The Key Role of Leverage

By David Maister

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.

Figure 1

Different Types of Practices

Figure 2

Guru Associates

Figure 3

The Consequences of Guru Associates’ Promotion Policies

Figure 4

The Economics of Guru Associates – 5 years later